There is little or no doubt in my mind as to the origin and proximate cause of the mortgage meltdown and the wider 2008 financial crisis that almost destroyed the world’s financial system.
In a nutshell, it was a confluence of lobbyist-inspired and written Congressional legislation and the lack of oversight by the governmental agencies charged with monitoring our financial systems.
There was the abandonment of Glass-Steagall Act that was enacted in 1933 to separate commercial and investment banking activities which posed inherent conflicts of interest between the financial firm and its customers. That is, commercial banks with a fiduciary duty to its depositors could not deal in brokerage activities such as underwriting, distributing, investing in, non-governmental securities for its customers or other prohibited acts. Most of this legislation was repealed by the 1999 Gramm-Leach-Bliley Act signed into law by then-President Bill Clinton at the urging of a bi-partisan coalition of legislators.
Then there was the 2000 Commodity Futures Modernization Act which repealed previous legislation that declared derivatives to be a form of gaming (gambling) provided that derivative transactions (such as credit default swaps)between so-called “sophisticated parties” would not be regulated under federal law. The legislation was signed into law by then-President Bill Clinton, again at the urging of a bi-partisan coalition of legislators.
Enter the two old-frauds …
The trigger for the global financial crisis was the relaxation of mortgage underwriting standards and the pronouncement that the corrupt quasi-governmental mortgage agencies Fannie Mae and Freddie Mac (creations of politicians and used for political purposes) needed to view underwriting in terms of public policy (aka political advantage). The two complicit parties were Representative Barney Frank (D-MA) who was Chairman of the House Financial Services Committee and Senator Christopher Dodd who was Chairman of the Senate Banking Committee. It was these two frauds that manipulated our financial system to the final stage of creating the conditions for the mortgage meltdown and the financial contagion that spread into other financial sectors.
Ironically the post-collapse reform legislation bears their names as the Dodd-Frank Act (Wall Street Reform and Consumer Protection Act) …
Among of the key provisions of Dodd-Frank was to identify and more closely regulate financial institutions that were “systemically important” and could represent a systemic risk if one of these institutions should collapse. Along with being identified as systemically important, these institutions were to develop contingency plans for unwinding the institution’s affairs should it encounter difficulty, and in some cases, reduce their risk to the general population.
However, as any keen observer could see, the largest financial institutions got larger, the use of derivatives expanded, and most of the protections of a future economic collapse were mired in nonsensical terms. One of these nonsensical assertions is that derivatives could not pose a systemic threat to the economy because they would be “netted out” among the financial institutions. Unfortunately, this is bull-pucky. As we saw with the collapse of Jon Corzine’s MF Global, counterparties refused to part with their cash at settlement time and turned to litigation. In addition, due to the nature of the trading, more than a billion dollars went missing or beyond the reach of U.S. regulators and judicial system. So it is unlikely that a desperate financial situation can be resolved by netting.
The game begins anew …
Along with government-approved relaxation of underwriting standards for those who do not meet conventional safe and sound banking practices, we are now seeing that Congress has approved Dodd-Frank rollbacks and that legislation is likely to be signed by President Donald J. Trump at the urging of a bi-partisan coalition of legislators.
Essentially, the legislation would “relax federal oversight of banks with assets of less than $250 BILLION and need no longer face periodic “stress tests.” We can look forward to this amount being regularly adjusted upwards without much public notice and scrutiny – much as one consumes a large salami, slice-by-slice. In addition, the legislation would designate certain large (but not the largest) financial institutions as being “systemically unimportant” and thus relax the regulatory scrutiny of these institutions. And let us not forget the relaxation of rules governing small home mortgage lenders who will no longer need to comply with the full requirements of HMDA (Home Mortgage Disclosure Act.)
Bottom line …
We know the devil is in the details – which are manipulated by a legion of high-priced legal weasels – and things in a single bill are never what they appear to be initially as they are modified by technical corrections, government agency interpretations, and follow-on legislation.
And who is watching the watchers? The leadership of most watchdog agencies is politically appointed and often looks like a revolving door between the regulatory agency and the institutions they purport to regulate. Where former government officials with inside knowledge retire as consultants, lobbyists, and in some cases, simply go back to their old desks with greatly increased compensation. If we have seen corruption in the high-visibility institutions like the IRS, DOJ, FBI, CIA, NSA, etc. – just think of the relative anonymity and obscurity of lesser-known watchdog agencies.
We are quickly approaching a day when financial institutions will repeal the part of Dodd-Frank known “Volker Rule” and can engage in using depositors funds for risky speculative bets on their own behalf – and be allowed to offset a collapse by simply taking a portion of their depositor’s funds. A risk the depositor has not assumed whether an account was insured by an instrumentality of the federal government.
Be prepared. Develop multiple sources of independent revenue streams. Invest in multiple asset classes. Do not rely on a single financial institution. Read the news carefully and respond accordingly.