Brad
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The financial Crisis
De-regulation and Bailouts, A-Plenty
February 21, 2013
Brad Van Senus
D. Williams
February 21, 2013
Brad Van Senus
D. Williams
The sub-prime mortgage crisis or the 2008 Financial Crisis was a devastating downturn of Wall Street and subsequently the world’s economies. In summary, there were too many people with mortgages that couldn’t pay up and things took a tumble. However, there are a lot of factors that entered into this. One factor was the deregulation of our financial institutions. Starting in the 80’s under the Reagan administration, legislation started being put into place that gave the banks more leeway in the financial marketplace. This was sold under the guise of business; banks and other financial institutions, unfettered by government oversight, would grow and prosper, helping out the economy and therefore the nation as a whole. Examples of such legislation are the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933 allowing for commercial and investment banks to form together again, as well as the lowering of required capital limits called leverage. It’s interesting to note these acts have been signed by both sides of the aisle and do not seem to be a partisan issue. One of the reasons banks allowed lenders to take out these loans, other than predatory lending which was indeed a factor, was due to ratings given to them by credit rating agencies such as Standard and Poor’s. They would evaluate the loan and give it a rating based on a number of issues, and the banks know what level of interest to offer or if they should offer the loan at all. Before the housing bubble burst, banks were receiving good investment ratings on these loans, so they went ahead with the transactions.
Now, were the banks aware that these loans were toxic? Did the credit rating agency? We don’t really know, because nobody has been prosecuted. Sure, the leaders of the
The financial Crisis
De-regulation and Bailouts, A-Plenty
February 21, 2013
Brad Van Senus
D. Williams
February 21, 2013
Brad Van Senus
D. Williams
The sub-prime mortgage crisis or the 2008 Financial Crisis was a devastating downturn of Wall Street and subsequently the world’s economies. In summary, there were too many people with mortgages that couldn’t pay up and things took a tumble. However, there are a lot of factors that entered into this. One factor was the deregulation of our financial institutions. Starting in the 80’s under the Reagan administration, legislation started being put into place that gave the banks more leeway in the financial marketplace. This was sold under the guise of business; banks and other financial institutions, unfettered by government oversight, would grow and prosper, helping out the economy and therefore the nation as a whole. Examples of such legislation are the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933 allowing for commercial and investment banks to form together again, as well as the lowering of required capital limits called leverage. It’s interesting to note these acts have been signed by both sides of the aisle and do not seem to be a partisan issue. One of the reasons banks allowed lenders to take out these loans, other than predatory lending which was indeed a factor, was due to ratings given to them by credit rating agencies such as Standard and Poor’s. They would evaluate the loan and give it a rating based on a number of issues, and the banks know what level of interest to offer or if they should offer the loan at all. Before the housing bubble burst, banks were receiving good investment ratings on these loans, so they went ahead with the transactions.
Now, were the banks aware that these loans were toxic? Did the credit rating agency? We don’t really know, because nobody has been prosecuted. Sure, the leaders of the
References: Labaton, S. (2008, September 26). Business. Retrieved from New York Times: http://www.nytimes.com/2008/09/27/business/27sec.html?em&_r=0 Sorkin, A. (2012, May 21). Legal/Regulatory. Retrieved from New York Times: http://dealbook.nytimes.com/2012/05/21/reinstating-an-old-rule-is-not-a-cure-for-crisis/?ref=business