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Originally Posted by Cimarron29414
You are right. I typed FDIC, but meant FED. Although, I did think that HUD and/or HNA loans are somehow backed by the FDIC. Is that not correct?
Bottom line, the FED kept rates low and in line with the prevailing banking AND political wind of the time - the politicians wanted people who couldn't afford them to buy houses. The FED enabled the behavior by keeping rates low and creating a huge amount of cheap, available money for people to use. The bankers knew they could just sell the loan and dump the mortgage on Freddie/Fannie, then take the same money and go sell another mortgage. Freddie and Fannie would buy those loans because there was big money in the fees and they knew they would be bailed out by the Federal government because it was the federal government who wanted people who couldn't afford them to buy houses. The derivatives guys knew they were too big to fail and had lobbied for years to have the government look the other way while they wheeled along.
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It had more to do with the SEC than the Fed
A bit of recent history: Henry Paulson, former chairman of Goldman Sachs and later Bush Treasury Secretary, and Chris Cox at the SEC:
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In 2004, at the request of the major Wall Street investment houses—including Goldman Sachs, then headed by Paulson—the U.S. Securities and Exchange Commission agreed unanimously to release the major investment houses from the net capital rule, the requirement that their brokerages hold reserve capital that limited their leverage and risk exposure. The complaint put forth by the investment banks was of increasingly onerous regulatory requirements—in this case, not U.S. regulator oversight, but European Union regulation of the foreign operations of US investment groups. In the immediate lead-up to the decision, EU regulators also acceded to US pressure, and agreed not to scrutinize foreign firms' reserve holdings if the SEC agreed to do so instead. The 1999 Gramm-Leach-Bliley Act, however, put the parent holding company of each of the big American brokerages beyond SEC oversight. In order for the agreement to go ahead, the investment banks lobbied for a decision that would allow "voluntary" inspection of their parent and subsidiary holdings by the SEC.
During this repeal of the net capital rule, SEC Chairman William H. Donaldson agreed to the establishment of a risk management office that would monitor signs of future problems. This office was eventually dismantled by Chairman Christopher Cox, after discussions with Paulson. According to the New York Times, "While other financial regulatory agencies criticized a blueprint by Treasury Secretary Mr. Paulson proposing to reduce their stature — and that of the S.E.C. — Mr. Cox did not challenge the plan, leaving it to three former Democratic and Republican commission chairmen to complain that the blueprint would neuter the agency."[12]
In late September 2008, Chairman Cox and the other Commissioners agreed to end the 2004 program of voluntary regulation.
Henry Paulson - Wikipedia, the free encyclopedia
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Gutting the SEC's regulatory oversight of the "net capital rule" was to blame, not the Fed.
The Financial Services Modernization Act, initiated by the Republican Congress and passed by Clinton in '99 that virtually repealed Glass-Steagall, tore down the wall between commercial banking and investment banking, and effectively de-regulated banking/financial services, also bears some blame.