SEC has been asleep during this crisis, refusing to police the jungle has allowed the situation to get worse.
http://bloomberg.com/news/marketsmag/mm_1108_story2.html

The SEC allowed the big 5 to take on WAY too much risk in April 2004, changing how much debt they were allowed to hold. What did the SEC say at the time? “We’ve said these are the big guys,” Mr. Goldschmid said, provoking nervous laughter, “but that means if anything goes wrong, it’s going to be an awfully big mess.” “I’m very happy to support it,” said Commissioner Roel C. Campos, “And I keep my fingers crossed for the future.”
http://bigpicture.typepad.com/comments/2008/10/sec-deregulatio.html

Unbelievable video of the smoking gun of this mess.
http://www.nytimes.com/interactive/2008/09/28/business/20080928-SEC-multimedia/index.html#

The role of Freddie and Fannie in this mess
http://bigpicture.typepad.com/comments/2008/10/the-role-of-fan.html

Get over it, it wasn't the CRA
http://bigpicture.typepad.com/comments/2008/10/federal-reserve.html

Again not the CRA
http://bigpicture.typepad.com/comments/2008/10/misunderstandin.html

Who were the leaders in lowering the credit standards
http://bigpicture.typepad.com/comments/2008/10/who-were-the-le.html

2.5 trillion price tag
http://bigpicture.typepad.com/comments/2008/10/bailout-price-t.html

I set an ambitious goal..that by the end of this decade we'll increase the number of minority homeowners by at least 5.5 million families . . . George Bush 2002
http://bigpicture.typepad.com/comments/2008/10/goal-increase-m.html

I've called on private sector mortgage banks and banks to be more aggressive about lending money to first-time home buyers. And the response has been really good. - George Bush 2004
http://bigpicture.typepad.com/comments/2008/10/quote-of-the--1.html

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Good Summary...

The proximate cause of the Housing crisis were
1) Ultra-low rates; and
2) Abdication of traditional lending standards, thanks to
3) originators ability to resell mortgages for securitization purposes, and hence,
4) not have to worry about loan defaults.

During the early 2000s, the Federal Reserve, under Alan Greenspan Fed elected against supervising new mortgage lending firms. This act of nonfeasance, based upon Mr. Greenspan’s free market philosophy, had enormous repercussions.

The final act of deregulatory zeal were the net capitalizations exemptions granted by the SEC to five firms. This exemption allowed firms to exceed rules limiting debt-to-net capital ratio to a modest 12-to-1 ratio. After the 2004 exemption, firms levered up as much as 40 to 1. Not surprising, the five brokers that received this exemption – Goldman Sachs, Merrill, Lehman Brothers, Bear Stearns, and Morgan Stanley – are no longer in existence; they either failed, merged, or changed into depository banks.

Greenspan’s decision to not supervise mortgage lenders led to a brand new lending standard. During a five year period (2002-07), the basis for making mortgages was NOT the borrowers ability to pay – rather, it was the lender's ability to sell a mortgage to firms that securitized them.

These new unregulated mortgage brokers no longer cared about a standard 30 year mortgage being repaid over time. In the new world of repackaged loans, all that mattered was that the loan did not come back to the originator. By contract, this was typically 90 or 180 days. As long as the borrower did not default in that period of time, it could not be put back to the originator.

It turned out that the best way to do that – to put people in houses that would not default in 90 days – were 2/28 ARM mortgages. Cheap teaser rates for 24 months, with an eventual large reset.

This monumental, unprecedented change in lending standards led directly to the key to the current crisis. It also shows what happens when we remove supervision from the financial sector. Most of these mortgage originators – nearly 300 – have since filed for bankruptcy.

Why do we have referees in professional sports? All intense competition leads to rules of the game getting tested. Refs are on the field to prevent the game from spiraling into something unrecognizable to fans.

Deregulation took the referees off of the field, allowed speculative excesses to flourish, and reckless short-term incentives to distort behavior.

That is Human Nature – we are competitive creatures, and we require reasonable boundaries to protect ourselves from our own worst instincts. When left to our own devices, we push the envelope, cut corners, even work against our own best interests in the pursuit of profits. Every financial scandal over the past decade – corrupt analysts, fraudulent accounting, over-stating profits, predatory lending, conflicts of interests, option backdating – are the result of a legitimate business operation pushed up to the legal boundaries, and then going far beyond them.

That is the risk deregulation brings: It encourages behavior that leads to systemic risk. In the present case, the global credit markets have frozen, threatening a worldwide recession. The total cleanup costs are scaling up towards $10 trillion dollars. All due to an excess of deregulatory zeal.
http://bigpicture.typepad.com/comments/2008/10/regulate-or-not.html


http://bigpicture.typepad.com/comments/2008/10/ignored-warning.html


http://bigpicture.typepad.com/comments/2008/10/subprime-suspec.html