Financial Crisis - Who and What Caused it?

[chinaco]

It seems to have started with Mortgage defaults. That causes some problems (or fear) about certain MBS. But the amount of money was trivial in the scheme of the crisis.

Fannie, Feddie, Countrywide... those were problems... but still a small one in the scheme of things.

It seems to me the root of the problem (in the US) is related to the CDS industry (broad speculation for buyers and sellers/writers of CDS). And the lack of regulation. Plus the SEC allowing the 5 large Investment Banks to use a huge (ridiculous amount of leverage).

The panic's final trigger (when the Dominos really began to fall) seems to be when Lehman failed and was not bailed.

I do not think there is a single culprit that can be identified. But it seems to me that the GWB administrations disdain for regulation (policing) the financial industry is the key ingredient to the Panic of 2008.

The lax credit standards for consumers (including mortgages) was a problem... but it did not cause the Panic of 2008.


I suspect that there will be a huge amount of new financial regulations enacted world-wide. It has been a world wide event. Derivatives will be one area of focus (including commodity futures market regulations). Speculators will have stricter rules.

I am wondering if the Feds are going to overhaul the Banking Industry in terms of rules regarding consumer credit and put stricter rules in place for Secured and Unsecured loans from banks and credit companies?

[FinanceDude]

Originally Posted by chinaco

It seems to have started with Mortgage defaults. That causes some problems (or fear) about certain MBS. But the amount of money was trivial in the scheme of the crisis.

Fannie, Feddie, Countrywide... those were problems... but still a small one in the scheme of things.

Repercussions caused a ripple effect.

It seems to me the root of the problem (in the US) is related to the CDS industry (broad speculation for buyers and sellers/writers of CDS). And the lack of regulation. Plus the SEC allowing the 5 large Investment Banks to use a huge (ridiculous amount of leverage).

Greed kills........

The panic's final trigger (when the Dominos really began to fall) seems to be when Lehman failed and was not bailed.

maybe if the partners who got their multimillion dollar bonuses would have refused them, there would have been a lesser need to bail them out...

I do not think there is a single culprit that can be identified. But it seems to me that the GWB administrations disdain for regulation (policing) the financial industry is the key ingredient to the Panic of 2008.

Uh, no.......

[audreyh1]

Excessive leverage and risk taking by investment banks; crazy financial investment vehicles to "diversify away" risk; complicit ratings agencies; a non-policing SEC which took regulations off the books, granted exemptions to leverage, and refused to enforce the few regulations left; a national desire for more people to be able to own homes; very low interest rates (easy credit) for a very long time; the growth of an unregulated mortgage industry; a huge housing bubble with lots of speculation; a Fed and Treasury and public very, very late to recognize a serious problem.

Audrey

[Donzo]

During these excesses - the mortgage biz was a good place to be. A friend from college was making $600,000yr there for a while! I remember him saying that alot of these people were not going to be able to handle the mortgage monthly strokes. Wamu was turning very few people down - the banks were competing for any mortgage - what a mess this led to.

[CompoundInterestFan]

Well, if you believe Rush Limbaugh, Obama was solely responsible for the current financial crisis. :-)

[Oldbabe]

First the set was staged by low low interest rates (Greenspan). FF had already been charged with loaning to low income buyers. Then Pres Bush told everyone to go shopping, and everyone did exactly that. And in addition encouraged lots of mortgage loaning so a bubble was created. But without an incentive to make lots of money the banks wouldn't have made these "creative" mortgages. So lax regulation of the financial industry came hand in hand with the bubble environment created by the Bush administration.

Pres Bush speaking in 2002:

"More and more people own their homes in America today. Two-thirds of all Americans own their homes, yet we have a problem here in America because few than half of the Hispanics and half the African Americans own the home. That's a home ownership gap. It's a -- it's a gap that we've got to work together to close for the good of our country, for the sake of a more hopeful future. We've got to work to knock down the barriers that have created a home ownership gap.

I set an ambitious goal. It's one that I believe we can achieve. It's a clear goal, that by the end of this decade we'll increase the number of minority homeowners by at least 5.5 million families . . .

Home ownership is also an important part of our economic vitality. If -- when we meet this project, this goal, according to our Secretary of Housing and Urban Development, we will have added an additional $256 billion to the economy by encouraging 5.5 million new home owners in America; the activity -- the economic activity stimulated with the additional purchasers, the additional buyers, the additional demand will be upwards of $256 billion. And that's important because it will help people find work."
- George W. Bush, U.S. President, October 15, 2002 1:55 P.M.
The Big Picture

[ziggy29]

Originally Posted by Oldbabe

Pres Bush speaking in 2002:

"More and more people own their homes in America today. Two-thirds of all Americans own their homes, yet we have a problem here in America because few than half of the Hispanics and half the African Americans own the home. That's a home ownership gap. It's a -- it's a gap that we've got to work together to close for the good of our country, for the sake of a more hopeful future. We've got to work to knock down the barriers that have created a home ownership gap.

There's actually nothing wrong with wanting to see more minorities able to own a home.

The problem is that you want the gap to close because minorities are making economic advances, not because you had to water down lending standards and encourage reckless lending AND borrowing.

[dex]

You could go back to the 1930s to see the beginning.
The key decision that was made is that Government would create or get involved in a market for its ends instead of primarily being a regulator of the market.

1930s
Government establishes the secondary mortgage market - Creation of Fannie Mae
Government begins the consumer credit market expantion with permitting 30 year market

1960s
privatizes Fannie Mae to get it off the govenment's books

1970s
Freddie Mac established to expand the secondary mortgage market
Carter enacts laws to expand lending in an attempt to help the deteriorating inner cities

1990s
The executive & board compensation for Freddie and Frannie changed to primarily an increase in assets/loans
Clinton press F&F to ease up on lending rules

2000
CDS specifically exempted by regulation by the Senate
Increase in the different types of loans
Low interest allowed for more people qualifying for loans
Low interest rates - banks willing to take higher risks to get a higher yield.
I'm sure I've missed a few

Fannie Mae - Wikipedia, the free encyclopedia

[Texas Proud]

Originally Posted by chinaco

It seems to have started with Mortgage defaults. That causes some problems (or fear) about certain MBS. But the amount of money was trivial in the scheme of the crisis.

Fannie, Feddie, Countrywide... those were problems... but still a small one in the scheme of things.

It seems to me the root of the problem (in the US) is related to the CDS industry (broad speculation for buyers and sellers/writers of CDS). And the lack of regulation. Plus the SEC allowing the 5 large Investment Banks to use a huge (ridiculous amount of leverage).

The panic's final trigger (when the Dominos really began to fall) seems to be when Lehman failed and was not bailed.

I do not think there is a single culprit that can be identified. But it seems to me that the GWB administrations disdain for regulation (policing) the financial industry is the key ingredient to the Panic of 2008.

The lax credit standards for consumers (including mortgages) was a problem... but it did not cause the Panic of 2008.


I suspect that there will be a huge amount of new financial regulations enacted world-wide. It has been a world wide event. Derivatives will be one area of focus (including commodity futures market regulations). Speculators will have stricter rules.

I am wondering if the Feds are going to overhaul the Banking Industry in terms of rules regarding consumer credit and put stricter rules in place for Secured and Unsecured loans from banks and credit companies?

From the new I get and reading the tea leaves... it was the Lehman failure that was the trigger for the 'freeze'... because of commercial paper not being 'safe', not because it failed in and of itself... if their commercial paper had some sort of protection etc. on a different level than their other liabilities then it might not have been as bad...

Our company CEO wanted our company out of ALL commercial paper.. but since right now we are low in cash it does not matter... but we will be getting some big cash by year end and will be looking to spread it around to insured accounts..