The act of researching and writing Who's Responsible for the Financial Crisis helped me to understand the series of events that nearly led to a global banking meltdown and depression. But I'd be lying if I said it wasn't still confusing. That is until Mark Gilbert's book Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable came out.
Gilbert is a columnist and bureau chief for Bloomberg News in London.
Did I read the book? Are you kidding? Who's got time to read business books? But I did catch Gilbert's interview on Bob Brinker's Moneytalk radio program, where I was fortunate enough to hear his succinct explanation for what and who caused the financial crisis. That inspired me to try my hand at this:
The Financial Crisis for Dummies
It all started with legislation. The Community Reinvestment Act (CRA) of 1977 was designed to make it easier for low-income families to get mortgages. But due to a long string of misguided and probably politically-motivated amendments, revisions, and related legislation over the next 25 years, the CRA train left the tracks and good intentions turned into idiotic mandates.
One by one, checks and balances intended to ensure that lenders didn't write bad loans were removed. And by 2002, the Department of Housing and Urban Development (HUD) required pseudo-government agency Fannie Mae to dedicate 50% of its funds to back affordable housing. We're talking hundreds of billions of dollars to back bad loans.
In effect, politically-motivated congressional leaders were responsible for creating the subprime mortgage crisis, which I like to think of as a deadly virus.
In addition, Fed Chairman Alan Greenspan and, to some extent, then treasury secretary Robert Rubin, kept interest rates down and supported sub-prime loans. That was an important catalyst for spreading the virus.
Then the bankers found a creative way of getting all those risky loans off their balance sheets by packaging and selling them to investors and institutions all over the world. But they couldn't have done it without help. Rating agencies like Standard & Poor's and Moody's essentially told the banks how to structure mortgage-backed securities in such a way that the agencies could rate them as investment-grade when they weren't.
That's like the banks and rating agencies knowingly infecting the entire world with the deadly virus.
Another key catalyst was then-Chairman of the Senate Banking Committee Phil Gramm pioneering the exemption of over-the-counter derivatives, such as credit-default swaps, from regulation. Greenspan and Rubin also supported deregulation of derivatives.
And that's pretty much what nearly turned the American subprime mortgage crisis into a worldwide financial meltdown. Gilbert calls it, "-- a conspiracy of greed among bankers, investors, rating agencies and regulators --" I think that's pretty darned accurate.
The only thing I still don't get is this. The politicians responsible for oversight of the housing and banking sectors leading up to and during the meltdown - Chairman of the House Financial Services Committee Barney Frank, and Chairman of the Senate Banking Committee Chris Dodd - have to date born zero responsibility and are still in charge of regulation of those sectors. That's the top of the food chain, folks. And they're still there.
Is it any wonder that I don't trust regulators? Do you?