Fluke? Credit crisis was a heist
Thanks to a complicit Congress, the reins were systematically loosened on the looters of the financial industry. And they're still at it, looking for new plunder.
Question:
How is it that the Office of Thrift Supervision, a unit of the Treasury Department that regulates the savings and loan industry, wound up as the primary federal regulator for insurance giant AIG?
Answer:
Either these examiners, used to the world of savings and loans, didn't understand the complex derivatives transactions they were seeing, or, as in the IndyMac case, they decided to go along. In either case, the agency didn't step in to halt the practice.
Question:
Why weren't state insurance regulators more aggressive in regulating AIG?
Answer:
Because the federal government had forced them to back off. An aggressive interpretation of the definition of insurance could have let state insurance agencies regulate the derivatives contracts that AIG's financial-products group was writing out of London. These were, in fact, insurance policies that guaranteed the companies taking them out (banks, other insurance companies, investment banks and the like) against losses on securities in their portfolios.
With the new law on the books, the market for credit default swaps exploded from $632 billion outstanding in the first half of 2001, according to the International Swaps and Derivatives Association, to $62 trillion in the second half of 2007.
Question:
Wasn't anybody worried about the risk to the financial system posed by a market that dwarfed the assets of the sellers of this insurance?
Answer:
Worry about leverage? You've got to be kidding.
In 2004, the Securities and Exchange Commission, after hard lobbying by Wall Street, reversed its 1975 rule limiting investment banks to leverage of 15-to-1. The new limit could be as high as 40-to-1 if the investment banks' own computer models said it was safe.
Question:
Why wasn't Wall Street more nervous about the rising tide of leverage and the risk it posed?
Answer:
Ah, come on. You know why: The new business model was incredibly profitable.
In 1999, AIG's financial-products group had revenue of $737 million, Morgenson reported in the Times. That had climbed to $3.26 billion by 2005. And almost all of that was profit: Operating income was 83% of revenue in 2005. The biggest expense, by far, was compensation. Salaries and bonuses ranged, depending on how good a year the unit had, from 33% to 46%.
Question:
Why didn't Washington step to at least temper the risk?
Answer:
Money. Just look at the who's who of senators receiving campaign contributions from AIG.
Congress has delivered a lot of other goodies in the past decade or so that have contributed to this crisis -- and made the cleanup more expensive and painful. For example, the Office of the Comptroller of the Currency and the Office of Thrift Supervision both moved to block states from enforcing their consumer-protection laws against any nationally chartered bank.
Among the measures states were prohibited from enforcing were rules against predatory lending.
Not that the federal government stepped in for the states: The Federal Reserve took all of three formal actions against subprime lenders from 2002 to 2007, and the Office of the Comptroller, with authority over 1,800 banks, took only three enforcement actions from 2004 to 2006, according to Multinational Monitor.
But you get the idea by this point.
http://articles.moneycentral.msn.com/Investing/JubaksJournal/fluke-credit-crisis-was-a-heist.aspx?page=1
Question:
How is it that the Office of Thrift Supervision, a unit of the Treasury Department that regulates the savings and loan industry, wound up as the primary federal regulator for insurance giant AIG?
Answer:
Either these examiners, used to the world of savings and loans, didn't understand the complex derivatives transactions they were seeing, or, as in the IndyMac case, they decided to go along. In either case, the agency didn't step in to halt the practice.
Question:
Why weren't state insurance regulators more aggressive in regulating AIG?
Answer:
Because the federal government had forced them to back off. An aggressive interpretation of the definition of insurance could have let state insurance agencies regulate the derivatives contracts that AIG's financial-products group was writing out of London. These were, in fact, insurance policies that guaranteed the companies taking them out (banks, other insurance companies, investment banks and the like) against losses on securities in their portfolios.
With the new law on the books, the market for credit default swaps exploded from $632 billion outstanding in the first half of 2001, according to the International Swaps and Derivatives Association, to $62 trillion in the second half of 2007.
Question:
Wasn't anybody worried about the risk to the financial system posed by a market that dwarfed the assets of the sellers of this insurance?
Answer:
Worry about leverage? You've got to be kidding.
In 2004, the Securities and Exchange Commission, after hard lobbying by Wall Street, reversed its 1975 rule limiting investment banks to leverage of 15-to-1. The new limit could be as high as 40-to-1 if the investment banks' own computer models said it was safe.
Question:
Why wasn't Wall Street more nervous about the rising tide of leverage and the risk it posed?
Answer:
Ah, come on. You know why: The new business model was incredibly profitable.
In 1999, AIG's financial-products group had revenue of $737 million, Morgenson reported in the Times. That had climbed to $3.26 billion by 2005. And almost all of that was profit: Operating income was 83% of revenue in 2005. The biggest expense, by far, was compensation. Salaries and bonuses ranged, depending on how good a year the unit had, from 33% to 46%.
Question:
Why didn't Washington step to at least temper the risk?
Answer:
Money. Just look at the who's who of senators receiving campaign contributions from AIG.
Congress has delivered a lot of other goodies in the past decade or so that have contributed to this crisis -- and made the cleanup more expensive and painful. For example, the Office of the Comptroller of the Currency and the Office of Thrift Supervision both moved to block states from enforcing their consumer-protection laws against any nationally chartered bank.
Among the measures states were prohibited from enforcing were rules against predatory lending.
Not that the federal government stepped in for the states: The Federal Reserve took all of three formal actions against subprime lenders from 2002 to 2007, and the Office of the Comptroller, with authority over 1,800 banks, took only three enforcement actions from 2004 to 2006, according to Multinational Monitor.
But you get the idea by this point.
http://articles.moneycentral.msn.com/Investing/JubaksJournal/fluke-credit-crisis-was-a-heist.aspx?page=1
