Why the Banks failed for real.
Let me present a different group of thoughts and causes. This entire mess began in the term of Cater I when he encouraged the banks to make loans to Sovereign Nations so he could redirect the money from Foreign aid to domestic welfare. He then passed the Community Reinvestment act which forced banks to make mortgages in ghettos and low income areas [AKA high risk loans]. The economy tanked as nine out of the top ten Money center banks had a negative net worth. The bad none performing Sovereign Nation loans were taking the banks down and exceeded their shareholder equity. Continental Illinois Bank was going to file BK and the Senate and House banking committees ordered the FDIC to take them over. They were then ordered to pay all deposits in full even those exceeding the $ 100,000 insurance limits.
Why did the government do this? Well Continental had pieces of all those foreign loans and if they went BK those would be auctioned off and establish the true MARKET value of all those loans to Nations. This would require the Standard Accounting Board to instruct all CPA firms doing independent audits to then write down the loans from cost to market value. If this was done all commercial banks would suffer a run on them and after having loaned out 8 time deposits they were failed. So, the banking committees put the government [taxpayers] on the hook for the bill - they did not have enough guts to just use T-Bill money so they removed the usury laws and instructed the Fed to hike up interest rates so the banks interest income would go from 8% prime rate to 16.5% over night, it topped out at 21.5%. Yes, this was a tax on the consumer [taxpayers]. This allowed the banks to attract huge amounts of cash with certificates of deposits paying 16.5% interest.
Well this single action caused ripples through the economy and the financial world. The Savings and Loan industry was BK the day they removed usury as they by law were forced to have 70% of their deposits in home mortgages which averaged around 6%. So, as you can see there cost of funds went from 3% to 16.5% overnight and they were losing 10.5% on every loan yes BK. But the banking committees gave them a way forward if they were real good developers. They were permitted to build shopping centers, housing tracts, resorts and commercial industrial projects. This gave them a few years of life before the bottom fell out and the S&L industry collapsed.
Under Reagan this created a glut of homes, projects being foreclosed and they were forced to create a government agency to sell these now government owned assets. Well, this took the heat off the bad Sovereign Nation loans but interest rates stayed high and banks were taxing people for many years to payoff the bad loans. The last crash of the financials was still tied to the bad loans to Sovereigns - they were packaged and sold with the CDO and other derivatives.
This time they learned do not do it with interest rate hikes as they kill the economy so keep money cheap and hope housing and other secured loans like the Sovereigns will recover and pay the loans back at lower rates. Well no investors would buy the assets except at super discounts like some of the banks [Wells Fargo] were sold at very low prices with government guarantees to entice buyers. So, Congress banking committees and the Treasury department were directed to come up with a plan - it was TARP. The idea was to buy the bad loans and inject liquidity into the economy so business could go on. Well it did not work when they found the size and scope of the problem.
They found that the derivatives, CDO, CMO, CMB and other debt instruments were flooded with Fannie and Freddie guaranteed loans which Congress was on the hook with the full faith and credit of the Federal government - now what are they forced to do.
Solution was to buy the failed companies and limit the collapse with Federal dollars. Look at the number of banks, insurance companies, auto companies, Investment bank companies [wall street]. The Congress ordered the Fed to keep interest rates low and make bad loans so they had no choice but to pick up the tab as they were behind the acts that caused the failures.
I wish I could agree that it is so simple as the elites [super rich] that engineered this after regulations were relaxed, however there is just no evidence such is even remotely true. There were many regulations in place that NOT enforced and not even APPLIED to any audits that surely showed the exposures. The Political class engineer the entire situation from beginning to the end as they directed the banks to make known bad loans and forced Fannie and Freddie to buy these loans which they then worked with Wall Street to repackage these and sell them so Fannie and Freddie could buy more bad credit loans as Congress directed.
No the fault lies with the elite rich for all they did was sit back and wait for opportunities to present themselves to them and they then purchased banks and lots of discounted paper. Buffet purchased Well Fargo bank so there is proof that even good honest businessmen took advantage of the government failed 30 year program. When Congress fails to protect we the people - it can not be blamed on others or the lack of the number of regulations. It is the failure of Congress who is charged with oversight of all agencies to perform even a poor degree of management.
Now you all have my opinion of the history of failed government policy.
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