Obama threatens first veto over CFPA bill

posted at 11:36 am on January 28, 2010 by Ed Morrissey

Barack Obama has campaigned hard for the Consumer Financial Protection Act, a series of reforms that he wants to use to launch an entirely new independent agency that will act as a watchdog on financial products.  Obama wants to have closer supervision on some of the more arcane but controversial practices in the market, such as default credit swaps that helped accelerate the financial damage from the collapse of the housing bubble.  The House has passed almost entirely want Obama wants, but the Senate almost certainly will leave the supervision in the hands of existing agencies rather than expanding the bureaucracy and creating duplication and overlap.  AOL Politics Daily columnist Joann Weiner reports that Obama has threatened a veto already, which would be the first substantive veto of his presidency:

Speaking in an online forum immediately following the president’s address, American Enterprise Institute fellow and member of the Financial Crisis Inquiry Commission Peter Wallison predicted that Obama will issue his first veto over the consumer protection measure. Although the House bill creates an independent consumer agency, Wallison said that “there is no chance in the world” the Senate will agree on the same provisions for the CFPA.

In light of this basic disagreement, Wallison noted that “the president said that if the financial reform bill reaches his desk and it does not have real reform, that he will send it back,” adding, “This is the first time that the president said that he might veto a bill that doesn’t have what he has proposed.”

Senate Banking Committee Chairman Christopher Dodd of Connecticut, who has announced that he is not seeking reelection, seems to validate Wallison’s views. Dodd has indicated lukewarm support for an independent CFPA.

There are actually two questions at issue.  First, why can’t existing agencies be tasked with whatever additional regulation is required?  After all, Obama himself talked about waste and duplication in government, both last night and repeatedly over the last three years on the national stage.  Creating a separate agency to handle financial products like credit default swaps and other less arcane and more commercial products when the SEC already oversees these markets is a recipe for both contradictory overlap and holes in oversight.  It’s less efficient and builds bureaucratic barriers where streamlined communications would produce better results.

The second question is whether the proposed regulations, even if completely effective and not overly burdensome, would have prevented the collapse in 2008.  In order to answer that, one has to understand the root of the failure, which Weiner clearly does not.  This is her opening paragraph:

President Obama knows that most Americans have no idea how their local bank transforms thousands of monthly mortgage payments into arcane credit default swaps with AIG. But the president recognizes that the banks’ financial engineering nearly brought on another Great Depression when the house of cards that their structured financial products created collapsed in 2008. And the president is committed to making sure that the American consumer will never again be put at the mercy of the bankers.

The problem with this statement is that is assumes that the AIG portion of the collapse happened in a vacuum.  It didn’t.  The collapse in the derivatives market — which was apparently a Wild, Wild West — only occurred after the collapse of the mortgage-backed securities on which those derivatives were based.  That collapse came from a sudden decline in housing valuations that left speculators in the home market badly overextended and without the equity to refinance — and that came from a bubble created mostly by Congressional mandates to Fannie Mae and Freddie Mac to buy subprime loans in massive quantities and create MBSs with implied government backing to spread the risk.  The derivatives, after all, were “derived” from those MBSs with rock-solid credentials, thanks to the Fannie and Freddie imprimatur.

When the housing bubble that Congress created by artificially increasing demand, which in turn artificially increased prices and valuations, finally collapsed under its own weight, that is when the derivatives market collapsed.  Better oversight over derivatives may or may not be a fruitful policy path to tread, but all that does is regulate an accelerator to the collapse rather than avoid the next one.  Congress needs to stop mandating social engineering by manipulating lending markets for their own desired and artificial outcomes.

Maybe Congress and Obama should concentrate on the next bubble, already in motion at FHA, before worrying about regulating the secondary causes of failure.


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“The foolish man built his house upon the sand…”

AubieJon on January 28, 2010 at 11:40 AM

Maybe Congress and Obama should concentrate on the next bubble, already in motion at FHA, before worrying about regulating the secondary causes of failure.

Maybe I should just have a bomb shelter built. At least I can get something for the bunker.

upinak on January 28, 2010 at 11:41 AM

The problem with the various mechanisms that “crashed the market” was that they were used to launder the risk out of the bad mortgages banks were encouraged to make. If there weren’t any “too big to fail” or government backed institutions for that risk to be laundered through, they wouldn’t have been a problem.

Count to 10 on January 28, 2010 at 11:41 AM

His new motto should be:

“Yesterday’s disasters dealth with tomorrow and tomorrow and tomorrow.”

Mommynator on January 28, 2010 at 11:42 AM

Real reform starts with sweeping these jokers out of office.

rbj on January 28, 2010 at 11:43 AM

Ed, you are thinking too logically. He is implementing far left policies – nothing else matters.

faraway on January 28, 2010 at 11:44 AM

I do not like that person. (I can’t even call him a “man”)

SouthernGent on January 28, 2010 at 11:46 AM

Gotta just love those drinking games…

Seven Percent Solution on January 28, 2010 at 11:47 AM

You can sum up the housing collapse with one sentence:

A government sponsored and enforced distortion of the risk to reward ratio for lending.

They filled the bucket with water, walked the horse right up next to it, and now want to shoot the horse for drinking.

BadgerHawk on January 28, 2010 at 11:47 AM

His new motto should be:

“Yesterday’s disasters dealth with tomorrow and tomorrow and tomorrow.”

Mommynator on January 28, 2010 at 11:42 AM

“Full of sound and furry, signifying nothing.”

Count to 10 on January 28, 2010 at 11:47 AM

First, why can’t existing agencies be tasked with whatever additional regulation is required?

There’s no practical reason why they can’t. But using existing agencies doesn’t add nearly as many government employees (SEIU) as a new infrastructure would and doesn’t create a new fiefdom that can be used to grant power to favored individuals and groups.

RadClown on January 28, 2010 at 11:48 AM

Judge Alito approves this message/

Knucklehead on January 28, 2010 at 11:51 AM

The best way for person. family or business to avoid fraud, is to avoid transactions were you are at a large information deficit (i.e., the seller knows a lot more than you). If you cannot bridge the information gap, you should seriously consider not entering into that transaction.

For example, I do not download stuff from the internet unless I know how the “seller” makes money.

WashJeff on January 28, 2010 at 11:52 AM

Gotta just love those drinking games…

Seven Percent Solution on January 28, 2010 at 11:47 AM

here is some water and a couple advil… you are going to need them.

upinak on January 28, 2010 at 11:52 AM

If he can’t have a free hand to manipulate the direction of the free market, he won’t be happy. Hence all the czars and committees doing his bidding. Since the senate failed to pass the committee to recommend new taxes and ways to save on spending, he will create his own. What is the Ways and Means Committee to do now?

Kissmygrits on January 28, 2010 at 11:55 AM

Knucklehead on January 28, 2010 at 11:51 AM

Recalling your question last week if I had a facebook page, I do not, but I am building a web site that I cannot link to since the HA engine views it as spam for some unkown reason. my website is whatisright . info (remove the spaces in the italics).

WashJeff on January 28, 2010 at 11:56 AM

After all, Obama himself talked about waste and duplication in government

Barry obviously has some IOU’s to payoff and already has a number of people ready and ‘qualified’ to fill those new positions.

Just another instance of Barry’s ability to talk out of both sides of his mouth.

GarandFan on January 28, 2010 at 11:57 AM

The absolute worst thing that could happen right now is to create a brand new agency, staffed with ideological zealots with zero business background, to decide which financial products are “safe.” This nonsense idea was hatched just two years ago in an article in Harvard magazine written by Elizabeth Warren, who no doubt will get the job as head of this agency. This woman has an undergraduate degree in psychology and a law degree. She has no business experience whatsoever.

Somehow this silly Kennedy School idea has become a centerpiece of Obama’s agenda for financial reform. It’s ridiculous. Nobody has spent any time thinking or talking about how such an agency will actually work or how it will interact with existing bank regulatory agencies and rules.

Meanwhile, the Fed and HUD have already enacted a slew of new rules on mortgage lending that are slowing down lending and increasing the cost of getting a mortgage. It may be correct to criticize them for closing the barn door after the horse is out, but the fact remains that it is no longer feasible for banks or non-banks to make the kind of NINJA loans, pay-option ARMs, 100% and even 105% LTV loans, that got us into this mess. There is already plenty of regulatory authority, and it is being used – massively so right now.

rockmom on January 28, 2010 at 11:57 AM

There’s no practical reason why they can’t. But using existing agencies doesn’t add nearly as many government employees (SEIU) as a new infrastructure would and doesn’t create a new fiefdom that can be used to grant power to favored individuals and groups.

RadClown on January 28, 2010 at 11:48 AM

Seriously, I think the only reason this agency is being pushed is to give a job to Betsy Warren so she can demagogue the banks in an official capacity. She is a dangerous nitwit.

Thankfully, the Senate Banking Committee has more sense. Chris Dodd knows this thing is a dog. And he would not have the votes to get it out of committee even if he liked it.

rockmom on January 28, 2010 at 12:01 PM

BadgerHawk on January 28, 2010 at 11:47 AM

yep. Kill the people who want a dream and watch them die.

upinak on January 28, 2010 at 12:01 PM

Dems want to do anything to keep the focus off of Fannie and Freddie. They sure don’t want to focus of FHA. It was those greedy bankers.

d1carter on January 28, 2010 at 12:02 PM

rockmom on January 28, 2010 at 11:57 AM

rockmom, I really wish you had a blog talking about this type of stuff. I would read it everyday! I have learned a lot from you.

upinak on January 28, 2010 at 12:03 PM

Nothing more than another huge growth in government and a lot less freedom for Americans.

jukin on January 28, 2010 at 12:06 PM

The problem with this statement is that is assumes that the AIG portion of the collapse happened in a vacuum. It didn’t. The collapse in the derivatives market — which was apparently a Wild, Wild West — only occurred after the collapse of the mortgage-backed securities on which those derivatives were based. That collapse came from a sudden decline in housing valuations that left speculators in the home market badly overextended and without the equity to refinance — and that came from a bubble created mostly by Congressional mandates to Fannie Mae and Freddie Mac to buy subprime loans in massive quantities and create MBSs with implied government backing to spread the risk. The derivatives, after all, were “derived” from those MBSs with rock-solid credentials, thanks to the Fannie and Freddie imprimatur.

–Most of AIG’s problems came from credit swaps it issued to European banks to protect them against sub-prime mortgage exposure. But it was (and is) just stupid to not require AIG and other entities that sold credit swaps to have adequate capital in place to protect themselves in case the underlying obligations turned south. Not to have the protection on the derivatives is like saying you don’t need to clean up the gasoline on your garage floor because you can stop any flames.

Jimbo3 on January 28, 2010 at 12:08 PM

Don’t let a crisis go to waste–repeat it!

Steve Z on January 28, 2010 at 12:09 PM

Meanwhile, the Fed and HUD have already enacted a slew of new rules on mortgage lending that are slowing down lending and increasing the cost of getting a mortgage. It may be correct to criticize them for closing the barn door after the horse is out, but the fact remains that it is no longer feasible for banks or non-banks to make the kind of NINJA loans, pay-option ARMs, 100% and even 105% LTV loans, that got us into this mess. There is already plenty of regulatory authority, and it is being used – massively so right now.

rockmom on January 28, 2010 at 11:57 AM

–And given the problems with these types of loans and the way the real estate market has gone the last three years, isn’t that a good thing? Only an idiot would make 100% or more loan-to-value loans in any type of real estate market nowadays.

Jimbo3 on January 28, 2010 at 12:10 PM

Jimbo3 on January 28, 2010 at 12:08 PM

Or you could just get rid of the requirements/pressure/incentives to make risky loans in the first place and stop backing banks that do.

Creating a solution to a problem that only exists because of government manipulation is a stupid way to do business.

BadgerHawk on January 28, 2010 at 12:11 PM

WashJeff on January 28, 2010 at 11:56 AM

Got it. See you on the spam side.

Knucklehead on January 28, 2010 at 12:14 PM

Creating a solution to a problem that only exists because of government manipulation is a stupid way to do business.

BadgerHawk on January 28, 2010 at 12:11 PM

Correct. I use a variation of this phrase a lot when someone is complaining about bank X or financial institution Z.

WashJeff on January 28, 2010 at 12:16 PM

Jimbo3 on January 28, 2010 at 12:08 PM

Hedgin investments is one thing, but a capital reserve, sitting there “in case investments dont work out” is wasted money.

As a former finacial securities guy – I have seen some shaky dealings (warrants trading higher than a stock…) and agree the current SEC along with NASD have the might and mandate to do their job; but risk/reward is inherent to anything financial. Some products have higher r/r, some lower – and the payout generally reflects this.

More education is needed to the common American person – not some 401k plan financial clown who shows up once a quarter to say “the market always goes up, because you are young – you should put more in assets, not income bearing, etc, etc”

There is zero correlation between age and stock performance. Ask the folks 64, a year from retirement – who saw thier retirement plans nosedive – and now have to remain working 5 years to hopefully breakeven.

Again – the limits and information need to be out there, properly – not the knee jerk “you need to do this” crap that is sold 24/7 in America. Because when valuations drop dramatically – there is no recourse to the common stock holder – within their retirement plan.

And people need to read their financial statements, included 12b-1 fees, management feees, holdings %, leveraged investments, etc.

There is a reason why 90% of analysts, money managers, hedge funds were wrong and lost money… thats the only stat needed when investing.

Odie1941 on January 28, 2010 at 12:17 PM

OT: BEST. FISH. EVER. I grew up eating this carp, every week on Fridays.

OmahaConservative on January 28, 2010 at 12:17 PM

I was wondering when he would actually veto something. I figured that he would soon since everyone hates Congress and so that must be why his approval numbers are dropping. Whatever the final bill says it will still have the same fatal flaw that this bill had… Govt Control…

jeffn21 on January 28, 2010 at 12:18 PM

Its actualy very simple… Obama does NOT want to fix anything, he just wants to APPEAR to be fixing things.

Its just like leaving both Geithner and Bernake (the two who, IMO, by not doing their jobs created most of the havoc) in charge… it not about performance…

Romeo13 on January 28, 2010 at 12:26 PM

O/T from Fox:

http://www.foxnews.com/politics/2010/01/28/senate-approves-tougher-deficit-curbs/

Apparently the Sentate just approved a measure pretty much blocking the Bush tax cuts from being extended. Apparently they are attempting to double down before Mr. Brown gets to Washington:

“The Democratic-backed plan would make it more difficult to permanently extend some tax cuts that expire at the end of this year and renew health care subsidies for laid-off workers.”

Johnnyreb on January 28, 2010 at 12:26 PM

Johnnyreb on January 28, 2010 at 12:26 PM

We are all Oregon now.

WashJeff on January 28, 2010 at 12:33 PM

It sucks that these types of threads draw so few comments.

BadgerHawk on January 28, 2010 at 12:34 PM

C’mon Congress. Kick his ass. Don’t take this crap from a pissin in his pants president.

capejasmine on January 28, 2010 at 12:37 PM

The best metaphor for the “financial crisis” is an electrical system blackout.
The electrical grid is a system that powers our everyday life, it does have the ability to be put into a certain unstable state. The “credit default swap” markets were created to spread around the risk so that no one party takes the hit for a credit failure, but by it’s nature when it becomes saturated, as it was, it is prone to be put into an unstable state, and since the risk is spread around, it makes everybody at risk.
The housing loans. many created under CRA and many more created under the extension of the rules of CRA, created the instability to the market. That created a huge instability in the market, which the saturated risk of the CDS market would then spread to virtually everybody.

J_Crater on January 28, 2010 at 12:38 PM

to launch an entirely new independent agency that will act as a watchdog on financial products

So are they going to dismantle the Securities and Exchange Commission?

Branch Rickey on January 28, 2010 at 12:45 PM

Yea, more government oversight, always the same answer from this jerk, more gov’ment will fix it.

la.rt.wngr on January 28, 2010 at 12:46 PM

J_Crater on January 28, 2010 at 12:38 PM

That works, but I still like my horse comparison.

BadgerHawk on January 28, 2010 at 12:46 PM

It sucks that these types of threads draw so few comments.

BadgerHawk on January 28, 2010 at 12:34 PM

I would guess it is because the subject matter is quite complex. What cracks me up everytime lawmakers try to legislate things, they never explain why previous regulation regimes failed and the new one will succeed.

WashJeff on January 28, 2010 at 12:48 PM

Johnnyreb on January 28, 2010 at 12:26 PM

Hmmm… I thought it was illegal for the guy in Scott Brown’s seat to Vote in the Senate?

Lawsuit time?

Romeo13 on January 28, 2010 at 12:51 PM


First, why can’t existing agencies be tasked with whatever additional regulation is required?

Where are the created jobs in that? Where is the headline grabbing “taking the bull by the horns” message in that? First and foremost though, where is the government meddling and wresting control from the private sector?

Koa on January 28, 2010 at 12:57 PM

The assumption is that because the reguloatory agencies “failed” to rein in the risky lending, they cannot be trusted to do it going forward; and that the bank regulatory agencies are structured to examine only on safety and soundness and not to worry about “protecting consumers” – whatever the hell that means.

Basically, they want a government nanny agency whose sole job it is to review any new type of loan or other financial product and determine if it is “safe” before it can be offered to the public. These morons think it is entirely analogous to the Consumer Product Safety Commission, like you can easily define a loan as “unsafe” the same way you can determine if a toaster has faulty wiring and will set your house on fire.

Unfortunately, the way financial services works can be messy. Every bank and lending institution has a slew of risk managers and lawyers whose job it is to decide if what the sales people want to sell is too risky. (In the company I used to work for, the legal staff were often referred to as the “sales prevention team.”) But the assumptions that underlay those decisions can sometimes be proven wrong, as they were when home prices started falling in 2006. Loans that are perfectly fine in a rising market can look stupid and downright insane when prices are falling.

rockmom on January 28, 2010 at 1:25 PM

Jimbo3 on January 28, 2010 at 12:08 PM
Hedgin investments is one thing, but a capital reserve, sitting there “in case investments dont work out” is wasted money.

As a former finacial securities guy – I have seen some shaky dealings (warrants trading higher than a stock…) and agree the current SEC along with NASD have the might and mandate to do their job; but risk/reward is inherent to anything financial. Some products have higher r/r, some lower – and the payout generally reflects this.

More education is needed to the common American person – not some 401k plan financial clown who shows up once a quarter to say “the market always goes up, because you are young – you should put more in assets, not income bearing, etc, etc”

There is zero correlation between age and stock performance. Ask the folks 64, a year from retirement – who saw thier retirement plans nosedive – and now have to remain working 5 years to hopefully breakeven.

Again – the limits and information need to be out there, properly – not the knee jerk “you need to do this” crap that is sold 24/7 in America. Because when valuations drop dramatically – there is no recourse to the common stock holder – within their retirement plan.

And people need to read their financial statements, included 12b-1 fees, management feees, holdings %, leveraged investments, etc.

There is a reason why 90% of analysts, money managers, hedge funds were wrong and lost money… thats the only stat needed when investing.

Odie1941 on January 28, 2010 at 12:17 PM

-Aren’t banks, insurance companies and brokerage houses all required to have several layers of capital by regulation? There’s no requirement not to invest them in something, but they should be in safe, liquid investments so they are there if needed. I don’t know why companies that sell derivatives shouldn’t be subject to similar requirements.

Jimbo3 on January 28, 2010 at 12:08 PM

Or you could just get rid of the requirements/pressure/incentives to make risky loans in the first place and stop backing banks that do.

Creating a solution to a problem that only exists because of government manipulation is a stupid way to do business.

BadgerHawk on January 28, 2010 at 12:11 PM

–The sub-prime real estate market was the largest part of AIG’s exposure (but it was under swap contracts to European banks who apparently made the original mortgage loans), but it wasn’t all of the problem.

March 31, 2008

Unrealized Market Valuation
Loss

Three Months
Ended Cumulative
Notional March 31, At March 31,
Amount 2008 2008
(in billions) (in millions) (in millions)

Corporate loans(a) $ 192 $ – $ –
Prime residential mortgages(a) 143 – –
Corporate debt/ CLOs 57 896 1,123
Multi-sector CDOs(b) 77 8,037 19,281
Mezzanine tranches(c) 6 174 174

Total $ 475 $ 9,107 $ 20,578
b) Approximately $60.6 billion in notional amount of the multi-sector CDO pools include some exposure to U.S. sub-prime mortgages.

See page 46 of AIG’s 10-Q for the quarter where everything started falling apart for them for more detail: http://www.sec.gov/Archives/edgar/data/5272/000095012308005336/y51401ae10vq.htm.

It is too bad very few people talk on these threads, BadgerHawk. I’m hoping that Rockmom, in particular, can say a little more about these things and her experience in DC.

Jimbo3 on January 28, 2010 at 1:39 PM

Justice Alito just destroyed his chance for a Noble Peace prize.

Heroes like Algore, Obama Yassar Arafat etc are in a different zone.

seven on January 28, 2010 at 1:46 PM

Obama, Franks, Waters, LLC — destroyers of the nation’s economy.

unclesmrgol on January 28, 2010 at 1:49 PM

Is it wrong for me to sympathize with Dingy Harry Reid just a bit here?

Damn – that Obama guy really puts a load on old Harry. And Harry’s old – and I don’t think his knees and back will handle it that much longer!

LOL

HondaV65 on January 28, 2010 at 2:06 PM

“There are actually two questions at issue. First, why can’t existing agencies be tasked with whatever additional regulation is required? After all, Obama himself talked about waste and duplication in government, both last night and repeatedly over the last three years on the national stage. Creating a separate agency to handle financial products like credit default swaps and other less arcane and more commercial products when the SEC already oversees these markets is a recipe for both contradictory overlap and holes in oversight. It’s less efficient and builds bureaucratic barriers where streamlined communications would produce better results.”

Perhaps the new body of regulators would be following the plan as put forth by Andy Stern where these positions would be filled with Union-Friendly acolytes? Much like he has in having his cronies appointed to Corp Boards after his pension fund acquires a sizable stake in shares. Liberty Chick has an awesome expose on how Stern< Paul Booth(AFSCME) etal, team up and use "shareholder resolutions" to manipulate Corp decisions…

http://biggovernment.com/2010/01/27/seius-secret-weapon-if-obamas-plan-fails-brandish-the-shareholder-resolution/

Andy Stern is a truly frightening individual whose ruthlessness in the pursuit of power is whole-heartedly, of the-ends-justify-the-means catageory. After all, he once frankly copped to in an interview about his beleifs, “The power of persuasion? No, the persuasion of power!”

We may get the impession that we have the Progressives on the run after recently winning the last 3 elections. Do not fool yourselves, these people haven’t even gotten started yet. And the depths to which they will stoop to to accomplish their aims, and maintain their hold on power, has not yet begun to manifest itself.

Fasten your seatbelts kids, we have some serious turbulence yet to traverse.

Archimedes on January 28, 2010 at 2:24 PM

Oh, and I forgot to mention that in the link to Libety Chick above, is evidence of the coincidentally convenient fact the CFPA is basically identical to the proposal of “suggested” reforms mailed by the SEIU to the banks they were/are trying to unionize.

Archimedes on January 28, 2010 at 2:35 PM

It is too bad very few people talk on these threads, BadgerHawk. I’m hoping that Rockmom, in particular, can say a little more about these things and her experience in DC.

Jimbo3 on January 28, 2010 at 1:39 PM

Yes. Please help me sort it out.
I know science & cows.
That is it.
I definitely need help understanding all this financial hooey.
I’ve been thinking of taking a literacy class for agriculture financing.
I signed so many papers this fall after restructuring our ag loan/mortgages my head is still spinning.

Badger40 on January 28, 2010 at 2:38 PM

http://moneymorning.com/2008/09/18/credit-default-swaps/

Badger, you might want to read this article that talks about the credit swaps/derivatives.

Jimbo3 on January 28, 2010 at 2:58 PM

-Aren’t banks, insurance companies and brokerage houses all required to have several layers of capital by regulation? There’s no requirement not to invest them in something, but they should be in safe, liquid investments so they are there if needed. I don’t know why companies that sell derivatives shouldn’t be subject to similar requirements.

Jimbo3 on January 28, 2010 at 12:08 PM

The capital backing anything varies, upon the products and services offered, but not a guarantee.

Insurance companies must have set capital as a ratio – but like we saw after 9/11 – the rare and massive destruction of assets outpaced the capital reserve. Actuarial scientists get paid lots of money to figure out the formulas. What did cause an uproar in the insurance industry was when they began rolling out products more akin to assets, then insurance. Variable annuities got crushed in ’87.

As you get closer to a true “asset”, that capital is far less. If you buy a $10 and its worth is now $5 – thats the risk you took, there is nothing to compensate for that loss, if you sell.

Banks are a different animal, being you are “lending” the bank money on your deposits, hence your interest rate. You may have heard about the Glass Stegal Act being overturned – which also caused an uprorar – because banks were allowed to sell fincial products, with high risk, wereas deposits were used to mitigate that risk. Think Citicorp 1999.

So yes, capital requirements for certain products and models are required – but a huge problem (that I mentioned earlier) is the majority of Americans place their 401k’s or other retirement vehicles into assets, instead of income or fixed bearing instruments. Within your retirement plan offerings – it is the job of the company and yourself to understand the investment vehicle, namely risk.

Another problem – just 20 years ago – company’s were responsible for the majority of retirement vehicles – like Penions, but have gone to 401k’s to limit their cost, which in a macro world – moves the majority of that risk to individual employees. I believe it was 75/25 and is now 65/35.

Again – I htink most people with a retirement account and a plan sponsor can recall a hambone doing his quarterly dance, while talking about “the stock market”, showing charts of success (which can be manipulated in 3 seconds with software like Oppenheimer Asset Calculator), combined with Morningstar reports (which tell you were a company was, not where its going – read analyst reports for that) – and paying little attention to income/fixed instruments.

Know why? Check the 12b-1 fees of a “risky” mutual fund vs fixed/income bearing. Companiues make up to 30 times more in feees to “manage” your portfolio – because no one needs to manage a fund of T-Bills. Thjat “privalege” you paid for goes into the abyss of loss, when the assets markets tank, then reverberate to derivitives, options, annuities, and any other ventures built off of that asset.

Like the recent mortgage backed fiasco…

I think we would agree – the complexity of some of these vehicles need to either be explained and/or ended in general.

Show me any decade and I will find an investment vehicle that lost billions, under the watch of the SEC. S&L’s, IPO’s, Variable market, mortgage-backed…

Odie1941 on January 28, 2010 at 3:21 PM

That collapse came from a sudden decline in housing valuations that left speculators in the home market badly overextended and without the equity to refinance — and that came from a bubble created mostly by Congressional mandates to Fannie Mae and Freddie Mac to buy subprime loans in massive quantities and create MBSs with implied government backing to spread the risk.

The bubble came from mandates to Fannie and Freddie to buy real estate loans in massive quantities.

The crisis was created by the gov’t flooding the market with too much debt on all levels. To point to one single type of loan understates the overwhelming size of the problem… it is exponentially bigger than most people realize.

In 1990, we had about 2.5 Trillion in mortgage debt.
In 2007, we had about 5.1 Trillion in mortgage debt.
Today, we have almost 12 Trillion in mortgage debt.

(One trillion, ONE, is $1 per second for 32,000 YEARS… and that’s without interest!!)

SO much money was dumped into the system, it grossly inflated the price of homes… doesn’t matter if the loan was subprime, Alt-A, prime or any other kind of category…. if a home was bought when the market was 20%, 30%, 40%, 50%, 60% over-priced, then ANY loan given during that time was a bad loan and that investment was a bad investment (either for the bank, the buyer or for both parties).

Subprime loans were simply the first link to break in a drastically over-stretched chain of debt. About 50% of subprime loans have defaulted (some markets have much higher or much lower default levels).

Now, Alt-A Option ARMs are starting to default. They expect 70% or more of those to default.

The prime loan default wave will be next and it could dwarf both the subprime wave and the Alt A wave.

Just remember one thing, the crisis was caused by the government artificially inflating the demand for housing with cheap money (which also artificially inflated employment across all sectors… but that is a whole other chapter).

The free market did not cause this crisis.

painesright on January 28, 2010 at 4:10 PM

Maybe Congress and Obama should concentrate on the next bubble, already in motion at FHA, before worrying about regulating the secondary causes of failure.

If at first you don’t succeed…!

Dr. ZhivBlago on January 28, 2010 at 4:37 PM

I think we would agree – the complexity of some of these vehicles need to either be explained and/or ended in general.

Show me any decade and I will find an investment vehicle that lost billions, under the watch of the SEC. S&L’s, IPO’s, Variable market, mortgage-backed…

Odie1941 on January 28, 2010 at 3:21 PM

–I try not to invest my money in anything that can’t be well explained in two sentences. We agree.

Jimbo3 on January 28, 2010 at 4:38 PM

SO much money was dumped into the system, it grossly inflated the price of homes… doesn’t matter if the loan was subprime, Alt-A, prime or any other kind of category…. if a home was bought when the market was 20%, 30%, 40%, 50%, 60% over-priced, then ANY loan given during that time was a bad loan and that investment was a bad investment (either for the bank, the buyer or for both parties).

Subprime loans were simply the first link to break in a drastically over-stretched chain of debt. About 50% of subprime loans have defaulted (some markets have much higher or much lower default levels).

Now, Alt-A Option ARMs are starting to default. They expect 70% or more of those to default.

The prime loan default wave will be next and it could dwarf both the subprime wave and the Alt A wave.

Just remember one thing, the crisis was caused by the government artificially inflating the demand for housing with cheap money (which also artificially inflated employment across all sectors… but that is a whole other chapter).

The free market did not cause this crisis.

painesright on January 28, 2010 at 4:10 PM

–I don’t remember the government with a gun in someone’s face demanding that they buy a house or else they’d be killed. And it wasn’t just the government doing the lending in residental mortgage loans. This website claims 378 mortgage lenders have imploded since 2006: http://ml-implode.com

Jimbo3 on January 28, 2010 at 4:42 PM

Typo, I should have said:
In 2000, we had 5.1 Trillion in mortgage debt… not 2007.
From 2000 – today it increased to almost 12 Trillion.
Sorry about that.

Point well taken about the fact that the gov’t didn’t put a gun to anyone’s head and make them buy a house or lend money (although some would argue that they did force the banks to lend to some people who did not qualify, but that was only part of the problem).

As Peter Schiff explains much better than I can, the market got drunk off of alcohol that was served up in gigantic quantities by the Fed/Congress.

If the alcohol wasn’t there to begin with, the market would have never gotten as face-down-in-the-toilet drunk as it did.

The excess liquidity had to go somewhere… due to the social engineering vote-buying schemes of Congress (”everyone deserves a home!”)and a tax code that favored real estate, it went into real estate.

Bottom line, the ultimate fault has to be put on the government and the Fed.

Without Fannie/Freddie, a tax code that favored investment in one particular product (houses) and trillions of dollars in cheap money, this would have never happened.

painesright on January 28, 2010 at 5:26 PM

The House has passed almost entirely want Obama wants, but the Senate almost certainly will leave the supervision in the hands of existing agencies rather than expanding the bureaucracy and creating duplication and overlap.

Type o.

:)

One Angry Christian on January 28, 2010 at 6:26 PM