History
Deregulation and regulatory forbearance have repeatedly lead to booms and busts in our real estate RE markets, but the only thing we learn from history is that we don't learn from history.
Savings and Loan S&L Crisis
Deregulation in the early eighties gave new powers to S&Ls such as making commercial RE loans, making construction RE loans, selling mortgages, etc. S&L bankers and examiners had little experience in these areas and were ill equipped to manage them. This was followed by regulatory forbearance in that the Reagan administration refused to fund adequate numbers of FSLIC examiners to meet the needs of this fast growing industry and refused to fund their reeducation to deal with the industry's expanded powers.
RE values went up then down creating selling and buying opportunities for those who were aware of what was happening. I did not assume this was a manipulation until it happened again.
Great Recessions GRs I
Deregulation and regulatory forbearance lead to another RE boom and bust.
The Glass-Steagall Acts of 1932/1933 separated commercial banks, investment banks, and stock brokers, thus eliminating conflicts of interest and the potential for abusive self dealing. In 1999 Glass-Steagall was repealed. I was still working as a bank examiner at the time, and I remember thinking there must be people much smarter than me to calculate we would be better off without this legislation which had served us well for over 65 years.
Brooksley Born in 1998/1999, as chairperson of the Commodities Futures Trading Commission CFTC, lobbied to give the CFTC oversight authority over off-exchange, over-the-counter OTC markets for derivatives in addition to its authority over exchange-traded markets for derivatives. These OTC derivatives were known only to their counterparties and those counterparties' regulators if any. There was no way to assess systemic risk. This systemic risk was made apparent in the 1998 collapse of Long Term Capital Management LTCM which had leveraged itself into an extreme risk position with the extensive use of unregulated OTC derivatives. Even their investors could not assess LTCM's risk exposure.
Born's position was opposed by other regulators and plutocrat cronies including Treasury Securities Rubin and Summers, Fed chairman Greenspan, SEC chairman Levitt, and Congress.
Congress in December 2000 passed the Commodities Futures Modernization Act CFMA within a FY 2001 appropriations bill. The CFMA legislation excluded financial derivatives including credit default swaps CDSs from supervision under the Commodities Enforcement Act. It reasserted and strengthened their exemption from state laws which could construe them to be gambling.
CDSs were used as insurance against defaulting securities, but while Insurers are precluded from underwriting policies for persons with no insurable interest in the subject property, naked CDS allow parties to have no interest in the contract referenced security. It's a very sophisticated hedge or, more likely more often, plain and simple gambling. Naked CDSs made up as much as 80% of the CDSs market (e). Insured commercial banks and other "too big to fail" institutions should not have been allowed to use them to speculate/ gamble.
Deregulation combined with regulatory forbearance to facilitate
a massive world wide securities fraud. Terrorism
played a role in this forbearance. On
9/11 all SEC records in
You could make the case bankers and others were not gambling
in their use of CDSs because in fact they had rigged their games. It wasn't gambling; it was stealing. SNL Financial reports
Just one indicative example was Abacus 2007-AC1. Investment bank Caldwell Banker colluded with John Paulson to create, sell, and bet against a synthetic collateralized debt obligation CDO Abacus-2007 AC1. The contract referenced securities in this transaction were intentionally picked to default. Caldwell Banker paid 550 million in settlements on this transaction but admitted no wrongdoing, and no one went to jail. Paulson made 1 billion from this transaction (f) and apparently suffered no legal consequences.
We are the most incarcerated country on earth. Though we are only 5% of the world's population, we have 25% of the world's prison population. There is room for victimless criminals like marijuana smokers, but no room for our plutocrats and their cronies who cheated the world of hundreds of billions.
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