A Common Denominator

The meltdown of the Savings and Loan industry of the 1980's which cost the taxpayers approximately $150 billion and the recent financial melt down of Wall Street financial institutions has the same common denominator.  Greed, deregulation and a lack of corporate checks and balances.  Financial reporters Paul Muolo and Mathew Padilla in their book, "Chain of Blame" tells the story of what went wrong.  Some of what they reported will be discussed below.

 

In 1982 President Reagan signed into law the Garn-St.Germain Depository Institutions Act and according to the book told an audience of S&L executives, bankers, members of congress, staffers and journalists that the bill would cut S&L's loose from the girdle of old fashioned regulations.  Prior to the act S&L's were the primary lender of home mortgages.  The act allowed the S&L's to get into the business of financing commercial real estate and development and they got into it big time.  New S&L's were created and started by people with no prior experience and soon became involved with financing commercial real estate ventures that they were ill equipped to do or understood.

 

The results were risky commercial loans that defaulted and caused the worst collapse in the history of the S&L industry.  The act opened up the industry to greed and failed to institute checks and balances to the lending process.

 

The present situation in the financial markets is a result of non bank lenderswho originated trillions of dollars in subprime  mortgages during the housing boom from 2000-2006.  There were few checks and balances in writing these subprime mortgages and many of the borrowers were never checked for their ability to repay their mortgage.  The non banks who originated these loans borrowed money from Wall Street bankers and others and then sold the mortgages to the likes of Merrill Lynch, Bear Stearns and others who wanted to participate in the trillion dollar business of subprime mortgages and failed to get a handle on the safety of the loans.

 

Merrill Lynch, Bear Stearns and other would package these subprime mortgages into bonds and other instruments and sell to investors.  When the subprime mortgage business went south because of the failure of home owners to repay their mortgage payments the financial industry went belly up.  Greed of wanting to participate in this trillions of dollars industry was the down fall of those Wall Street financial institutions along with their failure of understanding just how risky the subprime mortgage business was. 

 

In early 2008, the largest debt market in the world was the U.S. residential mortgage market at $9 trillion.  Corporate America, especially Wall Street has proven they can not be trusted to regulate themselves.  There is too much wealth at their disposal and the kind and amount of wealth we are talking about is corrupting.  That says it all.

 

I would recommend this book be read by everyone.