Financial Reform

TheMoneyIllusion nicely summarizes the financial reform legislation

I can’t see how it addressed ANY of the major causes of the 2008 fiasco. But easily the most inexcusable aspect of the bill was that it didn’t even address Fannie and Freddie. People excuse that on the basis that there is a lot of political support for F&F. But if you can’t reform them right after a $165 billion taxpayer bailout, when will they be unpopular enough that we can address their flaws? …

And no ban on sub-prime mortgages? I thought that was the cause of the crisis.

He misses, however, the biggest failure of the financial reform legislation – that the NRSROs are still in business, rather than in jail.

The government has decided to not reform the NRSROs – because any reform, we are quite truthfully told, would put them out of business.

In other words, their business is completely dependent on corruption and gross improprieties that have cost the taxpayer a trillion, possibly trillions.

Indeed, the regulations that Lawrence White complains about look very much as if they were passed to keep the NRSROs in

As Lawrence White tells us (from behind a paywall):

By means of the high ratings that they awarded to subprime mortgage-backed bonds, the three major rating agencies—Moody’s, Standard & Poor’s, and Fitch—played a central role in the current financial crisis. Without these ratings, it is doubtful that subprime mortgages would have been issued in such huge amounts, since a major reason for the subprime lending boom was investor demand for high-rated bonds—much of it generated by regulations that made such bonds mandatory for large institutional investors. And it is even less likely that such bonds would have become concentrated on the balance sheets of the banks, for which they were rewarded by capital regulations that tilted toward high-rated securities. Why, then, were the agencies excessively optimistic in their ratings of subprime mortgage-backed securities? A combination of their fee structure, the complexity of the bonds that they were rating, insufficient historical data, some carelessness, and market pressures proved to be a potent brew. This combination was enabled, however, by seven decades of financial regulation that, beginning in the 1930s, had conferred the force of law upon these agencies’ judgments about the creditworthiness of bonds and that, since 1975, had protected the three agencies from competition.

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