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Response to ucrdem (Reply #50)

Thu May 21, 2015, 10:47 PM

64. Yep

2008 was a function of a derivatives market gone wild as much as anything else. Rubin and Summers teamed up to defeat Brooksley's Born's proposal in the late 90s to regulate the derivatives market. She sought to regulate the swaps market, which she felt was entirely too opaque and vulnerable to crisis. Given that the crisis in 2007-08 began in the swaps market, particularly credit default swaps, she looks prescient as a result.

The trouble in the CDS (credit default swaps) market directly led to the bankruptcy of AIG. AIG, in a fit of stupdity, agreed to take bets made against the housing market with a variety of entities. One of the most notorious was the Abacus deal. In Abacus, Goldman put together a set of the worst tranches of loans in a CDO, sold it to their investors, and then bet against it, using AIG as their bookie. A credit default swap is an insurance policy against a certain market going in an undesired direction. Now, in the case of a party with an actual interest in the underlying deal, it makes sense. A bank could make a risky loan, then buy a CDS from another party which would pay them in case of a default on that loan. The problem with the CDS market is that anyone, not just parties with an actual interest in the underlying deal, can buy one on any given deal. Rather than follow the traditional policy of insurable interest as you would see in home insurance, the CDS market allows anyone to make a bet. Had the Clinton administration pushed for the regulation of the derivatives market, rather than against it, it's quite possible that insurable interest would have become part of this market. That could have proved instrumental in preventing the crisis from becoming as large as it did. It could have been the difference between LTCM and Lehman.

That's just one example of how a Democratic administration made decisions that would prove disastrous in 2007-08. The final repeal of Glass-Steagall allowed commercial banks to do proprietary trading without needing to get a waiver from Treasury, so the leverage employed by those banks ballooned as a result. While it was never on the same level as the investment banks, who were entirely insolvent by the time Obama came into office, it was enough to put them under strain. Citi actually was insolvent and should have been resolved in 2009-10. It wasn't resolved because Rubin was the chairman and his acolyte, Larry Summers, was back in the White House.

The Bush administration did plenty to add to the crisis itself.. It's unlikely that it would have taken the shape it did if that administration had given the endemic fraud in mortgage appraisal even a cursory glance. Had that administration paid attention when whistleblowers came forward to report that the loan pools that made up the late-stage MBS market were primarily comprised of stated-income loans (aka liar's loans), most of the pain could have been spared. These are just two examples of complete regulatory failure on the part of W and his dumbasses, who were content to watch an obvious bubble inflate without a care in the world.

So, yeah, it really was a bi-partisan affair. It feels good to blame the other team, but it's dishonest. If all you want to do is rah-rah for the home team, have at it. Just don't pretend that it has any bearing whatsoever on reality.

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