Overlooked this little doozy, as did probably everyone else.

A Tiny Revolution: In 2000 SEC Testimony, Paulson Recommended "Self-Regulation" For Wall Street, Plus A Rule Change Now Blamed For Collapse

In 2000 SEC Testimony, Paulson Recommended "Self-Regulation" For Wall Street, Plus A Rule Change Now Blamed For Collapse

Back in 2000, when Hank Paulson was CEO of Goldman Sachs, he testified in front of the Security and Exchange Commission. Among other things, he lobbied the SEC to enact a "change to self-regulation" for Wall Street. He also urged them to change the "net capital rule" which governed the amount of leverage investment banks could use. The net capital rule was indeed changed in 2004, and is now blamed for the investment banks' collapse.

The Challenge of Technology and Change to Self-Regulation in the United States

The third area for re-examination and reform is the structure of broker/dealer regulation, a function now shared by the SEC and the self regulatory organizations ("SROs"), principally the New York Stock Exchange and NASD Regulation Inc.

[W]e and other global firms have, for many years, urged the SEC to reform its net capital rule to allow for more efficient use of capital. This is the single most important factor in driving significant parts of our business offshore, so that our firms can remain competitive with our foreign competitors risk-based capital standards must become the norm. The SEC has made it clear that risk-based capital rules can be implemented only when the Commission is confident that firms employing value-at-risk models have robust credit and risk management policies in place.

For these reasons we think it is time to seriously consider the creation of a single, independent SRO to adopt, examine and enforce a core body of financial responsibility, customer protection and margin rules. We hope and expect that there would be savings generated by economies of scale.

How did Paulson's recommendation to let investment banks borrow much, much more work out?

Here's a story from two weeks ago:
The Securities and Exchange Commission can blame itself for the current crisis. That is the allegation being made by a former SEC official, Lee Pickard, who says a rule change in 2004 led to the failure of Lehman Brothers, Bear Stearns, and Merrill Lynch.

The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults...

The so-called net capital rule was created in 1975 to allow the SEC to oversee broker-dealers...The net capital rule also requires that broker dealers limit their debt-to-net capital ratio to 12-to-1...

In 2004, the European Union passed a rule allowing the SEC's European counterpart to manage the risk both of broker dealers and their investment banking holding companies. In response, the SEC instituted a similar, voluntary program for broker dealers with capital of at least $5 billion, enabling the agency to oversee both the broker dealers and the holding companies.

This alternative approach, which all five broker-dealers that qualified — Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley — voluntarily joined, altered the way the SEC measured their capital. Using computerized models, the SEC, under its new Consolidated Supervised Entities program, allowed the broker dealers to increase their debt-to-net-capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1. It also removed the method for applying haircuts, relying instead on another math-based model for calculating risk that led to a much smaller discount.

Who murdered the American economy? It was the CEO, in the 13th Floor Conference Room, with the Prepared Testimony.

—Jonathan Schwarz

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All things serve The Beam

yes I have read this before......and he and the rest of the dirty dozen are runing htis "bailout"...what a joke....

__________________
Every decent man is ashamed of the government he lives under.

Every normal man must be tempted at times to spit on his hands, hoist the black flag, and begin to slit throats.

H. L. Mencken


Mortgage Backed Security survivor

The sheer fucking chutzpah of his position boggles the mind.

Any way you could possibly replace the 'the' in the title with a 'that'?

Thanks, I tried to, but can't.

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All things serve The Beam

The first question that has to be asked, is on what basis you presume to asser that the regulations mentioned above had anything whatsoever to do with the current problem.

This problem is a result of the sub-prime mortage mess, and for all their own finger pointing, it has been liberals who have been pressuring if not outright threatening the financial industry to use lower standards (or no standards) of credit-worthiness to increase access to credit for people who are otherwise unworthy of the credit they got.

Freddie and Fannie Mae were ground zero in this problem, and not only were the regulatory flaws which made financial powder kegs fought for by democrats, but the entities themselves were created by liberals in Congress.

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"It's a good feeling to shoot a bad guy. Something you democrats would never understand. Americans are homesteaders, we want a safe home, keep the money we make, and shoot bad guys!"

----Denny Crane

Perhaps it escaped your notice, but I didn't write the article. I have asserted nothing.Ascribing blame to either one party or the other in this case is irrational.Irrelevant.

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All things serve The Beam

Really? Did the title of this thread write itself--"Paulson lobbied for rule change that caused collapse"?

Don't be obtuse and suggest that you were not making a statement in the words you chose to cite.

And yet this thread starting with you citing an article which pointed the finger in only one direction.

Can I assume this means you think that Nancy Pelosi, Barack Obama, and Joe Biden are all irrational?

How is the real cause of the problem "irrelevant" being blamed other factor irrelevant?

Did anything Paulson lobbied for cause any of the now questionable mortgages to be made?

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"It's a good feeling to shoot a bad guy. Something you democrats would never understand. Americans are homesteaders, we want a safe home, keep the money we make, and shoot bad guys!"

----Denny Crane

I'm sorry, did he or did he not lobby for the rule change? Perhaps it was all just an illusion.I merely stated a fact. You don't have to like it.And therefore I personally consider that there are no other contributory factors? You assumption slip is showing.You seem to assume a lot, so do as you wish.My point was that your assertion that liberals originally created Freddie and Fanny is irrelevant to any potential solution to the current mess.

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All things serve The Beam

Yes, but the rule had nothing to do with ther current crisis.

Riiiiggggghhhhttttt. And you were not in any way shape or form trying to convey any particular reflection of your own views whatsoever. In fact you were torn whether to state that fact, or whether to start a thread titled "The Sun is hot".

I made no such assumption, I merely "stated a fact" that--whatever you may believe in your mind--you are only pointing fingers in one direction.

Well, based on your assertion, and the fact that all of them have done nothing but blame one party, it is either a perfectly logical and reasonable conclusion...or you yourself are being very selective in applying your own standard.

Not if the very existence of government sponsored entities with the purpose and policies of Freddie and Fannie were the root cause of the current mess.

Also, I did not just refer to the creation of Freddie and Fannie, but also to the ongoing obstruction and refusal on the part of democrats to permit any regulation of them that might have avoided this mess.

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"It's a good feeling to shoot a bad guy. Something you democrats would never understand. Americans are homesteaders, we want a safe home, keep the money we make, and shoot bad guys!"

----Denny Crane

Ah, you failed to actually read the article. I wondered where your cognitive dissonance was coming from. Thanks for clearing that up.Since we've established that you didn't read the article, I'll help you out: It's title is far too long to duplicate, word for word in the title box here.In this case, the article, the subject, this thing that you seemingly refuse to understand, deals only with one issue. Nowhere did I say there were no others. Again, and I know from past experience that this is your usual M.O., you blithely assume and end up looking foolish in doing so.No, not in the least. But if saying it makes you feel better, that's fine.Problem being, their 'very existence' wasn't the real problem. Their misuse certainly was.Yawn. Same moronic conservative schtick.

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All things serve The Beam

I have been saying for at least 5 years the economy will eventually collapse.
I knew way back that the fantastic growth of the economy throughout the 90's was based on a false foundation....debt.
I also knew that irregardless of the size and seemingly strength of the economy - it was a ticking time bomb...that eventually the lack of a true foundation would cause the giant bubble to burst.
I have also been saying for sometime that the coming collapse will be different; that it is not a correction or simple ebb and flow of a normal economy.
We are only at the beginning folks. The Government, by the end of the year will toss in approximately $1.5 trillion dollars in an attempt to stop a collapse that cannot be stopped. The bailout will affect any of us very little if any at all...the core of the problem is still here (and not being addressed at all).
We still have a false economy.

DID ANYONE REALLY BELIEVE BELOW WAS REAL??? (or such growth even possible)

Attached Images

 

let me dip my oar in with some others tidbits a sorta whos who and when....

How Government Stoked the Mania
Housing prices would never have risen so high without multiple Washington mistakes.

Many believe that wild greed and market failure led us into this sorry mess. According to that narrative, investors in search of higher yields bought novel securities that bundled loans made to high-risk borrowers. Banks issued these loans because they could sell them to hungry investors. It was a giant Ponzi scheme that only worked as long as housing prices were on the rise. But housing prices were the result of a speculative mania. Once the bubble burst, too many borrowers had negative equity, and the system collapsed.


Part of this story is true. The fall in housing prices did lead to a sudden increase in defaults that reduced the value of mortgage-backed securities. What's missing is the role politicians and policy makers played in creating artificially high housing prices, and artificially reducing the danger of extremely risky assets.

Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low and moderate income borrowers. For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target -- 42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005.

For 1996, HUD required that 12% of all mortgage purchases by Fannie and Freddie be "special affordable" loans, typically to borrowers with income less than 60% of their area's median income. That number was increased to 20% in 2000 and 22% in 2005. The 2008 goal was to be 28%. Between 2000 and 2005, Fannie and Freddie met those goals every year, funding hundreds of billions of dollars worth of loans, many of them subprime and adjustable-rate loans, and made to borrowers who bought houses with less than 10% down.

Fannie and Freddie also purchased hundreds of billions of subprime securities for their own portfolios to make money and to help satisfy HUD affordable housing goals. Fannie and Freddie were important contributors to the demand for subprime securities.

Congress designed Fannie and Freddie to serve both their investors and the political class. Demanding that Fannie and Freddie do more to increase home ownership among poor people allowed Congress and the White House to subsidize low-income housing outside of the budget, at least in the short run. It was a political free lunch.

The Community Reinvestment Act (CRA) did the same thing with traditional banks. It encouraged banks to serve two masters -- their bottom line and the so-called common good. First passed in 1977, the CRA was "strengthened" in 1995, causing an increase of 80% in the number of bank loans going to low- and moderate-income families.

Fannie and Freddie were part of the CRA story, too. In 1997, Bear Stearns did the first securitization of CRA loans, a $384 million offering guaranteed by Freddie Mac. Over the next 10 months, Bear Stearns issued $1.9 billion of CRA mortgages backed by Fannie or Freddie. Between 2000 and 2002 Fannie Mae securitized $394 billion in CRA loans with $20 billion going to securitized mortgages.

By pressuring banks to serve poor borrowers and poor regions of the country, politicians could push for increases in home ownership and urban development without having to commit budgetary dollars. Another political free lunch.

Fannie and Freddie and the banks opposed these policy changes at first through both lobbying and intransigence. But when they found out that following these policies could be profitable -- which they were as long as rising housing prices kept default rates unusually low -- their complaints disappeared. Maybe they could serve two masters. They turned out to be wrong. And when Fannie and Freddie went into conservatorship, politicians found out that budgetary dollars were on the line after all.

While Fannie and Freddie and the CRA were pushing up the demand for relatively low-priced property, the Taxpayer Relief Act of 1997 increased the demand for higher valued property by expanding the availability and size of the capital-gains exclusion to $500,000 from $125,000. It also made it easier to exclude capital gains from rental property, further pushing up the demand for housing.

The Fed did its part, too. In 2003, the federal-funds rate hit 40-year lows of 1.25%. That pushed the rates on adjustable loans to historic lows as well, helping to fuel the housing boom.

The Taxpayer Relief Act of 1997 and low interest rates -- along with the regulatory push for more low-income homeowners -- dramatically increased the demand for housing. Between 1997 and 2005, the average price of a house in the U.S. more than doubled. It wasn't simply a speculative bubble. Much of the rise in housing prices was the result of public policies that increased the demand for housing. Without the surge in housing prices, the subprime market would have never taken off.

Fannie and Freddie played a significant role in the explosion of subprime mortgages and subprime mortgage-backed securities. Without Fannie and Freddie's implicit guarantee of government support (which turned out to be all too real), would the mortgage-backed securities market and the subprime part of it have expanded the way they did?

Perhaps. But before we conclude that markets failed, we need a careful analysis of public policy's role in creating this mess. Greedy investors obviously played a part, but investors have always been greedy, and some inevitably overreach and destroy themselves. Why did they take so many down with them this time?


the rest at-


How Government Stoked the Mania - WSJ.com

__________________
Every decent man is ashamed of the government he lives under.

Every normal man must be tempted at times to spit on his hands, hoist the black flag, and begin to slit throats.

H. L. Mencken


Mortgage Backed Security survivor

and the best of all, from their own mouths, to gods ears.......UN fuckingbeleivable....

What They Said About Fan and Fred

House Financial Services Committee hearing, Sept. 10, 2003:

Rep. Barney Frank (D., Mass.): I worry, frankly, that there's a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. . . .


Rep. Maxine Waters (D., Calif.), speaking to Housing and Urban Development Secretary Mel Martinez:

Secretary Martinez, if it ain't broke, why do you want to fix it? Have the GSEs [government-sponsored enterprises] ever missed their housing goals?

* * *
House Financial Services Committee hearing, Sept. 25, 2003:

Rep. Frank: I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing. . . .

* * *
House Financial Services Committee hearing, Sept. 25, 2003:

Rep. Gregory Meeks, (D., N.Y.): . . . I am just pissed off at Ofheo [Office of Federal Housing Enterprise Oversight] because if it wasn't for you I don't think that we would be here in the first place.

Fannie Mayhem: A History
A compendium of The Wall Street Journal's recent editorial coverage of Fannie and Freddie.
And Freddie Mac, who on its own, you know, came out front and indicated it is wrong, and now the problem that we have and that we are faced with is maybe some individuals who wanted to do away with GSEs in the first place, you have given them an excuse to try to have this forum so that we can talk about it and maybe change the direction and the mission of what the GSEs had, which they have done a tremendous job. . .

Ofheo Director Armando Falcon Jr.: Congressman, Ofheo did not improperly apply accounting rules; Freddie Mac did. Ofheo did not try to manage earnings improperly; Freddie Mac did. So this isn't about the agency's engagement in improper conduct, it is about Freddie Mac. Let me just correct the record on that. . . . I have been asking for these additional authorities for four years now. I have been asking for additional resources, the independent appropriations assessment powers.

This is not a matter of the agency engaging in any misconduct. . . .

Rep. Waters: However, I have sat through nearly a dozen hearings where, frankly, we were trying to fix something that wasn't broke. Housing is the economic engine of our economy, and in no community does this engine need to work more than in mine. With last week's hurricane and the drain on the economy from the war in Iraq, we should do no harm to these GSEs. We should be enhancing regulation, not making fundamental change.

Mr. Chairman, we do not have a crisis at Freddie Mac, and in particular at Fannie Mae, under the outstanding leadership of Mr. Frank Raines. Everything in the 1992 act has worked just fine. In fact, the GSEs have exceeded their housing goals. . . .

Rep. Frank: Let me ask [George] Gould and [Franklin] Raines on behalf of Freddie Mac and Fannie Mae, do you feel that over the past years you have been substantially under-regulated?

Mr. Raines?

Mr. Raines: No, sir.

Mr. Frank: Mr. Gould?

Mr. Gould: No, sir. . . .

Mr. Frank: OK. Then I am not entirely sure why we are here. . . .

Rep. Frank: I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.

* * *
Senate Banking Committee, Oct. 16, 2003:

Sen. Charles Schumer (D., N.Y.): And my worry is that we're using the recent safety and soundness concerns, particularly with Freddie, and with a poor regulator, as a straw man to curtail Fannie and Freddie's mission. And I don't think there is any doubt that there are some in the administration who don't believe in Fannie and Freddie altogether, say let the private sector do it. That would be sort of an ideological position.

Mr. Raines: But more importantly, banks are in a far more risky business than we are.

* * *
Senate Banking Committee, Feb. 24-25, 2004:

Sen. Thomas Carper (D., Del.): What is the wrong that we're trying to right here? What is the potential harm that we're trying to avert?

Federal Reserve Chairman Alan Greenspan: Well, I think that that is a very good question, senator.

What we're trying to avert is we have in our financial system right now two very large and growing financial institutions which are very effective and are essentially capable of gaining market shares in a very major market to a large extent as a consequence of what is perceived to be a subsidy that prevents the markets from adjusting appropriately, prevents competition and the normal adjustment processes that we see on a day-by-day basis from functioning in a way that creates stability. . . . And so what we have is a structure here in which a very rapidly growing organization, holding assets and financing them by subsidized debt, is growing in a manner which really does not in and of itself contribute to either home ownership or necessarily liquidity or other aspects of the financial markets. . . .

Sen. Richard Shelby (R., Ala.): [T]he federal government has [an] ambiguous relationship with the GSEs. And how do we actually get rid of that ambiguity is a complicated, tricky thing. I don't know how we do it.

I mean, you've alluded to it a little bit, but how do we define the relationship? It's important, is it not?

Mr. Greenspan: Yes. Of all the issues that have been discussed today, I think that is the most difficult one. Because you cannot have, in a rational government or a rational society, two fundamentally different views as to what will happen under a certain event. Because it invites crisis, and it invites instability. . .

Sen. Christopher Dodd (D., Conn.): I, just briefly will say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time. And we don't want to lose sight of that and [what] has been pointed out by all of our witnesses here, obviously, the 70% of Americans who own their own homes today, in no small measure, due because of the work that's been done here. And that shouldn't be lost in this debate and discussion. . . .

* * *
Senate Banking Committee, April 6, 2005:

Sen. Schumer: I'll lay my marker down right now, Mr. Chairman. I think Fannie and Freddie need some changes, but I don't think they need dramatic restructuring in terms of their mission, in terms of their role in the secondary mortgage market, et cetera. Change some of the accounting and regulatory issues, yes, but don't undo Fannie and Freddie.

* * *
Senate Banking Committee, June 15, 2006:

Sen. Robert Bennett (R., Utah): I think we do need a strong regulator. I think we do need a piece of legislation. But I think we do need also to be careful that we don't overreact.

I know the press, particularly, keeps saying this is another Enron, which it clearly is not. Fannie Mae has taken its lumps. Fannie Mae is paying a very large fine. Fannie Mae is under a very, very strong microscope, which it needs to be. . . . So let's not do nothing, and at the same time, let's not overreact. . .

Sen. Jack Reed (D., R.I.): I think a lot of people are being opportunistic, . . . throwing out the baby with the bathwater, saying, "Let's dramatically restructure Fannie and Freddie," when that is not what's called for as a result of what's happened here. . . .

Sen. Chuck Hagel (R., Neb.): Mr. Chairman, what we're dealing with is an astounding failure of management and board responsibility, driven clearly by self interest and greed. And when we reference this issue in the context of -- the best we can say is, "It's no Enron." Now, that's a hell of a high standard.

What They Said About Fan and Fred - WSJ.com

__________________
Every decent man is ashamed of the government he lives under.

Every normal man must be tempted at times to spit on his hands, hoist the black flag, and begin to slit throats.

H. L. Mencken


Mortgage Backed Security survivor

There is a lot of very bad information out there concerning the role of the various regulatory reforms played in setting the conditions for the current crisis. The original article posted in this thread is exhibit A in that regard. The article, probably intentionally, misleads the reader about the meaning of "self-regulating entity." A quick read of the article by an uninformed person with an agenda would have you believe that Paulson was proposing that the individual investment banks be allowed to self-regulate. That is as foolish as it is untrue. The self-regulating entities described in the article -- NYSE and NASD -- are the exchanges themselves, not the companies traded on them. All of the SREs are doing just fine today, as they make money on the level of volatility in the markets, not on the direction of the indexes.

The author of the article is also either intentionally obtuse or very uninformed about the application of risk-based capital standards and their role in the expansion of leverage. He derides the new rules as "mathematical formulas" as if that were something new in the world of finance and banking. These were highly calibrated, exhaustively reviewed models developed by the best financial economists at the Fed and the ECB, not by Wall Street. Moreover, the rules were implemented through the very nonpolitical processes of international bank regulators at the Bank for International Settlements (the EU Parliament rubber stamped the rules and the US Congress delegated to the Fed, OCC, and OTS), not through the US Congress.

These changes were not the cause of the crisis. How do we know? Two ways. First, because the US banking regulators slowed the adoption of those rules and they were not implemented at US Banks, who are in just as deep trouble as the Invetment Banks and European Banks that were using them. They've also been adopted by Japanese Banks, who remain relative unscathed by the crisis. If the problem was the new capital rules, US banks would have been immune. Second, the new international capital rules were likely more restrictive than the old ones were for the specific types of investments that caused the crisis. The loosening of capital requirements came through lower charges for interbank lending, which is not the cause of the crisis and which are actually probably marginally helping keep whatever limited amount of private liquidity is available in those markets today.