Blame The Subprime Meltdown On The Repeal Of Glass-Steagall

A lot of blame has sloshed around for the sub-prime meltdown, from greedy borrowers to greedy mortgage brokers to Alan Greenspan, but if you want the real culprit, it was the repeal of the Glass-Stegall Act. On November 12, 1999, the champagne must have been shooting from the walls at Citigroup, which had worked behind the scenes for over 30 years to get the act overturned. After recovering from their hangover, they and their banking buddies went on a sub-prime lending orgy. But what was Glass-Steagall and how did it used to protect us?

Glass-Steagall was passed under the Roosevelt administration in 1933 in direct response to the Wall Street shenanigans that ushered in the Great Depression where banks shoved their own depositors into buying the stocks the banks were dealing. The basic idea was to keep banks from speculating with the savings that American citizens were entrusting within their vaults.

Its repeal, under the Gramm-Leach-Bliley Act, drafted and passed by a Republican congress, and signed by Billiam Jefferson Clinton, allowed commercial banks to merge with investment banks. For instance, Citigroup merged with Traveler’s Insurance (although this merger was announced in 1998, before the act was passed, at the time Citigroup CEO Sanford I. Weill said that he spoke with the Feds and, “that over that time the legislation will change…we have had enough discussions to believe this will not be a problem.”).

Now, on the one side they could sell mortgages to homeowners, and then invent fancy investment structures which they sold on Wall Street. Because they were “covered” on both ends, banks felt free to sell increasingly dicey mortgages, just so long as another sucker was picking up the garbage. This sucker was picking it up because he had a plan to repackage it and sell it to another sucker, and so on. Eventually we end up with no-doc stated income interest-only option-ARM no money down mortgages being repackaged as “sound investments” being sold as “stable assets” for city pension plans to park their money in. (See “Subprime Meltdown As Told By Stick Figures“).

We can only imagine the level of machination exerted over those 30 years, but we do know this. Robert Rubin was Secretary of Treasury, which had oversight over Glass-Steagall regulation. Days before he resigned, Glass-Steagall was repealed. Just over a year later, he became chairman of the Citi executive committee, with an annual compensation of $40 million, a position he still holds, despite Citigroup’s $24 billion in subprime-related losses.

(Photo: Joy Of The Mundane)

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  1. If there was ever a reason to do whatever possible to keep the Clintons from moving back into the White House, this is it.

  2. SuffolkHouse says:

    So, Rubin got to screw hundreds of thousands of home “owners,” city pension funds, and facilitate the collapse of the entire market and he gets to profit from it?

    If this isn’t illegal, what we need is some vigilantism, don’t we?

  3. GotanOrange says:

    Good ol slick willie. My hate for that bastard and his shrew wife grows more everyday.

  4. snazz says:

    fantastic!

  5. scoobydoo says:

    Awesome.

    He screws things up.

    And she pretends she’ll fix it all for us.

  6. LorneReams says:

    @GotanOrange:

    Look who else voted for it. There is plenty of hate to go around.

  7. ARP says:

    @GotanOrange: If I recall correctly, it was a Republican controlled Congress. While GWB ignores laws, treaties, the Constitution at will, my understanding is that Bill couldn’t have passed the law on his own. Do you have any support that shows Republicans were firmly against this legislation? If so, how did it pass? The Republicans were bigger cheerleaders of this Act than Clinton. Clinton isn’t without blame. He signed it and offered support so he shares some blame. But it was a Republican Congress that pushed this. Also, SEC’s implementation in 2004 provided much more deregulation through its rulemaking activities. Who was in charge of SEC in 2004?

  8. iMe2 says:

    @Steaming Pile: Not that Obama would have done anything different:

    MR. HUNT: But was the repeal of Glass-Steagall a mistake?

    SEN. OBAMA: Well, Glass-Steagall I think, is an example of where maybe we didn’t entirely think it through. You had $300 million worth of lobbying done by the financial institutions. They wanted to compete because they were seeing big profits in some of these areas. It wasn’t necessarily the best thing to assure that U.S. consumers were protected or that the financial markets remained stable and sound.

    MR. HUNT: Well, should you restore Glass-Steagall then?

    SEN. OBAMA: Well, no. The argument is not to go back to the regulatory framework of the 1930’s because, as I said, the financial markets have changed substantially.
    -Via Bloomberg

  9. Imaginary_Friend says:

    Wow. Nice work, Consumerist.

    [upload.wikimedia.org]

  10. FightOnTrojans says:

    Wow. I am in the wrong line of work. Really? $40 million a year? I’d work one year and retire. Meanwhile, a CSR types out “Are you nucking futs?” on a computer screen and gets fired, but we can’t do anything about these a-holes?

  11. FightOnTrojans says:

    @G-16: C’mon, you know how the proximity of the “B” and “W” on the keyboard… oh.. wait, nevermind.

  12. bloodhound96 says:

    Informative article. Helped me get some perspective on the sub prime mortgage business that’s going down. Someone always makes out like a bandit when the regular person suffers.

  13. bohemian says:

    I knew it!!!

    We bought a house in late 1998 and another one in 2006. The entire process between the two was totally different. Real estate agents were trying to refer me to mortgage brokers who didn’t want much of any documentation. Even our bank had totally changed from a serious scrutiny to here have a bag of money.
    We got a sensible government backed loan but the whole process seemed way too easy compared to our previous (2nd) home purchase.

  14. lesspopmorefizz says:

    corruption 101! thanks consumerist!

  15. bohemian says:

    @iMe2: That isn’t saying he wouldn’t change and put back some regulations. He said he wouldn’t put back the regulations FROM THE THIRTIES. Gawd I hate it when people try to twist words.

  16. Ben, don’t you know that we don’t believe anything said on a blog unless there’s a link?

    I guess I have Google, which via Wikipedia tells me that the Economist agrees, which means it must be true because they’re not a blog. Print publications are never, ever wrong.

    (Actually, in all seriousness, good work. I hadn’t heard of Glass-Steagall before, which means I learned something today.)

  17. johnva says:

    @iMe2: That doesn’t sound to me like exactly the same position. It sounds like he’s expressing reservations about it being repealed without really wanting to totally restore it. What I would take from that is that he might go for some middle-of-the-road regulation.

  18. bohemian says:

    Here is some information on the bill from 1999 including who voted what way.

    McCain voted for it.
    Of course neither Clinton or Obama were in Congress at that point.

    I did notice that much of the Senate Democrats didn’t initially vote for it but did in the final vote.

    [thomas.loc.gov]

    [www.senate.gov]

    [clerk.house.gov]

    [www.senate.gov]

    If the links don’t work go to thomas.loc.gov look up 106th Congress and S900

  19. Of the fathers of this bill, Phil Graham is on John McCain’s campaign as a “fiscal” adviser and possible Treasury Sec candidate under McCain.

  20. iMe2 says:

    @johnva: Sorry if I came across as partisan, I meant to imply that we shouldn’t demonize Bill Clinton; in the same situation, based on Obama’s statement, he would have done exactly the same thing in terms of repealing Glass-Steagall. Whether he could have (or would have had the foresight to) push through effective regulation that would have prevented this crisis, we’ll never know.

  21. @Michael Belisle: Oh snap, that article is in The America Prospect. But I get to blame Wikipedia: the citation said “Economist”. I didn’t question because I saw red. Doesn’t the AP know that the Economist owns red?

    /me is off to correct Wikipedia again.

  22. midgard says:

    A nice narrative, but no, not really. While the elimination of the G-S barriers did let some companies cross over to lines of finance that had been closed to them, there’s absolutely nothing that would have stopped investment banks from buying subprime loans generated by nonbank lenders prior to the 1999 law. Countrywide and Capital One, two lenders who relied on securitizations for all their funding years and years ago, are products of the Glass-Steagall era.
    Might things have played out differently? Sure, but in all likelihood, it’s the names that would have changed, not the events themselves.

  23. Gari N. Corp says:

    Ben, I don’t agree. I think one can blame the excesses on the lax regulation of banks and hedge funds. I think you might even be able to blame the extent of losses at the banks during Enron on Glass-Steagall. But combining investment banks/brokers and commercial banks, which Glass-Steagall facilitated, did not cause this crisis. The two largest victims of the crisis, Merrill Lynch and Bear Stearns, don’t own commercial banks. Citigroup is probably the exception. These guys all made really shitty calls in pursuit of greater profits, which you could use as a generalised indictment of short-termism on stock markets, and one could argue that the Feds or whoever should have kept an eye on the magnitude of their positions, but Glass Steagall had nothing to do with it. There were plenty of outfits, say Countrywide, who were totally independent and managed to come up with staggering volumes of terrible loans for the investment banks to choke on.

  24. chiieddy says:

    @ARP: According to the NY Times ([query.nytimes.com]), the vote was 54 – 44 and along party lines. It was written by Senator Phil Gramm (R, Texas)

    President Clinton has threatened to veto the Senate legislation, and his aides have expressed a decided preference for most of the provisions in a competing version that has been moving quickly through the House.

    Something happened or some deal was made. The article above looks like it might have been concessions to water down the bill, but I believe it was the privacy rules that were enacted that got placed in that probably swayed him.

  25. @iMe2: If you’re going to pass another law, dusting off a 75 year old law and passing it as is is probably not the smartest thing to do. You can sue Glass-Steagall as a guideline, but you still gotta get off your lazy ass and write a new, up-to-date law.

  26. munkles says:

    @GotanOrange: I’m fairly sure there was a strong-arming Republican Congress trying everything they could to overthrown Clinton’s lawful election due to a blowjob, and that they might have had something to do with changing the law, since no law can be changed without Congress.

    I’m comfortably guessing that you were less than stellar in your Social Studies classes when ‘how your government works’ was discussed.

    But you go right ahead and hatefully make shit up, and then believe it even though you’re the one who made it up, so you should probably be aware it isn’t even true, but strangely you’re not aware that the things you make up are made up.

    Dumb and angry is no way to go through your so-called life, son.

  27. mediatus says:

    @iMe2: Here’s the extra twist to the problem that makes Obama’s answer make a little more sense: at the same time that the big banks were coming up with exotic ways to disguise the underlying securities’ lack of value, they were signing agreements ensuring each other’s risk. These counterparty agreements have made bigger, more profitable deals possible. But since they also tie the entire market together, they’ve magnified the current troubles, and make it difficult to talk about reimposing Glass-Stegall without the threat of the entire house of cards collapsing.

    Here’s what seems to me to be a more promising approach: simple fraud prosecutions. If the mortage brokers, banks, hedge funds, etc., could reasonably been expected to know that the products they were repackaging were worthless, then they should be criminally liable and should be expected to forfeit their ill-gotten gains.

  28. char says:

    The gutting of Glass Steagal was part of the issue, the part about the investors, and how these businesses could hide these losses from investors, home owners, feds, ect. Also, how the banks thought they could stack the deck, but ended up just screwing themselves over.

    [www.npr.org]

    More than half of our economy moves through totally unregulated markets that don’t actually add anything back.

  29. iMe2 says:

    @Steaming Pile: So why blame Bill Clinton? That’s the job of Congress.

  30. Nice work Ben!

    @midgard: isn’t the point that the repeal of G-S made investment banks feel better about doing this because other players could now be involved? I’m actually asking, cause I had to watch the stick figure video.

    @ManchuCandidate: very important to note. I’m not voting for him anyway, but now my mom won’t either!

  31. The Porkchop Express says:

    @bohemian: like you did by highlighting the from the 30’s bit.

    Look folks, none of them are really looking uot for us, not a single one. They all have and want too much money to even be bother with us.

    None of them care and would screw us anytime.

  32. bsalamon says:

    i smell a giant lawsuit coming.

  33. GotanOrange says:

    @ARP: Believe me, both sides of the aisle deserve a place in hell as far as I’m concerned.

  34. iMe2 says:

    @char: More than half of our economy moves through totally unregulated markets that don’t actually add anything back.

    Sort of like our federal budget…zing?

  35. midgard says:

    @missbehave:

    There were a lot of things going on at the same time, some of them it the result of loose regulation. But even the loose regulation was largely outside of the territory governed by G-S.
    But all else being equal, investment banks are like any other companies in that they prefer to have businesses all to themselves. Competition cuts into profit margins, so in general, you want to keep the number of sheep in the flock small enough for optimal grazing.

  36. BigElectricCat says:

    I notice no mention has been made of the bankruptcy “reform” bill or BAPCPA, that Congress passed in 2005.

    I’ve idly speculated that one of the reasons why banks were so cavalier about mortgage lending standards was a mistaken belief that the tighter BAPCPA standards that applied to discharging consumer debt like credit cards would also apply to mortgages.

    As some of these lenders are now finding out via walkaways and “jingle mail,” those tighter standards do not apply. Perhaps they should have read the bill more closely before they paid their Congressmen and Senators to pass it.

  37. backbroken says:

    Yes, but what role did Best Buy, Comcast, and Sears have in this? Surely they are to blame somewhere along the way!

    Nice article, btw.

  38. hilighter says:

    I worked at Citi at the time. There was much whooting and patting on the back. Yay! Deregulation.

  39. TechnoDestructo says:

    Something like this is the answer:

    [wh40k.lexicanum.com]

  40. darcymcgee says:

    Me, I blame it on Americans not being able to spend within their means and overextending their credit.

    Believe it or not, you don’t HAVE to buy that 52 inch plasma TV at all. That’s called a WANT not a NEED.

  41. The repeal of the Glass-Steagall act brought with it competition for assets that allowed everyday people to invest in American corporations. This increased the value of their stocks, interest in IPOs, and bank profits. In turn, banks had wider spreads and consequently more flexibility in interest rates, more creativity with financing structures, and a greater appetite for risk.

    You make a good point about the incentive for banks to take risk being increased, but keep in mind – consumer banks and loan originators in mortgage-specific entities originated these loans. The ability of banks to securitize loans and their subsequent entry into origination perhaps increased the depth of the crisis, but is hardly the precipitating factor.

    Worse, Glass-Steagall would have prevented the rapidity of credit repair after the crisis was underway. Bank of America’s acquisition of Countrywide would not have been possible and could have precipitated a massive run on the American consumer in the form of called loans. Bear would have been impossible to save. The Fed would not have been able to purchase cut-rate loans which they will profit from.

    MUCH worse, a repeal of this prevents banks from selling investments to individuals who elect to stash their money in risk-free investments like savings accounts, money-market accounts, etc. Not only is that bad for most investors, it’s bad for cash-starved businesses who need investment capital to advance the American economy. The vast majority of prudent investors will come through even this ahead of where they would have in a savings accounts.

    Policies that discourage investment over savings are an economic non-starter.

  42. ironchef says:

    @Steaming Pile:

    Nice try but this mess looks like a classic case of Bush asleep at the wheel.

  43. midgard says:

    @hilighter:
    That makes sense – Citi had the most at stake. The Citi-Travelers merger needed the law change and unraveling that quickly would have been a very messy, expensive exercise.
    Now they get to do it messy and slowly, the way things are meant to be done.

  44. lightaugust says:

    I’m not turning away from being a Democrat anytime soon, but to me, this seems like a good reminder that it’s always a good idea to keep an eye on your own team, and never think they won’t screw up just as bad as the other guy.

  45. Phildawg says:

    [epic.org]

    On November 4, 1999, the Senate approved by 90-8. The House followed within hours by a vote of 362-57. President Clinton signed the measure on November 12, 1999.

    I don’t think this was completely Clinton’s fault… maybe a lot of lobbying???

  46. Phildawg says:

    BTW it was a Republican congress by a vast large majority in 1999… This is everybody’s fault, not just one. And if anybody is most to blame, it’s Republicans.

  47. midgard says:

    @ADismalScience:
    I quibble at my own peril, but I think B of A could still have bought Countrywide because mortgage lending was an accepted part of banking. Also, spreads got incredibly tight for banks on the mortgage side in the latter stages of the bubble.

    The Bear deal is indeed another story altogether, and the point about efficient capital allocation is well taken.

  48. squablow says:

    It’s interesting, but the law didn’t force the banks to make bad decisions.

    If the gov’t legalized heroin tomorrow and I overdosed, it wouldn’t be their fault. It’d be my fault for making such a poor decision, even though it was legal.

    Was probably still a bad idea but it’s no excuse, it’s more of a “blame them, not our fault” scapegoat from my perspective.

  49. Applekid ┬──┬ ノ( ゜-゜ノ) says:

    @Phildawg: Are you familiar with the term, “The buck stops here”? With those kind of numbers in congress it STILL would have been repealed since they have a 3/4 majority, but at least Clinton could have been on the right side of things forevermore in history with a veto.

  50. kickarse says:

    The more uninformed society is the worse off this country will be.

    Yes, I agree that people should take the initiative to inform themselves. However, institution’s for lending should have realized where it would lead.

    All of this is funded, not by money, but greed.

  51. Phildawg says:

    106th Congress (1999-2001)
    Majority Party: Republican (55 seats)
    Minority Party: Democrat (45 seats)

  52. Phildawg says:

    @Applekid: I understand, but it’s all of their fault, not just Bill Clinton. I don’t like Clinton one bit, but to slant the article as if he was the one who brought this all together is foolish. I tried to bring up the vote record on this, but have been unable to so far. This has republican written all over it. And as noted, the overwhelming support for it by both parties. Finally, I think the late 90s tech boom and prosperity of the US is finally to blame. They laxed up and let the banks run wild!

  53. @Applekid:

    As of phildawg’s quote:

    On November 4, 1999, the Senate approved by 90-8. The House followed within hours by a vote of 362-57. President Clinton signed the measure on November 12, 1999.

    There was broad, bipartisan support for this measure. There still is, based on the Obama quote above. Glass-Steagall doesn’t actually solve the problem; it simply restricts corporate activities. Mr. Popken is incorrect in assuming that this law would have successfully prevented or mitigated a home price bubble. It’s impossible to substantiate that claim.

  54. petrarch1608 says:

    according to what i’ve read the Glass Steagall act didn’t have much to do with the meltdown. Here’s an article by a reputable economist: [meganmcardle.theatlantic.com]

  55. ThunderRoad says:

    A good position for any honest politician would be to vote against ANYTHING that a corporate-backed stooge was suggesting.

    Of course, there are no honest politicians….

  56. bohemian says:

    NPR was discussing the workings that allowed this mess to happen.
    The statement in a nutshell was that banks were now able to package all of these crappy high risk loans as collateralized debt obligations. They sold them as extremely secure financial products out in the investment markets. So other suckers (consumers) were buying into yet other suckers (consumers) lousy home loans.

    The banks thought these sub prime loans grouped together had a 90% pay rate. But only 80% paid on time or didn’t default and this threw everything into where we are today.

    From what I understand is that these origination banks used to be the ones stuck holding said mortgages so they made damn sure the consumer wasn’t going to default. Since they were lumping them together and pretending they were low risk investments, they passed the risk off to anyone who happened to end up invested in these things.

    Someone at these banks knew what they were doing and need to go to PMITA prison.

  57. Galls says:

    Consumerist, your lack of a MBA is showing.

    There were so many loopholes around Glass-Steagall it was ridiculous, there were no champaign corks going off the day this law was repealed because they were already in the investment business.

    Aside from that European banks have no such distinction commercial and investment banks. In an international marketplace it is debilitating to maintain unfair regulations when there is no international regulating body.

    While I can understand the desire for pitchfork vigilantism, the problem with the internet is ignorant bloggers can claim a mantel of intelligence.

    Why don’t you go after the Community Reinvestment Act?

  58. mikelotus says:

    @Steaming Pile: not that i support them, but Congress has as much to do with this and the act itself is not the problem. Its the lack of regulation for investment banks, something that traditional banks have in place for them.

    @Gari N. Corp: exactly right.

  59. bostonmike says:

    I got a (partially) no-doc mortgage in 1998 because I was running a complex Schedule C business. Those tax records can show a huge amount of detail about the internal finances of a business, and I saw no reason I should have to turn it over to a lender who wasn’t lending based on my business. I wasn’t hiding anything bad, I simply wanted to maintain a shred of control over the privacy of my business records. So I found a lender who would waive the 1040+schedules requirement and lend based on bank statements and credit reports only. I got as good a loan rate as anyone else, but now it’s described as part of the subprime fiasco. No-doc was apparently widely abused, but there are legitimate reasons for some loans to be done that way.

  60. ClayS says:

    @Phildawg:
    Republicans are mostly to blame? Did they override President Clinton’s veto? Did the Democrats in the House and Senate vote yea or nay on the bill?

  61. Ah. yes. This is all Bill Clinton’s fault, since it was passed by a Republican congress.

  62. tricky69 says:

    @Steaming Pile: Before you go blaming just individual perhaps you should learn the history of what happened during that time. The Congress and Senate were majority republicans throughout both Clinton administrations and many of the changes that caused problems today were passed through by those same republicans as well as many democrats. Just because Clinton signed it doesn’t mean he had much of choice since the Republicans had the majority.

    For thought Bill Clinton introduced an offshore banking reform bill in 1997 to prevent criminals and terrorists from using it as havens. Phil Gramm and the republicans shot it down. Phil Gramms wife Wendy went on to work at Enron’s board — remember the company that had over 900 dummy company’s using offshore banks to hide profits? Phil Gramm after the bill mentioned above went on to work on the UBS bank board as well. There’s plenty of finger pointing to go around. It’s not all ONE individual.

  63. tricky69 says:

    @ClayS: Republicans did pretty much WHATEVER the hell they wanted to do in 1990’s and in the past 8 years. Democrats try to stop them? Please. They were weak and still are – although that may be changing.

  64. ClayS says:

    @tricky69:
    The President could have vetoed the bill, but he did not.

    Why would you say the Democrats are weak…their votes count the same as the Republicans.

    My feeling is that no president, regardless of party should be blaming congress for passage of a bill or spending measure unless he tenders a veto and it is then overridden. Every president has tremendous power in that respect, but it is used way too infrequently.

  65. BigElectricCat says:

    @petrarch1608:

    “Here’s an article by a reputable economist: [meganmcardle.theatlantic.com]”

    (laughing, pointing) :D

    McArdle? Not so much. I cancelled my subscription when her bleatings started appearing in the Atlantic.

  66. Bobg says:

    @bsalamon I just logged on to the chat and I saw your post. I have been waiting for the lawsuits to start. It appears that there was some massive fraud going on or at least misrepresentation of the facts. The people left holding these worthless pieces of paper are going to want to get at least some of their money back. I’m sure that when the lawyers get involved it won’t be pretty. Watch, some loan originator’s head is going to roll and the CEOs will be standing, watching the perp walk and crying shame, shame.

  67. Juggernaut says:

    @bostonmike: So now you admit to causing the whole meltdown?

  68. 8Millionth says:

    Gramm-Leach-Bliley wasn’t entirely a repeal of Glass-Steagal, some of which had been repealed already.

    A prosey-ish explanation can be found here, in an article entitled “Triumph of the Suits”

    [www.kintera.org]

  69. cabalist says:

    #1 – Bill should have never signed it (and Rubin should be hanged).

    #2 – I believe that the Republican controlled congress could have overwritten his veto if he refused to sign it. So really, it is their fault.

    :)

  70. cabalist says:

    sorry, overridden.

  71. Mr. Gunn says:

    Talk all you want about lawsuits, regulations, personal responsibility, and so on. The fact remains that the banks and the brokers and the homebuyers all share a little of the blame. After all, there’s no market unless there’s buyers and sellers, right?

    If any one of the parties here, from the house-flippers to the brokers raking in huge bonuses, to the bankers leveraging themselves 50:1, had decided they were going to get off the little merry-go-round, they’d have been thought stupid and irresponsible for turning down all the free money. Whose responsibility was it to pull back first?

    If the hedge funds had been paying attention, they would have realized it first, I think.

  72. Trai_Dep says:

    It’s notas though Clinton was the leader in this regard. Recall that the GOP ran both houses of Congress and was The Party of Ideas(tm), ramming “innovation” down our throats.
    This is totally something out of the Republican playbook, however. I’d bet this was one of things horse-traded by Clinton to get policy objectives nearer and dearer to his heart.
    Patsy? Yup. Ringleader? Hardly.
    Put another way, would Clinton have done this alone? Absurd. Did the GOP mount the barricades to stop this reckless scheme? Hilariously absurd.

  73. Bill Brasky says:

    Oh, and let’s be clear. The only difference between the Dems and Repubs is: Republicans want to grow the government a little bit slower.

  74. ellis-wyatt says:

    Sorry, but the subprime meltdown mess can’t be blamed on G-S. Nor can it be blamed on politicians of either or both parties. Poor lending practices and the lack of enforcement of existing regulations are the primary culprits. As the “problem” evolved into the current “crisis”, ignoring it rather than stopping it before it got completely out of hand became the desired approach. The “bury our heads in the sand and that will make it all go away” approach.

    This round of the credit meltdown is being blamed on “subprime”. Who’s going to get the blame for the next round, which will be home equity? And the next round, which will be miscellaneous consumer debt aka credit cards, vehicle loans and student loans? Answer: whether they get the blame or not, the source of these upcoming problems will be the same as with the “subprime” mess – poor lending practices and inadequate enforcement of existing lending regulations. Lenders did virtually whatever they wanted without regard to future ramifications and regulators turned their head away from it when they should have been stopping it.

    Anybody who thinks this whole disaster is over or almost over is seriously out of touch with what’s still on the books in regard to home equity and miscellaneous consumer debt. The chain reaction is far from over. We’re in phase one of a three phase meltdown, or the third inning of a nine inning game, for those of you who prefer the sports analogy. Buckle up, folks, it’s going to be a long, rough ride.

  75. Erwos says:

    @Galls: I was wondering when someone would finally bring that up. For the love of G-d, G-S was not the end-all, be-all of financial regulations. For all the beneficial things it did, it still wound up hurting the US more than it helped, which is why it got repealed. I’ve seen this both from the economist and the MBA side of things.

  76. thejynxed says:

    Not to mention: It didn’t help matters any that these lenders all created mortgage/loan packages based on the assumption that housing prices would ALWAYS increase and NEVER decrease. What happens when that assumption doesn’t hold true (especially in the large markets)? You get a rapid devaluation of all existing mortgage loans and property values plummet in tandem. One domino tips over and the rest collapse soon after.

    Another thing that they couldn’t foresee back then: Oil prices hitting $100+ a barrel. Right up until fairly recently during the bubble, the price of oil remained sub $70 per barrel. When your customers have to choose between dumping their McMansion for a smaller home and paying for fuel to get to their jobs and run the kids around, guess which is going to come first?

  77. sounds like a pyramid scheme of epic proportions

  78. quail says:

    Just taking a look at the state level, it was about this time that Texas passed laws weakening their homestead act. Before 1997 or 1998 a homeowner couldn’t lose their house to a creditor, only to the mortgage company. But they couldn’t refinance and take out their “equity” to send little Johnny to college or buy that plasma TV either.

    Shortly after that the state was going crazy with banks and lenders getting people to pull equity out of their houses. It’s a tax free loan and it’s your money was the selling point. I wonder how much these lobbyists at the Federal level had to do with getting the Texas voters to weaken their homestead act? The timing seems funny to me after reading this.

  79. danman81 says:

    The real culprits are irresponsible borrowers who weren’t able to afford their mortgages in the first place.

  80. ageshin says:

    The regulations on the financial markets that were created in the 1930’s were done in response to the great depression . The whole deregulation movement that came out of the Regan era was fallowed by high crimes and looting. Greed and the lust for riches are not good role modles for a society. If we don’t reinstate strong regulation on our markets we shall indeed see just what the great depresion was really like.

  81. Trai_Dep says:

    @Bill Brasky: yeah, right. That’s why the size of the gov’t predictably grows more under Republican Presidents than Democratic ones. Look it up.
    The difference is that GOP pols tell you they’re for small gov’t, ad infinitum, figuring (correctly) that their constituents lack the independent thought to verify matters on their own.

  82. RvLeshrac says:

    @ClayS:

    He COULD have, and he WOULD have been overridden.

    “…you fight the fights that need fighting” is a terrible aphorism. If you’re beaten before you begin, you simply waste your support. Clinton knew that when he signed the bill – and I’m certain he knew that it would turn around and bite the senators and congressmen in the ass.

  83. RvLeshrac says:

    @Trai_Dep:

    And, of course, there’s the fact that Clinton actually managed to *shut down* the government, but the Republicans act like it was a bad thing.

  84. nrwfos says:

    @quail: As a native Texan who lived and bought houses in Texas up until 1995, I can attest that lobbyists for banks and mortgage lenders were all doing a huge job of “campaigning” for a change in the Homestead laws which were originally designed to protect the wife (or husband) from foreclosure because the other partner took out a second mortgage (for unrelated purposes) on the family home using the equity as collateral. Since both partners owned the “homestead” (originally the family farm or ranch) the weaker partner would not find themselves homeless and not by their own efforts. It was deemed “old-fashioned” and archaic and thwarted lenders from making a lot more money. The influx of new population from the north found it very inconvenient because it made their getting a home loan harder than they were used to before they came to TX. It also made it harder for them to pay off credit card or personal bank loan debt (the very kind that the law was designed to forestall) of one partner not necessarily agreed to or known about by that other protected partner. The laws were very “paternalistic” and presumed an inability of women (primarily)- but it did save more than one mother and children family in a divorce from being totally destitute and without a home. In reality it was a pain in the butt since it did not allow people to do with their property what they would like – but at the times the law was made were those when women were mostly disenfranchised and able to find very little good-paying employment and they weren’t allowed to own their own property unless there was no male family-member (father or husband) to “help” them. Obviously the law could have been re-written to make full-disclosure of impending additional debt that was for work on the homestead a requirement for a legal loan. But this was a hamstring that the banks didn’t want. It took a long time for Texas to change these laws. Apparently, it might have been a measure that would have allowed many families to retain their homes. It makes getting a mortgage much harder if you are only allowed one mortgage on your home – but that built in a fail-safe for people who really shouldn’t be loaned 100% financing, no interest loans and those who could have gotten a mortgage but on a smaller, less expensive home. We bought 2 homes in Texas during our years after college and before we moved here. It was VERY difficult to qualify for the (non FHA or VA) mortgage and to come up with the money for a down-payment – but we knew we were qualified and we knew that no “unscrupulous” lenders would foreclose on our house because of other kinds of consumer debt. The house was safe. This apparently is too much “government interference” in a citizen’s life now. But it enforced better loan procedures and stopped practices that have led to the present real estate situation in the US. Anyone who thinks that an investment can always only go up is a fool, especially if the investment forecast is based on false premises and unscrupulous procedures.

  85. guevera says:

    @Galls: What’s the beef with Community Reinvestment Act? My understanding is that it requires banks to “lend where they live.” That discourages redlining (in theory) but doesn’t mean they’re somehow forced to write a ton of NINA, low-doc stated income option ARMs.

    Not an attack on your post — I’d actually like to know what’s the issue. I’ve used CRA data to look at lending practices, and if I’m missing something, lemme know.

    Consumerist — Nice work. I’m a proud card carrying member of the dreaded MSM. I’ve filled hours of airtime with stories about the subprime meltdown and have rarely managed to shed as much light as you did here.

  86. heavylee-again says:

    How do I get one of these gigs? Ya know, the kind where I’m a government official and I do a big favor for a large corporation, then I get a bazillion dollars shortly there-after.

  87. Phildawg says:

    @ClayS: As somebody else pointed out, this was on first vote more along party lines. However, they added more to the bill that one over the democrats to give full support to the bill and trivialize clinton’s veto power.

    Don’t be stupid, if you are a republican, you know you are for deregulation, corporations, and big business. This is the kind of bill you hope to be able to vote for as a republican.

  88. Phildawg says:

    American greed has destroyed this country, and what is coming to us now is deserved and justified. We let the businesses have their way, and now their getting their labor elsewhere and insure more of our money is headed overseas.

    Over the past 20 years, IMO, we balanced to budget, got really strict on our finances and then decided to forget about it and make as much money as possible, and now we are fooked.

    God Bless Ron Paul’s movement, it’s the only thing that will save us.

  89. mookiemookie says:

    CRA had very little to do with why we’re in the mess we’re in. Robert Gordon goes into it all here: [www.prospect.org]

  90. Swedgin says:

    One of the things that kept me up at night during the ’08 election is that the same Phil Gramm behind this catastrophark was John McCain’s chief economic adviser during the campaign. His intent, spelled out during McCain’s campaign, was to continue this “deregulation as an ethos” that keeps digging the hole we are in deeper. You may disagree with much of the economic policies of the last year, but putting Phil freakin’ Gramm in charge of the US Treasury would have been disastrous on a level that is difficult to comprehend.