Deregulation Myths and the Wizards of Wall Street

By Examiner Editorial
- 10/8/08

ACan multi-billion-dollar corporations like AIG and Lehman Brothers collapse and die without anybody having the faintest idea something was wrong? No, of course not. But don’t expect Beverly Hills Democrat Henry Waxman and other House Democrats to let facts get in the way of their simplistic narrative pinning the entire blame for the Wall Street economic crisis on the Bush administration’s alleged penchant for “deregulation.” In fact, the Bush administration and Congress increased government regulation of much of the economy following the Enron and WorldCom debacles, beginning with the Sarbanes-Oxley Act of 2002 (SOX). The problem now is that none of this added regulation addressed the activities of Wall Street investment bankers hell-bent on cashing in on the government-mandated flood of sub-prime mortgages.

For the record, SOX imposed a host of new regulations on the financial sector, with compliance costs estimated as high as $1.4 trillion – so high, in fact, that many foreign owned firms and small business abandoned plans to go public. Also for the record, as noted recently by The Heritage Foundation, regulatory agency spending under Bush was up to $44.9 billion in 2007 from $27 billion in 2001, a 44% increase. And the administration has added more than more than 4,500 pages of new regulations to the Code of Federal Regulations since January 2001.

So it is equally simplistic to say that either too much or too little federal regulation of the economy caused our present economic difficulties. The fact is for three decades the federal government mandated billions of dollars in risky sub-prime mortgage lending to increase home ownership among low-income groups. In response, Fannie Mae and Freddie Mac – with their implicit government guarantee against losses – combined groups of risky mortgages in packages called mortgage-backed securities (MBS) as a means of increasing available lending resources. Wall Streeters got into the act by buying Fannie/Freddie's MBS’s, then further slicing and dicing them into novel new investment instruments - “selling” risk instead of holding assets to guard against losses.

In the process, they leveraged themselves to the hilt, owing $30 or $40 for every dollar in assets. As long as the bubble grew, this created outsize profits – and obscenely large bonuses. But it was all a pyramid scheme that depended upon rising home prices and the government guarantee behind Fannie/Freddie. When the bubble burst, the Wizards of Wall Street didn’t know how much their exotic instruments were worth or even who held them. So the issue is not too much or too little regulation, but why there was none at all. The place to begin understanding why is the money trail of campaign contributions from Fannie/Freddie and Wall Street to Congress, under both parties.

2 Comments

Reader Comments:

POSTED Oct 8, 2008

Deregulation Was a Major Cause: "Sure there's plenty of blame to go around. But if you think Bush-era deregulation and lax oversight were not major contributors to this financial meltdown, I have a bridge to nowhere to sell you. Don't make me laugh."

POSTED Oct 17, 2008

: "Oct 8 Poster - please name the deregulation that took place under the Bush era. There were none. As for attempts at oversight and regulation -specifically of Freddie Mac... these were blocked by the concressional back caucus and democrats. Namely, Meeks, Dodd, Frank et al."