Watched Meet the Press, Washington Week, and the McLaughlin Group talk about Wall St this morning. With one exception, the pundits and Henry Paulson (guest on both ABC's Stephanopolis show AND NBC's Meet the Press at the same time) spoke in vague generalities. Or flagellated the entire country for greed, or "things that go up must come down". Little to no fingerpointing.
The one exception, Mort Zuckerman on the McLaughlin Group. He said Fannie and Freddie kicked off the sub prime mortgage disaster by buying sub prime bonds. He, the Wall St Journal, McCain, and the Bush administration have been calling for Fannie Freddie regulation for years, but Fannie and Freddie killed it with campaign contributions to Obama, Dodd, Biden, and Barney Frank, plus a vigorous lobbying effort on the rest of the Congress. Regulation of Fannie and Freddie means putting a lid on the amount of money they could loan and forbidding them from buying sub prime mortgage bonds. Zuckerman also faulted the SEC chairman for loosening the capital requirements on banks. Used to be, back before 2000, banks were only allowed to lend up to 11 times their capital. The SEC under Cox raised that to 30 times, and the now defunct Bear and Lehman were up to 33 times when they croaked.
Why does the capital to loan ratio matter? Simple, some loans default. To keep the bank alive after losses, the bank needs some of its own money in the till. Under the 11:1 capital rule, a bank could survive a loan loss of nearly 10%. Under the 30:1 rule, all it takes is a 3% loss and the bank is broke.
McCain is right to call for the head of the SEC chairman. The SEC's job is to prevent a Wall St disaster. The chairman has clearly failed in that mission.
No comments:
Post a Comment