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Smith
Faculty Opinion Article
The 30
Seconds Outlook
September 1, 2008
“How ironic
that this group [Wall Street and
Secretary of the Treasury] was
fixated on a questionable measure of
market health [“regulatory
overkill”], while the seeds of
today’s market turmoil were being
nourished not be regulatory excess,
but be fundamental failures in
oversight at almost every level.”
— Arthur Levitt, former
chairman of the SEC, Wall Street
Journal, March 21, 2008.
Well, I hate to say this, but the
financial markets are
under-regulated. Let me count the
ways, but, first, remember that
before the subprime storm Wall
Street claimed “regulatory overkill”
was threatening its preeminent role
in global financial markets. Wall
Street’s “perfect storm” of a
solution was to create products with
fundamental failures in oversight at
all levels that created incentives
for mortgage lenders to offer loans
to what were previously unqualified
borrowers. With easy credit,
millions responded by buying houses,
which supported the market for newly
created mortgage securities. But,
this would not have happened but for
several events. Federal regulators
and monitors of credit standards
went from industry protectors to
enablers. Regulator failures
provided investors with much less in
the way of transparency of credit
risk. The bottom line is that
structured financial products and
subprime mortgage securities
dramatically changed the lending
business—lenders were no longer
concerned with exposure to the risks
of the credits they created--credits
that were packaged and sold to the
public. As a result, credit
standards were rigged and mortgages
provided to almost anyone who could
make an “X” on the loan application.
Conflicts of interest became the
norm. And, when mortgage “teaser
rates” went away, borrowers had much
higher interest rates with monthly
payments they could not afford. (to
be continued)
John A. Haslem
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