I Wear Pants;1263508 wrote:How?
Biggest failure during Clinton's administration was Glass-Steagall.
https://nicedeb.wordpress.com/2008/09/21/the-white-house-warned-congress-about-fannie-mae-freddie-mac-17-times-in-2008-alone/
There was a failure of regulation, but there's fair debate as to whether Glass-Steagall was the real culprit. AIG is not a bank, and Bear and Lehman, as pure investment banks, were unaffected by Glass-Steagall. And while mortgages have been a staple of traditional retail banks, it was actually the prop arms of IB's that got into trouble when their risk models failed. It's not like they were leveraging retail bank assets.
Sure, claim Glass-Steagall created "too big to fail", but actually (at the time) you had capital markets dominated by the [then] 8 bulge bracket IB's. When contagion spread, credit markets froze and it would not have been substantially different if the mergers had never been allowed in the first place. The IB's were already too big to fail. Actually, that's really not the case either as Bear and Lehman WERE allowed to fail. But with AIG now going under the risk became uncontrollably systemic. Not a single bank by itself was then or is now too big to fail, but as an industry group you're talking 15% of GDP or something like that at the time. It's the concentration, as you have with the auto industry, that makes it difficult to absorb losing a player. And, again, it would have survived Bear and Lehman, but probably not also AIG and obviously not with the housing market now in free fall.
It's not uncommon to have a company need emergency/rescue financing. It's happened in the banking industry 2 or 3 times before since 1980 alone. But with credit markets frozen, the economy devastated and contagion spreading, only the govt was capable of providing the needed expedient financing. Same thing for GM and the auto industry.
The lack of regulation/CDO's is really much more to blame than Glass-Steagall. That's what led to massive hidden leverage and a web of cross-default exposure that served to concentrate, rather than diversify, risk. It was contagion that effectively had the banks operating as one entity that resulted in "too big to fail". They lacked the sophistication and understanding to properly regulate the CDO's. It's happened before and it will happen again.
But financial engineering has been a source of competitive advantage for US companies for decades. People forget the S&L crisis. It wass very similar with a new and not fully understood security at the center. It sent Michael Milken and others to jail. Junk bonds were blamed, rightly so, for a big recession. Today they are more politely referred to as "High Yield" and a vital source of capital - to the tune of $1.3T (and that's just the US) - for companies.
