Measures Taken Since the Subprime Loans Crisis to Assure This Will Not Happen Again

The questions that I would like to deliberate in this blog are: did the bailouts shield the people from learning the lessons or left them with old habits? Did we leave the Goldman Rule of “pursue profitable opportunities regardless the effects on others” intact (Watkins, 2011, p.363)?

            To reflect upon these questions, we need to reach back and examine the history of the past financial crises. Recently, Carlson and Wheelock have summarized in a report, the history of Federal Reserve Bank (FRB)’s as the lender of the last resort (2013) to tackle financial disasters over the past100 years. The report outlines the actions taken during the depression years of 1920’s/30’s to the most recent events of subprime mortgage crisis of 2007-2009 years. In this report, it is concluded that the FRB has evolved over  100 years (Carlson & Wheelock, 2013, p. 43) and helped to contain several disasters from becoming bigger. However, it is my opinion, that I didn’t find any evidence in the report that the FRB will help prevent (from not happening) repeat of the subprime mortgage type crisis in the future.

Apart from the major role of the FRB to be the lender of the last resort (Carlson & Wheelock, 2013), other steps to prevent future disasters include,

• Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd & Frank, 2010): The Act will prevent the excessive risk-taking by the financial institutions. Provide common-sense protections for American families, creating new consumer watchdog to prevent mortgage companies and lenders from exploiting consumers. The Act will also allow Securities and Exchange Commission (SEC, 2013) to ensure greater transparency by the financial institutions. For example, Goldman Sachs was fined $550 million for charges related to subprime mortgages CDOs (SEC, 2010).
• Place both GSEs (Fannie Mae and Freddie Mac) into conservatorship: Federal Housing Finance Agency (FHFA) placed the GSEs in conservatorship to stand behind the $5 trillion debt (Jickling, 2008) to prevent default and thus further cause havoc in the global financial markets.
• There were several other temporary measures taken by the U S Congress, such as; A $787 billion, American Recovery and Reinvestment Act (US Congress, 2009a) to help create jobs and improve infrastructure. Fraud Enforcement and Recovery Act of 2009 or FERA (US Congress, 2009b) to improve mortgage, securities, commodities and financial fraud recovery and enforcement.
• Basel III Agreement (on a Global scale): To enhance and strengthen the banking sector to have higher capital and liquidity and thus be more resilient from unexpected shocks (BCBS, 2010; Watkins, 2011, p. 370).

Did the Government bailouts (Angelides, et al., 2011) and other actions, cure the sick patient (financial institutions, GSEs and to a certain extent homeowners) but perhaps leavethe disease intact (unethical and immoral behaviors by the people involved)?
In my opinion, based on the past history, the measures being taken to date won’t prevent such disasters; unless there is a fundamental change in our ethical and moral behavior at all levels of the society.

References

Angelides, P., Thomas, B. Hon., Born, B., Georgiou, B., Graham, B., Senator, Hennessey, K. & ...Wallison, P. J. (2011). The Financial Crisis Inquiry Report. Retrieved July 6, 2013, from http://cybercemetery.unt.edu/archive/fcic/20110310173545/http://c0182732.cdn1.cloudfiles.rackspacecloud.com/fcic_final_report_full.pdf

BCBS. (2010). Basel III: New Bank Capital and Liquidity Requirements. Retrieved July 7, 2013, from http://www.icaew.com/~/media/Files/Technical/Financial-services/Basel%20III_new%20bank%20cap%20and%20liq%20req.pdf

Carlson, M. A., & Wheelock, D. C. (2013). The Lender of Last Resort: Lessons from the Fed’s First 100 years. Retrieved July 7, 2013, from http://research.stlouisfed.org/wp/2012/2012-056.pdf

Dodd, C., & Frank, B. (2010). Wall Street Reform and Consumer Protection Act. Retrieved July 3, 2013, from http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/html/PLAW-111publ203.htm

Jickling, M. (2008). Fannie Mae and Freddie Mac in Conservatorship. Retrieved July 7, 2013, from http://fpc.state.gov/documents/organization/110097.pdf

SEC. (2010). Goldman Sachs to pay record $550 million settle SEC charges related to subprime mortgage CDO. [Press Release]. Retrieved July 5, 2013, from http://www.sec.gov/news/press/2010/2010-123.htm.

SEC. (2013). Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act Retrieved July 7, 2013, from http://www.sec.gov/spotlight/dodd-frank.shtml

US Congress. (2009a). American Recovery and Reinvestment Act of 2009. Retrieved July 7, 2013, from http://www.gpo.gov/fdsys/pkg/BILLS-111hr1enr/pdf/BILLS-111hr1enr.pdf

US Congress. (2009b). Fraud Enforcement and Recovery Act of 2009 or FERA. Retrieved July 7, 2013, from http://www.gpo.gov/fdsys/pkg/PLAW-111publ21/pdf/PLAW-111publ21.pdf

Watkins, J. P. (2011). Banking Ethics and the Goldman Rule. Journal of Economic Issues (M.E.Sharpe Inc.), 45(2), 363-372. doi:10.2753/JEI0021-3624450213