Quote:
Originally Posted by cbirk
Isn't it the government involvement (and not deregulation) that has Fannie and Freddie buying bad notes?
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Yes, in the form of intervention, as opposed to regulation.
It wasn't the only factor, though. The two were publicly traded, and they reportedly saw big stock price gains following their move into risky notes in 2000, with corresponding bonuses paid to their executives. Sounds like a lot of other companies. As MacLeans reported, perhaps they were driven "largely, though not wholly, by the same distorted incentives as the rest of the subprime circus"
So, there was pressure from Congress, Wall Street, and shareholders. All contributed to management making bad decisions, short term gains that were far too risky.
What might have helped is a regulatory environment that set certain standards around leverage and capital ratios. More transparency would allow investors to realize what they were investing in.
Another interesting debate is whether the nature of state regulation of banks in the US is a contributor. Being regulated by a number of agencies is not as effective as having a single regulator.
There is a lot of discussion about the amount of regulation, but not so much about the quality of that regulation. Not all regulation is created equal. Regulation that is rules-based tends to promote rule-skirting. Regulation that is principles-based tends to promote more of an approach focused on risk evaluation and better management decisions, IMO.