NC, I'm sorry to see you on that side of the discussion. But, let's be a bit more accurate. After the twenties, we regulated banks and savings and loans rather stringently so that they would not likely fail again, also installing the FDIC and FSLIC. One of the things that we did was to restrict the amount of money that a bank or S&L could put into securities. A great deal of the cash had to be in government securities.
We began a decline in regulations when Reagan was in office, and once again, banks and S&Ls began to fold. Fanny Mae and Freddie Mac had nothing to do with it. The deregulation coupled with regulators who were essentially instructed not to do their jobs instigated it. Unfortunately, even Clinton continued the deregulation, being a rather non-courageous character who wanted Wall Street on his side.
It continued through the early Bush years primarily because Bush told regulators in everything to lay off doing their jobs: SEC, banking, EPA, etc. Even the INS did nothing. But, another development began that was totally destructive to the industry, and it had nothing to do with Fannie May and Freddie Mac. The anti-regulation crowd loves to blame them, but they were not responsible for the bundling of phony loans.
We had some wildcat mortgage operations that gave loans to anything that was willing to sign a loan paper. The victims were actually glad to have the opportunity to buy a home and thought they were getting a good deal. But, the phony mortgage companies used fraudulent income sources and ignored liabilities to create what looked like a solid loan on paper. People who couldn't qualify to get a motel room were set up on $200,000 mortgages when their jobs might have supported a pup tent. They were not helped because they couldn't begin to pay for the loan, except that some of them were ARMs with low first year schedules. But, the phony mortgage company had initiated a loan that would never be paid off. Now, they bundled these into packages with some other loans and sold them to somewhat unsuspecting banking institutions who now owned a lot of worthless paper. Some of them knew it was worthless. A lot didn't. But, this was supposedly now a security, a debenture. It really shouldn't have qualified as a security, much more of an insecurity. But, once again, it was the type of thing that a bank could not have invested in some thirty years earlier. But, this was only one of the things that caused this meltdown. It was kind of the straw that broke the camel's back.
I think that step one may have been the phony oil and real estate loans of the seventies and eighties. We created some absurd real estate and oil loans, largely based on developmental tax write-offs. We built buildings that were never expected to be office buildings, overdeveloping a lot of large cities, by giving 2 and 3 to 1 writeoffs on development. People invested, not to make a profit, because it almost never did. They invested to get the tax writeoff. When tax rate is 50%, a 3-1 writeoff means that you profit even if you never get a penny back. Your writeoff was more than your investment.
But, it also resulted in some extremely fraudulent loans or mortgages on large buildings, many of which were held by pension accounts, insurance companies, and banks. As an example, one building had a $500,000,000 mortgage. Not a penny of interest was paid on the mortgage. Why wasn't it called for default? If that mortgage had gone into default, the insurance company that held the mortgage would have gone into default. So, they kept it on the books as viable even though it wasn't. The same developer had caused the state's teacher retirement program to lose about $200,000,000 in loans that had been made for real estate construction that were never paid off. Who paid their retirement? How do you think he got the loan.
There were other problems with deregulation of S&Ls. I watched a firm started by a couple of sisters who were a secretary and a stockroom clerk. They got $75,000 with no collateral from an S&L to start an interior decorating firm. When they couldn't pay back a penny, they got another $50,000. Of course, since neither knew anything about how to start an interior decorating business, thinking it was in storefront walk-in traffic, they folded.
These types of things were going on because the people in control of regulation were told to look the other way. In the seventies, there were a number of Dallas banks that were Texas owned. In 1990, ALL had been sold because every one of them had gone bad. Most sold to NC banks. They had all been involved in real estate and oil loans that were essentially fraudulent. But, who was regulating them?
If you look at some of the European failures, they had something to do with some moves that they pulled in conjunction with some of these fraudulent American banking operations.
So, don't blame this nonsense on Fannie Mae and Freddie Mac. This was due to the fraudulent packaging of loans and the lack of regulatory activity. In some cases, the regulations were there. They had just been told not to do it. This was capitalism gone corrupt, and they resisted every attempt to reel in the fraud as being socialism. Even Adam Smith knew that capitalism requires regulation. Theodore Roosevelt made a career of it.
