Bill Clinton's legacy, crisis and more

Clinton is not entirely blameless for repealing the Glass Seagall Act born during the depression era circa 1930's and replacing it with a new act. This new Act allowed banks to get into investment banking activities. This, in short, means that actual mortgages of clients could be converted into bonds (vetted by the rating agencies) and then sold to unsuspecting investors far and wide. This is one of the major contributing reasons of the sub-prime crisis. Had local banks not been allowed to transfer "risk" from themselves to an investor, they would have not indulged in sub-prime loans and also would have been much more careful in follow ups with non paying customers and ensured that the mortgage was always given to the customers who would repay it back to the bank. The change of the law removed this most crucial control wherein the bank did not have much reason to ensure that it acted in the best interest of its own self and of course, today we have seen what happens when a bank does not have control over its customers or the loans that it gave and meanwhile the investors also come and file a lawsuit and then...the bank goes bankrupt. This is quite familiar to us with exactly the same things happening in US, UK, Iceland, Ireland etc.

However, this common sense control was removed and the banks continued to sell mortgages which after a 90 day period (if the owner had not defaulted by then on the monthly payment) were legally allowed to be converted into a securitized asset "bond" (by virtue of this law approved by Clinton).

Anyhow, now it too late to play the blame game and of course, with all due respect, it was not entirely Clinton's fault, it was partly his advisers and partly the bureaucracy and the way the system works prodded by bankers (especially the ones too big to fail) and regulators and the rating agencies....and the list goes on.

In fact, Clinton also admits that NOT regulating derivatives during his administration between 1992-2000 was his fault. This is a sign of a great man because no one else has admitted this yet including Greenspan and many others.

I strongly recommend that you set aside a few minutes and read all the pages of this article.

Excerpts:

When the subject came up during our conversation in Chappaqua, Clinton calmly dissected the case against him and acknowledged that in at least some particulars his critics have a point. In almost clinical form, as if back at Oxford as a Rhodes scholar, he broke down the case against him into three allegations: first, that he used the Community Reinvestment Act to force small banks into making loans to low-income depositors who were too risky. Second, that he signed the deregulatory Gramm-Leach-Bliley Act in 1999, repealing part of the Depression-era Glass-Steagall Act that prohibited commercial banks from engaging in the investment business. And third, that he failed to regulate the complex financial instruments known as derivatives.

The first complaint Clinton rejects as “just a totally off-the-wall crazy argument” made by the “right wing,” noting that community banks have not had major problems. The second he gives some credence to, although he blames Bush for, in his view, neutering the Securities and Exchange Commission. “Letting banks take investment positions I don’t think had much to do with this meltdown,” he said. “And the more diversified institutions in general were better able to handle what happened. And again, if I had known that the S.E.C. would have taken a rain check, would I have done it? Probably not. But I wouldn’t have done anything. In other words, I would have tried to reverse everything if I had known we were going to have eight years where we would not have an S.E.C. for most of the time.”

However, it is true that many small banks have gone under. 36 banks have already closed in USA this year in 2009, more than the entire 2008. This does not include many banks worldwide who are having problems. Read here about small community banks in Minnesota having problems:
Analysts warn bank failures loom in Minnesota




It is indeed a fascinating article and you will come out enriched after having read it.

The Mellowing of William Jefferson Clinton

I love Clinton's picture too!