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The Register has a eminently readable explanation of why big banks are considered too big to fail, and get government bailouts after mismanaging their financial situations.
We seem to rage every time this happens, Let them go Bankrupt! seems the cry from the man in the street.
But that is a juvenile approach which will hurt far more people than those few officers miss-managing the bank or its funds. Banks don't have funds. Its all your funds. And if the bank fails, you mostly get nothing.
The article explains just what banks are (for those of you who slept through Econ 101), and what they are not. Its worth a read! And don't skip the comments section on the article. Many posters had no problem with bailing out the banks, but railed against bank management officers who rarely or never face any serious charges.
When you look at it this way, the federal "Stress Tests", and Forced Closures (over 500 since 1998) imposed on US banks, large and small, was the right course of action when combine with holding our collecting noses and bailing out the big ones.
Its too bad the stress tests, measuring a bank's ability to withstand withdrawals, loan defaults, and deposit slow-downs from unemployed depositors, weren't imposed far earlier. Local and national Banks have learned at least part of the lesson, and are closing money losing branches at a record rate, in favor of ATMs and digital services.
(Score: 2) by curunir_wolf on Monday May 18 2015, @03:43PM
I worked briefly in the subprime mortgage industry back in 2006 (I was young and needed the money badly), and can assure you that (a) mortgages were being given out with no reason to think that the borrower was ever going to be able to pay back the loan, (b) Fannie and Freddie were not major considerations in the industry, and (c) the name of the game was to sell to private investors that the bad loans were AAA securities when they weren't.
Well maybe Fannie and Freddie weren't "major considerations" to you - but they absolutely were to the banks. They were actually considered "private investors" even though they were government-backed (the executives of the organization was even earning million-dollar-a-year bonuses). During the height of the housing bubble, almost 40 percent of newly issued private-label subprime securities were purchased by Fannie Mae and Freddie Mac, making them the largest single source of liquidity for the market. Just comparing Fannie’s FICO-based sub-prime share to the overall market paints a picture of Fannie clearly leading the overall market. In 2000, when Fannie’s FICO-based subprime was 18 percent of its business, subprime as a share of the overall mortgage market was only around 12 percent. Subprime’s overall share in the market did not begin to approach the percent of Fannie’s business which was subprime until around 2004, corresponding with Fannie and Freddie's movement into large-scale purchases of private-label mortgage-backed securities.
Many subprime lenders did not sell their loans directly to Fannie and Freddie. A significant portion of subprime lending was securitized and sold to investors as private-label mortgage-backed securities. However, the largest “investors” in these securities were Fannie and Freddie.
Here's a telling quote from Fannie Mae's 10K for 2006:
So it wasn't just the federal government "not regulating" - it was a case of their political subdivisions actually fueling it.
I am a crackpot