# The CRA/repeal of Glass-Steagal caused the financial crisis **URL:** \ **Category:** Great Debates\ **Created:** [August 15, 2012, 2:21pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564 "2012-08-15T14:21:50Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [August 15, 2012, 10:23pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/21 "2012-08-15T22:23:13Z")
The point of securitizing debt is to remove risk from your balance sheet by selling the debt. Essentially, you’re just transferring the risk onto another party, right? Which is fine… unless you yourself start buying securitized debt, meaning that you are taking on risk yourself. Which is what all the banks/investment firms did. Therefore, no risk was transferred at all. THEN you had the quants. “Quants” are mathematicians hired by the firms to slice and dice this debt even more, create derivatives out of it, etc. By 2007, the deals were so complex, nobody really knew who owned what. So when Lehman collapsed, _nobody knew how much their assets were worth because nobody really knew how exposed they were to Lehman Brothers_. [Here’s a link](http://farm7.static.flickr.com/6233/6325010078_d72df6e23b.jpg) to a complex CDO deal. The above image is taken from page 200 of Nicholas Dunbar’s _The Devil’s Derivatives_, in my opinion one of the finest layman books written about the 2008 crisis. (Sorry for the sucky scan, but it came out clean enough imho.) Each of the dots around the edge (and the dots scattered around the middle) represent other CDO’s which made up this particular derivative (This derivative is represented by the dot in the middle of the Eye.) Not shown in this picture are the hundreds of mortgage bonds (which, in turn, represent the tens-of-thousands of mortgages that make up the assets of the bonds), from which the value of the derivatives are derived. Remember: each of the outside dots represented hundreds of mortgages. While there were problems in the market prior to September 8th, the official collapse of Lehman Brothers (LB) on that date meant that some of these “dots” were now worthless, the assets behind them either tied up in bankruptcy court, or seized by other counterparties. Trying to figure out which of the outside dots were LB-backed CDO’s (or which of those dots had LB mortgage bonds within them), was a horrendously difficult task just for this one CDO-cubed derivative. Multiply that by every derivative in the world which may or may not have had LB-backed assets, and it’s no wonder that the markets froze - as I said, nobody knew what their exposure was to LB, which meant that nobody had any idea what the value/price of the CDO should be. Ergo, panic. ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [August 16, 2012, 1:45am UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/22 "2012-08-16T01:45:33Z")
You are going to have to forgive my ignorance of derivatives. The only kind I am familiar with are stock options and commodities futures. I also thought CDOs were a sort of super bond made out of pieces of different bonds which were made out of pieces of other bonds, sort of like shares in a mutual fund of mutual funds. I was also under the impression that a credit default swap was basically insurance on a particular cdo. How far off am I? Thanks, Rob ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [August 16, 2012, 1:51am UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/23 "2012-08-16T01:51:25Z")
> [@sweeteviljesus](#): > > By which you mean the incentive of the ratings agencies to overrate securities (because they were insured by credit default swaps) Sorry, I just noticed this. In my readings (and I’ve read at least 40 books on the '08 meltdown) I don’t ever recall it being said that the rating agencies (RA) gave AAA ratings to securities because of CDS’s\*. Instead, they gave increasingly higher ratings _because ratings were being shopped_: So you’re an RA in competition with another (say, RA1 and RA2). Goldman Sachs comes to you to rate a security. _They pay you to do this_\*\* - this is, after all, how you make your money. So you do your diligence and pronounce “This is a A- structure.” Irked, Goldman takes the next deal to RA2 and tells them of the "difficulties’ that they had with your organization. Understanding what they meant, RA2 (not surprisingly) looks at the same deal and says “Hey, this is actually a AA structure and should be rated as such!” Puzzled as to why you haven’t seen Goldman in 2 months, and hurting for revenue, you give them a call. And they say to you “Well, the other guy understands what we’re doing better, so we’re going to use him from now on.” “Wait!”, you cry out, “Perhaps there was something we overlooked. Perhaps your guys can come down and show us what we missed?” So GS comes down, shows you the same shit sandwich, and, because your kids have to eat too, you say “Wow, guys, thanks for taking your time to more fully explain this to us. We don’t see anything wrong with rating this… what, AAA?” Pleased with your rating, your business picks up, and your kids go off the Ramen and Water diet. Everybody wins! Well… except the investors. And eventually, the bank. And, if things get bad enough, the entire fuggin’ country. \*Doesn’t mean it wasn’t true, just that I don’t remember it. \*\*What, you expected them to do it for free? Or that they were being paid by the Feds? No, they were being paid by the very organizations whose debt they were to rate. ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [August 16, 2012, 1:54am UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/24 "2012-08-16T01:54:33Z")
> [@sweeteviljesus](#): > > You are going to have to forgive my ignorance of derivatives. The only kind I am familiar with are stock options and commodities futures. I also thought CDOs were a sort of super bond made out of pieces of different bonds which were made out of pieces of other bonds, sort of like shares in a mutual fund of mutual funds. I was also under the impression that a credit default swap was basically insurance on a particular cdo. How far off am I? > > Thanks, > Rob No, you’re right. In the image I posted in post #21, Dunbar goes to explain a bit how this particular CDO was designed and, yes, in general, they’re little more than a “super bond made out of pieces of different bonds which are made out of pieces of other bonds” (which are made out of thousands of mortgages, to close off the chain). As you probably know, CDS’s are what got AIG in trouble. They had other issues, but the CDS one was the ballbreaker. … now waiting for someone to tell me I got it all wrong. 😉 ---
**Author:** ![phxjcc](https://avatars.discourse-cdn.com/v4/letter/p/8491ac/32.png) [@phxjcc](https://boards.straightdope.com/u/phxjcc)\ **Post date:** [August 16, 2012, 2:12am UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/25 "2012-08-16T02:12:36Z")
> [@JohnT](#): > > Sorry, I just noticed this. > > In my readings (and I’ve read at least 40 books on the '08 meltdown) I don’t ever recall it being said that the rating agencies (RA) gave AAA ratings to securities because of CDS’s\*. Instead, they gave increasingly higher ratings _because ratings were being shopped_: > > So you’re an RA in competition with another (say, RA1 and RA2). Goldman Sachs comes to you to rate a security. _They pay you to do this_\*\* - this is, after all, how you make your money. So you do your diligence and pronounce “This is a A- structure.” > > Irked, Goldman takes the next deal to RA2 and tells them of the "difficulties’ that they had with your organization. Understanding what they meant, RA2 (not surprisingly) looks at the same deal and says “Hey, this is actually a AA structure and should be rated as such!” > > Puzzled as to why you haven’t seen Goldman in 2 months, and hurting for revenue, you give them a call. And they say to you “Well, the other guy understands what we’re doing better, so we’re going to use him from now on.” > > “Wait!”, you cry out, “Perhaps there was something we overlooked. Perhaps your guys can come down and show us what we missed?” > > So GS comes down, shows you the same shit sandwich, and, because your kids have to eat too, you say “Wow, guys, thanks for taking your time to more fully explain this to us. We don’t see anything wrong with rating this… what, AAA?” > > Pleased with your rating, your business picks up, and your kids go off the Ramen and Water diet. Everybody wins! > > Well… except the investors. And eventually, the bank. And, if things get bad enough, the entire fuggin’ country. > > \*Doesn’t mean it wasn’t true, just that I don’t remember it. > > \*\*What, you expected them to do it for free? Or that they were being paid by the Feds? No, they were being paid by the very organizations whose debt they were to rate. The most cogent explanation that I have read in a long time. ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [August 16, 2012, 2:17am UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/26 "2012-08-16T02:17:12Z")
> [@jasg](#): > > To extend this question a bit, what is the SD on the effect of the [CFMA](http://www.cftc.gov/opa/press00/opa4479-00.htm) on the financial crisis? Huge. Here’s something I wrote in another thread ([You have 100 Blame Points. Assign them to those responsible for the financial meltdown.](http://boards.straightdope.com/sdmb/showthread.php?t=628504)): > [@](#): > > 15 pts: Wendy Gramm, Robert Rubin, Larry Summers, Arthur Levitt, and William J. Ranier. In 1993, on, literally her last day as Chairwoman of the Commodities Future Trading Commission (CFTC), Wendy Gramm (yes, wife of Phil Gramm) exempted Over-The-Counter (OTC) derivatives from regulatory oversight from the one agency that was charged with this oversight function. Her successor, Brooksley Born, feared for the future of the capital markets and spent her one term as Chairwoman of the CFTC fighting for greater disclosure requirements and increasing capital reserves against losses. Alan Greenspan argued otherwise, and while Bob Rubin and Larry Summers saw merit in both arguments, they eventually sided with Greenspan when their support of Ms. Born could have made the difference. Rubin, Summers (then Treasury Secretary), Levitt (head of the SEC), Ranier (then-head of the CFTC) and Greenspan all gave their support to the Commodity Futures Modernization Act of 2000, which expressly forbade the CFTC from regulating derivatives. > > Oops! Wish we had that one to do all over again! > > FYI, Bob Rubin left government service to become an extremely highly-compensated executive at Citigroup, an executive that actually had no day-to-day responsibilities while earning in excess of $15 million/year. ---
**Author:** ![WillFarnaby](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/willfarnaby/32/514_2.png) [@WillFarnaby](https://boards.straightdope.com/u/WillFarnaby)\ **Post date:** [August 16, 2012, 4:11am UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/27 "2012-08-16T04:11:36Z")
Just thought I’d add that Glass-Steagall wasn’t repealed at all. If it was it would have been the end of FDIC. This could have lessened the effects of the bubble because depositors would have incentive to place their money in banks that weren’t engaging in risky behavior. As it was and is, depositors deposit their money willy-nilly and banks have no incentive to behave sensibly because they know the bailouts are coming. FDIC has always been for the benefit of the banks. After the bank runs of the 30’s, Glass-Steagall was passed to shore up falling consumer confidence in banks. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 16, 2012, 6:49am UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/28 "2012-08-16T06:49:23Z")
> [@WillFarnaby](#): > > Just thought I’d add that Glass-Steagall wasn’t repealed at all. If it was it would have been the end of FDIC. This could have lessened the effects of the bubble because depositors would have incentive to place their money in banks that weren’t engaging in risky behavior. As it was and is, depositors deposit their money willy-nilly and banks have no incentive to behave sensibly because they know the bailouts are coming. > > FDIC has always been for the benefit of the banks. After the bank runs of the 30’s, Glass-Steagall was passed to shore up falling consumer confidence in banks. Gee, studying banks really worked in 1929 - 1933, didn’t it? Sure, little Polly is going to study the books of all the banks in her neighborhood before putting her life savings in any of them. And she is going to keep studying the balance sheet of her bank to make sure they don’t start doing something risky. And the banks of course are going to be utterly transparent about their business strategy. Libertarianism of this sort works fine - if every consumer has the equivalent of an advanced degree in the area of each business they interact with, and the time to study that business. Very realistic there. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 16, 2012, 6:51am UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/29 "2012-08-16T06:51:27Z")
> [@JohnT](#): > > No, you’re right. In the image I posted in post #21, Dunbar goes to explain a bit how this particular CDO was designed and, yes, in general, they’re little more than a “super bond made out of pieces of different bonds which are made out of pieces of other bonds” (which are made out of thousands of mortgages, to close off the chain). If I remember the reading I did correctly, beyond what you wrote the rating agencies also published (or revealed) their formula - which let the banks create instruments just barely good enough for a particular rating. Kind of like teaching to the test. Do I remember correctly? ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [August 16, 2012, 6:55am UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/30 "2012-08-16T06:55:33Z")
I’m glad to see Dopers zeroed in on under-regulation to blame, rather than CRA, as the always-blame-the-liberals crowd would have it. But the simple existence and persistence of the housing price bubble can also be blamed. I know such bubbles are often considered “human nature”, and that Alan Greenspan is on record as stating (at least for stock price bubbles) that deliberately puncturing a bubble may do more harm than good, but I’m not so sure. The Federal Reserve deliberately raises producers’ interest rates when there is producer price inflation. Might it not make sense to raise homebuyers’ interest rates when there is home price inflation? One thing is clear to me: There were many smart people who knew the housing bubble would collapse, but continued bubblish policies out of greed. I do _not_ propose legislation that greed be replaced with altruism :dubious: , but the disconnect between private expert opinions and opinions propagated by mass media should be recognized as a problem. ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [August 16, 2012, 12:08pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/31 "2012-08-16T12:08:07Z")
> [@JohnT](#): > > Sorry, I just noticed this. > > In my readings (and I’ve read at least 40 books on the '08 meltdown) I don’t ever recall it being said that the rating agencies (RA) gave AAA ratings to securities because of CDS’s\*. Instead, they gave increasingly higher ratings _because ratings were being shopped_: > > So you’re an RA in competition with another (say, RA1 and RA2). Goldman Sachs comes to you to rate a security. _They pay you to do this_\*\* - this is, after all, how you make your money. So you do your diligence and pronounce “This is a A- structure.” > > Irked, Goldman takes the next deal to RA2 and tells them of the "difficulties’ that they had with your organization. Understanding what they meant, RA2 (not surprisingly) looks at the same deal and says “Hey, this is actually a AA structure and should be rated as such!” > > Puzzled as to why you haven’t seen Goldman in 2 months, and hurting for revenue, you give them a call. And they say to you “Well, the other guy understands what we’re doing better, so we’re going to use him from now on.” > > “Wait!”, you cry out, “Perhaps there was something we overlooked. Perhaps your guys can come down and show us what we missed?” > > So GS comes down, shows you the same shit sandwich, and, because your kids have to eat too, you say “Wow, guys, thanks for taking your time to more fully explain this to us. We don’t see anything wrong with rating this… what, AAA?” > > Pleased with your rating, your business picks up, and your kids go off the Ramen and Water diet. Everybody wins! > > Well… except the investors. And eventually, the bank. And, if things get bad enough, the entire fuggin’ country. > > \*Doesn’t mean it wasn’t true, just that I don’t remember it. > > \*\*What, you expected them to do it for free? Or that they were being paid by the Feds? No, they were being paid by the very organizations whose debt they were to rate. Clearly, paying a ratings agency to rate your derivative (especially if it has competitors) will lead to ratings inflation to some degree (maybe we should make the bond issuers pay the agencies in the bonds they rate :). But I also thought that the fact that the bonds were underwritten was a justification for the higher rate. Another thought I just had: if the CDOs were made from so many little parts of different mortgages, wouldn’t the expected default rate on those mortgages asymptotically approach the national average default rate? Couldn’t that be used to assign the risk? Also, what regulation of derivatives did Dr. Barnes have in mind? We are referring to the CDSs here and not the CDOs which are debt instruments, right? Thanks, Rob ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [August 16, 2012, 12:33pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/32 "2012-08-16T12:33:34Z")
> [@Voyager](#): > > If I remember the reading I did correctly, beyond what you wrote the rating agencies also published (or revealed) their formula - which let the banks create instruments just barely good enough for a particular rating. Kind of like teaching to the test. Do I remember correctly? I don’t know if they (Moody’s, Fitch, S&P) published their formulas/models (after all, they were in competition with each other), but let’s just say that the RA’s worked _very closely_ with their clients in order to make sure the deals were rated “accurately.” ---
**Author:** ![WillFarnaby](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/willfarnaby/32/514_2.png) [@WillFarnaby](https://boards.straightdope.com/u/WillFarnaby)\ **Post date:** [August 16, 2012, 1:41pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/33 "2012-08-16T13:41:30Z")
> [@Voyager](#): > > Gee, studying banks really worked in 1929 - 1933, didn’t it? The response was the problem. Instead of banks keeping adequate reserves, they lobbied for FDIC. This way consumer confidence was restored without the necessity of changing questionable banking practices. > [@](#): > > Libertarianism of this sort works fine - if every consumer has the equivalent of an advanced degree in the area of each business they interact with, and the time to study that business. Very realistic there. Do you have a degree in electrical engineering? If not, how many fires have started because you purchased faulty lamps or wiring? There is electricity coursing through nearly every home in the U.S. Shouldn’t there be more electrical fires if an advanced degree is required to make smart consumer decisions? ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [August 16, 2012, 2:09pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/34 "2012-08-16T14:09:20Z")
> [@sweeteviljesus](#): > > Clearly, paying a ratings agency to rate your derivative (especially if it has competitors) will lead to ratings inflation to some degree (maybe we should make the bond issuers pay the agencies in the bonds they rate :). But I also thought that the fact that the bonds were underwritten was a justification for the higher rate. > > Another thought I just had: if the CDOs were made from so many little parts of different mortgages, wouldn’t the expected default rate on those mortgages asymptotically approach the national average default rate? Couldn’t that be used to assign the risk? > > Also, what regulation of derivatives did Dr. Barnes have in mind? We are referring to the CDSs here and not the CDOs which are debt instruments, right? > > Thanks, > Rob 1. I’m no expert in the forming of a CDO by any means, but it seems to me that you can’t insure the thing until it exists and one of the steps involved in creating a CDO is getting it rated by the RA’s. In addition, without a rating, how do you know what the insurance premium should be? BBB debt carries a higher premium than AAA debt, of course. 1. You would think but I’m sure somebody smarter than I can build a model that shows that the more risk you take on, the safer you are. Oh, wait… they already did, which is why the crash happened in the first place. 😉 2. No clue about Dr. Barnes’s ideas. (I think that last was aimed at another poster as the name “Barnes” doesn’t show up in this thread until you mentioned it…?) ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [August 16, 2012, 4:25pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/35 "2012-08-16T16:25:16Z")
I meant Brooksley Born. I remembered the B, the R and the N, correctly and in the right order. Do I get partial credit? BTW, what, if anything, is being done about the incentive for ratings agencies to overrate bonds? What could or should be done? Thanks, Rob ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [August 16, 2012, 4:31pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/36 "2012-08-16T16:31:21Z")
> [@WillFarnaby](#): > > The response was the problem. Instead of banks keeping adequate reserves, they lobbied for FDIC. This way consumer confidence was restored without the necessity of changing questionable banking practices. > > Do you have a degree in electrical engineering? If not, how many fires have started because you purchased faulty lamps or wiring? There is electricity coursing through nearly every home in the U.S. Shouldn’t there be more electrical fires if an advanced degree is required to make smart consumer decisions? At the risk of hijacking my own thread, what’s an adequate reserve? Unless the requirement is 100%, a run on the bank is still possible, albeit with decreasing likelihood. At some point, the requirement will make the bank somewhat pointless, or at least unprofitable. No, I have a degree in Computer Science, but I certainly don’t take apart lamps or tear open the walls in my house (not sure if the inspector took off the socket plates) to inspect the wiring and I wouldn’t know good from bad if I did unless it was really obvious. We have building codes that help protect us from this sort of thing. Rob ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [August 16, 2012, 4:31pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/37 "2012-08-16T16:31:59Z")
I don’t really know what her ideas were, other than the fact that they run along the lines of “Holy shit! We have trillions of dollars of financial instruments being created and traded on a daily basis and nobody has any oversight of this market. This could be a freakin’ disaster!” ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 16, 2012, 4:43pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/38 "2012-08-16T16:43:36Z")
> [@WillFarnaby](#): > > The response was the problem. Instead of banks keeping adequate reserves, they lobbied for FDIC. This way consumer confidence was restored without the necessity of changing questionable banking practices. You should read the history of the time. No bank can practically have enough reserves to guard against a run. The problem was purely psychological, as people feared for the safety of their money even in banks which were strong. The FDIC eliminated that fear, and the problem of bank runs disappeared. Given banks failing during the last crisis, I bet that without the FDIC we’d have a much bigger disaster on our hands. > [@](#): > > Do you have a degree in electrical engineering? If not, how many fires have started because you purchased faulty lamps or wiring? There is electricity coursing through nearly every home in the U.S. Shouldn’t there be more electrical fires if an advanced degree is required to make smart consumer decisions? Actually I do. 🙂 Remember though, that major wiring jobs have to be done by licensed electricians, which cuts down on the number of fires. (That pesky gummint again.) While I didn’t see much more than 12 volts in any of my labs, I know enough to want to study real hard about the issues before I would wire my house, or, better, get someone with experience. The real danger is from those who don’t know enough to know what they don’t know. You know, the kind of people who keep the makers of quack remedies in business. And while lamps are certified by UL, the power of government is lurking in the background. If there were tons of competing certifiers, we might be forced to go to a government one. ---
**Author:** ![leahcim](https://avatars.discourse-cdn.com/v4/letter/l/b4bc9f/32.png) [@leahcim](https://boards.straightdope.com/u/leahcim)\ **Post date:** [August 16, 2012, 5:19pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/39 "2012-08-16T17:19:59Z")
> [@JohnT](#): > > In addition, without a rating, how do you know what the insurance premium should be? BBB debt carries a higher premium than AAA debt, of course. Price it on the open market. That’s how credit is currently priced into bonds: You say “XXX promises to pay you 4% per year and then 100000 in five years, how much do you think XXX’s word is worth?” and the market responds with a price that takes that into account. > [@](#): > > 1. You would think but I’m sure somebody smarter than I can build a model that shows that the more risk you take on, the safer you are. Oh, wait… they already did, which is why the crash happened in the first place. 😉 I suspect the “;)” means, “the previous is an oversimplification meant humorously”. CDOs are meant to reduce risk by taking on more mortgages, yes, but based on the principle that having two assets _both_ default is less likely than one of them default, which is a perfectly valid result. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 16, 2012, 6:36pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/40 "2012-08-16T18:36:56Z")
> [@leahcim](#): > > Price it on the open market. That’s how credit is currently priced into bonds: You say “XXX promises to pay you 4% per year and then 100000 in five years, how much do you think XXX’s word is worth?” and the market responds with a price that takes that into account. Ratings are meant to provide information to the markets. How can they evaluate anything without information? How do you keep those with information from fleecing those without? > [@](#): > > I suspect the “;)” means, “the previous is an oversimplification meant humorously”. CDOs are meant to reduce risk by taking on more mortgages, yes, but based on the principle that having two assets _both_ default is less likely than one of them default, which is a perfectly valid result. Since you “lose” on your insurance if you win on your investment, the return is reduced along with the risk - just as you’d expect. [Previous page](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564.md?page=1) [Next page](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564.md?page=3)