Deregulation precisely the economic problem

By The Daily Progress

Published: October 19, 2008

The author of “Over-regulation at fault in crisis” (The Daily Progress, Oct. 10) is mistaken.

It is lack of regulation, lack of transparency and lack of proper risk assessment, together with excessive leverage, that have created this financial meltdown.

The Community Reinvestment Act that columnist David Marotta tries to blame did not force banks to make subprime loans. It banned redlining. Subprime loans were overwhelmingly made by either unregulated or only partially regulated entities, such as independent mortgage companies. They did this because they could package and sell these loans as mortgage-backed securities, thanks to the Commodity Futures Modernization Act of 2000.

This brainchild of Phil Gramm, Sen. John McCain’s chief economic advisor, banned regulation of financial instruments issued by banks. Instead of “sticking to their knitting” of guaranteeing mortgages for borrowers with good credit scores and the ability to make a deposit (in the words of The Economist, “End of illusion,” July 17), Fannie and Freddie’s management, seeking to please investors, moved the companies into the more profitable and more risky business of buying mortgage-backed securities issued by others.

According to the same article, Alan Greenspan, then chairman of the Federal Reserve, said in 2004 that these purchases “do not appear to be needed to supply mortgage market liquidity,” a Fannie and Freddie mission. Yet, by the end of 2007, Fannie and Freddie were counterparties to $2.3 trillion of derivative transactions, with a gearing ratio of 65:1.

It was Fannie and Freddie’s entry into this unregulated market for collaterized debt obligations that resulted in the companies having a negative net worth, just as it was entry into the unregulated market for credit default swaps that sent AIG into a death spiral.

Heather Rowland
Albemarle County