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I don't think the problems with today's banks are that they are Too Big To Fail, but rather they are Too Dumb To Succeed!
Evan Klimpl's profile photoNike N. Chillemi's profile photo
+Evan Klimpl The banking industry was forced into giving subprime mortgages by politicians such as Barney Frank and Christ Dodd.
+Nike Chillemi My thoughts are that the true problem was not regulations but rather that the nature of mortgages were changed at their core by the financial industry. Traditionally, mortgages were loans made and more importantly held by a bank who qualified the recipient to make sure they would have a good chance of being repaid during the life of the loan producing a stream of dependable profit for the bank. By self-policing to whom the bank gave the loan, they were able to make a good business decisions and modestly increase profits in a stable manner. If they didn't make good decisions, enough loans were defaulted and the bank would go under. However, the need to cash in on higher short term profit and financial deregulation, laid the groundwork for the mortgage implosion. When loans became something the originator didn't hold for the term of the loan, but rather packaged them into investment vehicles to be sold to third-parties, the risk of the loan was transferred away from the originator. This meant that the profit stream would also transfer to the 3rd party, leaving the loan originator making a commission to earn their profit. This encouraged them to make as many loans as possible and earn the fees safe in the knowledge that if the loans were not repaid, someone else who take the hit. The big change came when banks traded in stability for liquidity in the name of profits.

My original comment was in response to a UBS trader who is charged with fraud for losing billions in unauthorized trades that his bank apparently didn't know he made. Any bank that isn't capable of knowing what their employees do with their money, that has no internal safeguards to limit risk, etc etc is not capable of regulating itself. Then couple it with the size of the bank and you have extreme risk to the entire financial system. They can't be trusted to keep themselves out of trouble, which is how financial regulation has grown in the US. This country started as no regulation, most fo them such as Glass-Steagal came as a response to a problem that was created by a lack of rules.

What we know is regulation is a two-edged sword. Too much and it can hinder growth, but too little and capitalism can consume itself. I'm a capitalist in philosophy, but reality dictates if you encourage companies to profit from acting irresponsibly, then they will do it. And in the case of the mortgage industry, the more reckless the loans, the more money made. Of course it was going to end ugly, it always does.
Bundling mortgages and selling them to other entitites is definitely part of the problem. But that also originates in government policiy. It's government policy that forced banks to give loans to people who could not afford the payments. What else was the bank to do with mortgages that were forced on them? They bundled them off to someone else.

There's a societal shift toward no responsibility. It's in every quarter. Everyone wants the easier softer way...but there is no easier softer way.
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