When Did The Mortgage Meltdown Begin?

It’s official. We now have a starting date for the mortgage meltdown. It was February 27, 2007, almost two-and-a-half years ago.

It was on that date that Freddie Mac said it would no longer purchase subprime mortgages and high-risk mortgage-backed securities.

Who says? The Federal Reserve Bank of St. Louis. It has come up with a financial crisis timeline which looks at the major events of the past few years.

The timeline is a smart idea, lists a lot of events and has good links and resources. That said, we can surely add a few items…

Sins of Omission

The timeline looks at events that happened, but it does not look at the steps which were not taken. For instance, the Federal Reserve has had the right to ban mortgages and mortgage activities which represent “unfair and deceptive acts or practices– (UDAP) under the Home Ownership Equity Protection Act of 1994 (also known as “HOEPA– — Section 32 of Regulation Z, part of the Truth in Lending Act). Since the Fed didn’t do anything to protect the public there’s no mention of its failure on the timeline. It was a sin of omission.

Glass-Steagall Act

We could go back further. For instance, the Glass-Steagall Act was repealed in 1999 — since the Depression it had prohibited banks from engaging in both commercial and investment banking. Armed with new powers, many large banks ultimately became involved with investments they didn’t understand and then left taxpayers with the bill.

Net Capital Rule

Here’s one more: On April 28, 2004 the Securities and Exchange Commission passed a revised “net capital” rule which would allow the brokerage subsidiaries of large banks to buy securities equal to as much as 30 times their capital base as opposed to the old standard of 12 times.

In other words, if you had $1 billion in capital you could borrow enough to buy securities worth $30 billion instead of $12 billion. Seen another way, leverage increased dramatically because the requirement for banks to have reserves fell from 8.5 percent to 3.3 percent. (For a good explanation, see: The SEC Killed Wall Street On April 28, February 18, 2009)

And you wonder why big banks got in trouble.

The good folks at the St. Louis Federal Reserve have done a good deed with their timeline, and hopefully it will be revised to include sins of omission as well as earlier events.

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