Put in place to force banks to choose between commercial and investment bank activities. Protected depositor funds from speculative risks. Repealed in 1999.
Bank Holding Company Act of 1956
Extended the Glass-Steagall Act and precluded banks from underwriting insurance.
Allowed banks to become heavily involved in investment bank activities.
Required no deposit and low interest. Interest would be drastically raised eventually, but borrowers relied on future increases in salary and home value (didn't happen)
No Document/Liar Loan
Attracted people with poor credit histories
Mortgagee had no income, no job, and no assets
Potential conflict of interest involved in the process of rating.
Rating agencies are paid by investment firms who create the securities then use the ratings to sell the securities.
Fair value measurements. Financial assets are to be revalued each reporting period at their current market or best estimate value. Results in an unrealized gain/loss.
Was market-to-market accounting to blame for the meltdown?
No, greed and poor risk management are.
Lessons from the melt-down
- Have realistic expectations and responsible behavior
- Full risk assessment, due diligence, and virtues expected
- Ethics risk are ever present
- Can't just act within existing laws
- Consider if something is unfair to the public/investors
- Consider virtues expected
- Transparent disclosures
- Compensation schemes should be based on a balance of financial incentives and ethics risk
- Moral courage is needed
- Corporate governance system need to be focused on the long term.