The Wall Street Bailout in terms of Regulatory Risk
Regulatory risk is usually considered as a change in laws and/or regulations that will materially (negatively) impact a business or a business operation. In some cases, it can also refer to noncompliance with governmental regulations, such as in environmental liability exposures. But today let’s consider the soon to be announced $700B “Wall Street” bailout in terms of regulatory risk.
Many view the economic circumstances we are suffering through today as the natural culmination of events which started in 1977 with the passing of the federal law entitled “Community Reinvestment Act” and will end in the crescendo of debt our grandchildren will not have finished paying off.
The CRA was drafted as a high-minded and well-intentioned regulation intended to encourage banks to “help meet the credit needs” of the communities in which they operated and were to include low and moderate-income neighborhoods.
The CRA worked as intended for the most part until 1995, when the Clinton administration enacted certain updates to the Act which, in part, included a provision allowing the securitization of sub-prime mortgages (which were then “guaranteed” by Fannie Mae and Freddie Mac). These revisions further required the banks to offer “equal access” to lending and essentially forced the banks to make loans they, in all probability, would not have made absent these new requirements.
*As a minor historical footnote, it is ironic to note that in 1997 Bear Stearns became the first company to securitize the subprime mortgages and sell them to other financial institutions. As you probably recall, they were the first domino to fall.
So viewed through this historical lens, our economy is now bearing the cost of regulatory risk.
I found (an admittedly politically charged) video to help with following the “bouncing ball” if you have 10 minutes to spare. After about 4:00 minutes, the video digresses into more politics than explanation…
What began as a well-intentioned government mandate has unhinged our economy in ways we have just begun to experience. And as we stand on the precipice of another government mandated “solution”, I am justifiably concerned that while well-intentioned, this new legislation will contain some new regulatory risk that will rear its ugly head in the future.