With world credit markets still not functioning smoothly, experts say inadequate US regulation is largely to blame for the home loan related credit squeeze that surfaced last August. VOA's Barry Wood has more.
Respected investment banker Henry Kaufman says U.S. state and federal regulators failed to do their job in safeguarding the financial system. Writing in Tuesday's Wall Street Journal, Kaufman says the recent integration of the banking, insurance, and brokerage business made existing, fragmented supervision obsolete. He says broader, coordinated regulation is needed.
At a conference at the American Enterprise Institute Tuesday, financial services lawyer James Sivon agreed that lax supervision contributed to the subprime debacle. "Clearly, there were gaps in regulation. There were bad practices that occurred in many cases where consumers were treated unfairly," he said.
In the United States there is one government regulator for banks, another for insurance companies, and another for brokerages. The credit squeeze occurred when the market for packages of subprime or higher risk mortgages, called collateralized debt obligations, froze up when home buyers were unable to keep current with their monthly payments. These high yielding secondary loans had been sold as high grade assets to financial institutions all over the world. With the market for subprime loans barely functioning, financial institutions don't know what value to attach to the loans and are taking big losses on them. Huge unexpected losses at America's biggest brokerage, Merrill Lynch, and biggest bank, Citigroup, have led to the resignations of their chief executive officers.
Robert Litan of Washington's Brookings Institution, blames the New York-based credit rating agencies, Standard and Poors and Moodys, for rating subprime debt obligations as AAA or high quality.
"I have to think that people would say how is this possible. Isn't there a lot of junk that doesn't have AAA that is residual, that is the crap that is left over? And isn't all of this going to blow up somehow. And what do we do about this ? "
Henry Kaufman says reckless lending practices created a credit bubble in the early part of this decade. That bubble, he says, has now burst and the consequences are both painful and not yet complete. He believes that a contraction in lending is now slowing the economy and could lead to an actual downturn or recession.