Wall Street: History? What’s that?

One of the many reasons we need to regulate institutions is that they don’t care about what happened in the past (via here):

Standard & Poor’s cut to junk the ratings on certain securities, backed by U.S. mortgage bonds, that it granted AAA grades when they were created last year by Credit Suisse Group, Jefferies Group Inc. and Royal Bank of Scotland Group Plc.

The reductions were among downgrades to 308 classes of so- called re-remics, or re-securitizations, created from 2005 through 2009, the New York-based ratings company said today in a statement. About $150 million of the debt issued last year, as recently as July, with top rankings were lowered below investment grades, according to data compiled by Bloomberg.

One of the reasons there was a crisis is that institutions packaged credit and then overvalued it and here we find that they’re still doing it–less than a year later!

You might say this is just one instance but you can see it more obviously here (I talk about it here). The savings and loan crisis of the late 1980s lead to more than 1000 banks going under. The Resolution Trust Corporation (under the FIRREA legislation) was formed to help resolve the crisis and close the banks and the RTC was closed in 1995. Starting in 1996 the FDIC collected no premiums:

But James Chessen, chief economist of the American Bankers Association, said that it made sense at the time to stop collecting most premiums because “the fund became so large that interest income on the fund was covering the premiums for almost a decade.” There were relatively few bank failures and no projection of the current economic collapse, he said.

“Obviously hindsight is 20-20,” Chessen said.

So, the RTC finished cleaning up a huge banking crisis in 1995 and in 1996 the banks couldn’t conceive of a large crisis. Really.

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