Fed Chairman Ben Bernanke told the Financial Crisis Inquiry Commission in 2010 that that the Wall Street meltdown “was the worst financial crisis in global history;” that 12 of the 13 most important financial institutions in the United States were close to failure “within a week or two.”

A similar crisis during the Great Depression led FDR to pass The Banking Act of 1933 — Glass-Steagall — to regulate financial institutions.

In the 1980s, Savings and Loans were exempted from many of those regulations. With no one watching, many then reduced their underwriting standards, making risky loans and speculating with other people’s money. As a result, over 700 S&Ls failed between 1985 and 1992. The “pro-market” Reagan administration responded by bailing out the S&Ls — at a cost of $160 billion — demonstrating that Washington would insulate the financial sector from risk.

Undeterred by the disastrous S&L deregulation, Congress passed Gramm-Leach-Bliley in 1999 — a law engineered by Republican Sen. Phil Gramm, chairman of the Senate Finance Committee — that repealed the Glass-Steagall regulations governing Wall Street investment firms. A year later, Gramm steered the Commodity Futures Modernization Act through a lame-duck Congress with one day’s notice. It prohibited the executive branch from regulating derivatives, instruments that Warren Buffett called “financial weapons of mass destruction.”

Alan Greenspan, as Fed chairman, exacerbated the problem, by opposing regulations on banks and derivatives, and by stimulating a housing bubble with cheap money; he lowered interest rates 13 times over a two-year period — from 6.5 percent to 1 percent — and kept them there.

The subsequent speculative frenzy resulted in risky loans — such as “stated income” (liar) loans, with nothing down and even negative amortization — being offered to unqualified buyers. Those subprime loans were then bundled into mortgage bonds that rating agencies (who get paid by banks) conveniently rated as Triple-A, a rating that allowed banks to fob these toxic securities off on pension funds (CalPERS lost billions) and municipalities (Orange County, Calif., lost $2 billion).

The speculation and outright fraud was enabled by years of deregulation and by Bush’s appointment of toothless industry lobbyists as “regulators.” Goldman Sachs, for example, sold subprime mortgages designed to fail and then bet against those instruments by selling them short (for which they were fined $550 million). Deutsche Bank sold its clients subprime mortgage bonds that one of its own traders had described as “pigs.”

The eventual collapse resulted when housing prices dropped, which increased mortgage defaults; that made mortgage-backed securities held by banks as collateral nearly worthless. Since some banks had debt-to-equity ratios as high as 50-1 —  hidden by accounting fraud (Google: “repo 105s”) — just a 2 percent drop in their assets made them insolvent.

The bailouts began in March 2008. It was subsequently revealed that the Fed loaned out almost $13 trillion — figures closely guarded until the Dodd-Frank bill mandated greater transparency — including $2 trillion in loans each to Citigroup and Morgan Stanley; billions to banks in Mexico, Bahrain and Bavaria; billions more to Japanese car companies, to millionaires and billionaires with Cayman Islands addresses, and (according to Sen. Bernie Saunders) hundreds of millions to the wives of two Morgan Stanley executives … with no business experience.

These sweetheart loans gave recipients cash at near-zero interest rates (.0078) that they then loaned back to the government at 3 percent by investing in T-bills, a license to print money.

At the same time, the Bush administration followed Reagan’s bailout precedent with its $700 billion TARP program, another sweetheart deal by and for insiders with no strings attached, no reporting requirement, and no assurances that lending would be increased.

So the financial class got bailed out but the middle class paid the price; a record 2.82 million homes were foreclosed just in 2009, according to RealtyTrac and millions of jobs were lost. A Fed survey found that American families lost an average of 23 percent of their household wealth between June 2007 and March 2009, a total of $19.4 trillion.

After the S&L debacle, more than 800 bank officials went to jail.

But neither the Bush nor the Obama administrations conducted criminal investigations of the deceptive loan practices, the fraudulent accounting, the insider trading and the conflicts of interest behind the current crisis.

Moreover, Republicans in Congress are attempting to gut the financial reform bill, The New York Times reports, by reducing funding for the regulatory agencies, and by exempting some derivatives from regulation. Meanwhile, big banks that created the crisis have gotten even bigger.

We are setting ourselves up for another crisis.

(A version of this, by the author, first appeared in the Mankato (MN) Free Press)

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