CLE Materials for Panel #1 - George Washington University Law ...

WILMARTH
4/1/2011 1:11 PM
2011] The Dodd-Frank Act 963
III
LCFIS PLAYED KEY ROLES IN PRECIPITATING THE FINANCIAL CRISIS
In order to determine whether Dodd-Frank’s reforms are adequate
to prevent a similar crisis in the future, it is essential to understand
that (1) LCFIs were the primary private-sector catalysts for the
current financial crisis and (2) the dominant position of LCFIs in the
financial markets has become even more entrenched due to the TBTF
subsidies they received both before and during the crisis. This Part
briefly summarizes the crucial roles played by LCFIs in helping to
produce the financial and economic conditions that led to the crisis, as
well as governmental policies that compounded the disastrous errors
of LCFIs. Part IV discusses how TBTF subsidies encouraged rapid
growth and consolidation among LCFIs.
A. LCFIs Originated Huge Volumes of Risky Loans and Helped to
Inflate a Massive Credit Boom That Precipitated the Crisis
During the past two decades, and especially between 2000 and
2007, LCFIs helped to generate an enormous credit boom that set the
stage for the financial crisis. LCFIs used securitization techniques to
earn large amounts of fee income by (1) originating high-risk loans,
including nonprime residential mortgages, credit card loans,
commercial mortgages, and leveraged buyout (LBO) loans; and (2)
pooling those loans to create securities that could be sold to
investors. 32 LCFIs ostensibly followed an “originate to distribute”
or significantly soften a future crisis. More than three-quarters say they don’t
have much or any confidence the proposal will make their savings and financial
assets more secure.
. . . .
Most Americans reject any new government rescues of financial institutions,
such as arranged for [Citigroup and AIG] . . . .
Id.; accord Brian Faler, TARP a ‘Four-Letter Word’ for Voters Even as Bailout Cost
Drops, BLOOMBERG BUSINESSWEEK (Oct. 8, 2010), http://www.businessweek.com
/bwdaily/dnflash/content/oct2010/db2010108_268416.htm (describing widespread public
resentment against the government’s rescue program for large financial institutions during
the financial crisis); John B. Judis, The Unnecessary Fall: A Counter-History of the
Obama Presidency, NEW REPUBLIC, Sept. 2, 2010, at 12, 13 (“The public’s [negative]
view of the bank bailout and the AIG bonuses colored its view of the auto bailout, the
stimulus, and health care reform. One of the rallying cries for the populist opposition to
[President] Obama was ‘where’s my bailout?’”).
32 Wilmarth, supra note 4, at 984–91, 1037–40 (reporting that, in 2007, residential
mortgage-backed securities accounted for nearly two-thirds of all U.S. residential
mortgages, while commercial mortgage-backed securities represented almost a quarter of
domestic commercial mortgages, asset-backed securities accounted for more than a quarter