In eight years after making this speech, the federal government would be directly bailing out firms that were too big to fail. This is indicating how the repeal of the Glass Steagall Act allowed financial institutions to engage in excessive amounts of risk taking. It is at this point that they took on large amounts of debt and had no accountability. (Crawford, 2011)
The information from this source is useful in showing how the repeal of certain laws helped to create situations which allowed for an atmosphere of deregulation. This set the stage for excessive amounts of risk taking with the liquid assets of the firm. When this happened, many institutions began to engage in activities that were believed to be safe. However, they were considered to be speculative and increased the company's risk position exponentially. This shows what the regulatory environment was like prior to the financial crisis and those factors allowed it to occur. (Crawford, 2011)
The lack of regulation has led to a concentrated push in having the federal government increasing the underlying guidelines inside the sector. This occurred with a focus on the size of these firms and how they were able to become so vulnerable. The results were that the organizations did not have any kind of responsible lending activities. Instead, they were basically approving loans without analyzing the borrower's ability to pay back the money or their income / credit history. Once interest rates increased, is when many of them could simply walk away from having very little invested in the house. (Crawford, 2011)
Solutions and New Regulatory Approach in the Global Financial Aftermath
In response to these challenges, the federal government has enacted the Dodd Frank Wall Street Reform and Consumer Protection Act. This law is reversing the deregulation from the late 1980s and 1990s. Under the new guidelines, a Consumer Protection Agency will have the authority to monitor the transactions of financial firms. Those organizations that are becoming a threat to the economy will be reduced in size from this entity. (Steiner, 2012)
Evidence of this can be seen with observations from Steiner (2012) who said, "Recent bad corporate behavior compelled legislators to step in and tweak corporate governance by giving shareholders proxy access and allowing them to vote on executive pay and golden parachutes. Small investors may also get more protection when it comes to their investment advisers. Retail investors are rarely aware that it's perfectly legal for brokers to overcharge customers -- as long as suitability standards are met. With the new legislation, investors will get the assurance of knowing that brokers have to put their customers' best interests first. Finally, people with money in the bank can rest easier knowing that FDIC insurance will permanently cover more of their funds." (Steiner, 2012)
These insights are showing how Dodd Frank is increasing the overall protections that are available. For all classes of investors, this is resulting in more honest practices when it comes to commissions and the kinds of products that are recommended. This will provide the industry with a set of morals and guidelines that will automatically reduce risks for these firms. (Holzer, 2012) (Steiner, 2012)
The results of the Dodd Frank Act are that the new Consumer Protection Agency is directly going after areas that are creating potential problems for the financial system. For example, in the last year the SEC has wanted to impose new rules on money market funds. This is because they determined that they were engaging in risky practices by investing in areas that are considered to be safe. Yet, they offer a higher return and greater amounts of income. Historically, these assets have always traded at $1.00. This is because it was believed that the practices of money managers were focused on meeting FDIC guidelines. (Holzer, 2012) (Steiner, 2012)
However, once the financial crisis began is when they were exposed for making purchases of subprime mortgages and other areas that were thought to be safe. To address these issues, the SEC wants to have prices trade similar to mutual funds. This will force the markets to accurately evaluate these areas and they are increasing disclosure requirements. Recently, one of the commissioners on the SEC was blocking any attempts to impose these guidelines. Then, when the Consumer Protection Agency stepped in, is the point that this person reversed their position (allowing for the implementation of these new guidelines) (Holzer, 2012)
Commenting about what is happening is Holzer (2012) who said, "Money funds typically invest in short-term...
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