Crashed

Adam Tooze

• The FED was created to try and stop speculation and bank runs.

• Under the Glass-Steagal act the government insured bank deposits up to 100K in 1980, changing to 250k during the crisis. Because of this banks had to be told a cap they could put on interests and also were subjected to more stringent regulation.

• Money market mutual funds started to become popular in the 1970’s investing depositors money in secure assets. They were not protected by deposit insurance.

• This was the start of the less regulated ‘banking’ called ‘shadow banking’ as it operated beside traditional banking.

• There is a tension too in the returns these funds could offer compared to the government impared regular savings and loans banks. Assets in these funds went from 3 billion dollars in the 70’s to 1.8 trillion by 2000.

• I’ve suddenly gotten confused about banks paying interest on deposits, I thought that was a thing too. I think it can be split up two ways. Banks could have ‘special’ account types where they will give you interest on loans, so you would deposit money with the bank and they’ll give you a return on it. This is basically just a bond with the bank. Then theres the rate the bank charges to lend you money.

• What mutual funds offered was the first kind, a special deposit that’s basically a bond. I’m not too sure how this was a popular deposit type in commercial banks though, because they could really invest in securities.

• The commercial paper and repo market were attractive places for mutual funds to maintain their ‘safe’ but high returns. Commercial paper was a short term loan for a fee not backed by anything, just the ‘good word’ of the company.

• how prevalent are repo agreements ? https://www.bankrate.com/banking/federal-reserve/why-the-fed-pumps-billions-into-repo-market/

• A repo is a short term collaralized loan. Someone gives securities to someone else saying they’ll buy them back for more. As an example, if I gave 15k worth of stocks to Sean and got 14k for them saying that I’ll pay 15.1 back to him next week. If we ‘rolled it over’ I might extend when I’d pay that 15.1k back, because the collateral might be stable. Like a treasury bond.

• Fannie and Freddie had dual missions, both public and private: support the mortgage market and maximize returns for shareholders. They did not originate mortgages; they purchased them—from banks, thrifts, and mortgage companies—and either held them in their portfolios or securitized and guaranteed them

  • Trying to establish
    • 1. why securitize? At the moment, my thinking is that it was a way to make more money for shareholders.
      • It started when Ginnie Mae would back MBS issued by lenders
      • Then Freddie got into the business of actually creating these MBS’s
    • 2. how did having, vs not having mortgages on the balance sheet affect the sustainability of these GSE’s? Generally how ‘having something on your balance sheet affects you’
      • Initially, Fannie Mae was turned into a public company because the debt it had was on the government balance sheet. Making it public distributes the balance sheet?

• After Congress imposed stricter capital requirements on thrifts, it became increasingly profitable for them to securitize with or sell loans to Fannie and Freddie rather than hold on to the loans. The stampede was on. Fannie’s and Freddie’s debt obligations and outstanding mortgage-backed securities grew from 759 billion in 2.4 trillion in

• The less regulated portion of the market attracted more capital.

• The GSE’s became powerful lobbyist and it seemed people clearly knew it wasn’t a good business model. They were very profitable in the 90’s by 2000 they held or guaranteed 2trillion in mortgages with only 35 billion in shareholder equity. k

  Securities are fungible and tradable financial instruments used to raise capital in public and private markets.

• Inflation is a result of having more money than goods and services.