It is no accident that banks did not succumb to the subprime siren song. Questionable products and sales tactics would surely be picked up by the banks' regulators so there's every incentive for bankers to avoid bad deeds and self-disclose the ones already committed. There is a chance that investment banks, had they shared the same relationship with their regulators, may have shied away from these combustible products and been more transparent in their pricing.
Avoiding the subprime siren song
By Cornelius Hurley | August 17, 2007
As the subprime meltdown continues to roil the markets and rattle policy makers, many are considering what it means to be a "regulated" financial institution. Congress has been busy pummeling bank regulators for not extending their turf over unregulated mortgage companies and brokers. Lost in the commotion are two salient facts: regulated banks as originators of mortgages largely avoided the subprime catastrophe; and regulated investment banks served as a catalyst for the subprime industry by bundling and selling questionable assets originated outside the regulated banking industry. How could one segment of the financial services industry get it so right while another went so far astray?
Until recently, a consensus seemed to be forming around the notion that overregulation of domestic financial services firms had placed them at a competitive disadvantage vis-a-vis foreign firms and markets. It found its voice in several significant studies, including ones by the US Chamber of Commerce, Treasury Secretary Henry Paulson, and Senator Charles Schumer and Mayor Michael Bloomberg, both of New York. The studies pushed for "principles-based" regulation. Opponents were forced into the awkward position of opposing principles.
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