The financial crisis that occurred during the time frame of the late months of 2007 to the end of 2009 hit the US economy hard and sent us spiraling into the recession that we are in today. The main cause of the seemingly abrupt market crash was the action of the banks taking risky investments with derivatives, the mortgage market performing poorly and collapsing and the banks gambling all in this market. According to Encyclopedia Britannica, “A derivative is a contract that gets it’s value from another asset other than the asset that the contract is based on” (derivatives (finance.) 8-9). As noted from Davis Polk and Wardwell LLP “Subprime loans were becoming popular and so many subprime loans were being originated and being defaulted on at one time that the banks began to lose money they didn’t have”. Guynn, Randall (D.,& Davis Polk & Wardwell LLP 10-12)
The debt of the American people went up and so did the debt of the banks. These loans were sold in the secondary mortgage market, and they seemed “fail proof” at first because the loans had high interest rates, making the banks, a lot of money and the loans were backed by the collateral of the property. The banks gambled on such loans and lent more money than they had. As said in, “A subprime loan is a loan approved and given to consumers with a credit rating that is unsatisfactory for normal credit terms. In the mortgage markets these were loans given to consumers with poor credit scores. The interest rates on these loans were much higher than regular loans” ("BusinessDictionary.com - Online Business Dictionary." 15-18). An (ARM) an Adjustable Rate Mortgage is an example of a subprime loan. “An ARM is a mortgage where the interest rate goes up and down over the course of the loan” (Board of Governors of the Federal Reserve System 19-21). This crisis exposed weakness and a lack of regulation in our financial system (Guynn, and Polk& Wardwell LLP 4-23).
“The need for reform was ever clear and could not be ignored. Reform is not pleasant, but grievous; no person can reform themselves without suffering and hard work, how much less a nation” (Carlyle). With the recession of 2008 came billion dollar plus major corporation bail-outs and millions lost their jobs. The Dodd Frank act is the reform that was passed in 2010 and is the answer to American response and need for reform. Although this act was passed it will be some while before it can be fully implemented because it broad. The exact definitions, regulations, and committees have to be formed. Housing Finance Reform and Taxpayer Protection Act and FHA solvency bill are resent reform the committee of Housing and Urban Affairs is trying to get passed.
The Dodd Frank Act
The Dodd Frank has nine categories of reform. The categories are financial stability reform, agencies and agency reform, securitization reform, derivatives regulation, investor protection reform, credit rating agency reform, the Volcker rule, compensation, corporate government, and capital requirement. Also no more government bailouts will be given to banks and major corporations. The overall goal is to make and enforce changes so financial institutions can be tightly supervised, reform credit agencies, create a financial watch dog committee, introduce regulation capital requirements, regulate banks stringently so no bank will ever get so big again that if it were to fail it would kill the economy and changes and regulation to the above mentioned categories (Morrison & Foerster 35-43). Studies will have to undergo and research committees formed before much of the changes can be made.
A Financial Stability Oversight Council with be created to regulate all financial institutions. The function