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How Wall Street lost its way

business Updated: Sep 24, 2008 22:58 IST

Regulation
Consumer protection
Under Franklin D. Roosevelt, the Glass-Steagall Act of 1933 prohibited consolidation of investment, commercial banking and insurance services. It also created theFDIC to insure consumerbank deposits.

Following the Stock market crash of 1929, the act was intended to stop bank executives from steering customers’ deposits into risky investments and to prevent another collapse of the banking system.

Deregulation
Financial liberalisation
The Gramm-Leach-Bliley Act of 1999 repealed the Glass Steagall Act and allowed consolidation among banks, securities firms and insurance companies and created more competition.

American consumers might benefit if lenders provided greater mortgage-product alternatives to the traditional fixed rate mortgage.

Industry expansion
Dabbling in new disciplines
Although mergers and acquisitionsactivity did not explode as expected, commercial lenders began engaging in highly lucrative trading of mortgagebacked securities and collateralized debt obligations just like investment firms.

Companies’ capital as a percentage of total assets, showing banks still face stricter requirements than investment firms.

Boom and Bust
Housing market rise and fall

Low interest rates spawned cheap mortgage loans for consumers that in turn generated a thriving investors’ market for derivatives such as MBSs, CDOs and other exotic securities. As rates rose, homeowners defaulted putting derivatives at risk.

Economic Crisis Economic Crisis
The financial tsunami
Highly leveraged securities firms made riskier mortgage investment bets than their commercial bank counterparts. The collapse of the housing market took several Wall Street firms down with it and affected global markets.

And Back to Regulation
Decisive, immediate action required
Federal Reserve Chairman Ben Bernanke said the US economy will shrink and further impact the world economy if markets don’t begin functioning normally, joining Treasury Secretary Henry Paulson in pushing forward a $700 billion rescue for financial institutions to relieve the credit crisis.