Genesis of the Financial Crisis

We're a year past the financial crisis, but I still am fascinated by it. The more I read about it -- from House of Cards to Too Big to Fail and Gods at War -- the more I am amazed at how close our nation came to collapse of its financial plumbing. The people that were most familiar with the arcane and exotic intracacies of our modern financial system (such as Jamie Dimon, John Mack, and Hank Paulson) were seriously concerned about its collapse.

Depending on what your political stripes are, you are likely to blame the crisis on the Community Reinvestment Act ("CRA") (a Republican gripe) or you blame it on the Gramm-Leach-Bliley "Financial Modernisation Act" of 1999 ("FMA" - which ended the 1933 post-Depression Glass-Steagall act) (a Democrat gripe). I've heard both arguments. Each has their merit, but neither is sufficient to explain the events of 2008. Rather, both rationales appear to be a conclusion that drives one's determination of relevant facts. It should be the other way around.

So when I was reading King of Capital (biography of Sandy Weill) on my train ride home today, I was pleasantly surprised to learn of the interwoven nature of the CRA and the FMA. The strengthening of the CRA (it was originally legislation of 1977) was part-in-parcel of the FMA legislation:

• Amidst horse trading in October 1999, "several last-ditch compromises were made addressing bank compliance with the CRA, and an agreement was reached on [FMA]." p257
  
• "Early in 1999, conservative politicians and commentators began worrying that President Clinton would veto the reform legislation. Clinton at one point decided to support an element of the legislation that called for protecting CRA." p255

It's also interesting to read how glowingly the author speaks of Citigroup's "impenetrable" business model that is "so big and so global" that it's nearly immune from any economic downturn.

Of course all things are obvious in hindsight.