Protecting Paulson's Pals The subprime collapse didn't bother the Bush administration, until Wall St

[EV_Ares]

bankers started whimpering.

The subprime mess has been spreading like toxic mold since the housing market peaked last year. So why did it take until now for the government to decide it should do something about it? I have a theory.

When individual borrowers began to suffer, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson didn't seem overly concerned. The market would clear out the problem through the foreclosure process. Loans would get written off; properties would change hands and be resold. When upstart subprime mortgage lenders ran into trouble, Bernanke and Paulson shrugged again. The market would clear out the problem through the bankruptcy process. Subprime companies like New Century Financial filed for Chapter 11, others liquidated or restructured, and loans made to the lenders were written down. Meanwhile, Paulson and Bernanke assured us that the subprime mess was contained.

But as the summer turned to fall, and the next several shoes dropped, their attitude changed. And that is because the next group of unfortunates to fall victim to subprime woes were massive banks. In recent years, banks in New York, London, and other financial capitals set up off-balance-sheet funding vehicles called SIVs, or conduits. The entities borrow money at low interest rates for short periods, say 30 to 90 days, and use the funds to buy longer-term debt that pays higher interest rates. To stay in business, the conduits must continually roll over the short-term debt. But as they searched for higher yields, some conduits stuffed themselves with subprime-mortgage-backed securities. And when lenders became alarmed at the declining value of those holdings, they were reluctant to roll over the debt. Banks thus faced a choice. They could either raise cash by dumping the already-depressed subprime junk onto the market, or bring the conduits onto their balance sheets and assure short-term lenders they'd get paid back.

Rest of the article @ link below:

http://www.slate.com/id/2175724/fr/flyout

[Fresh_Start]

1. Look what happens when Bank Regulators sleep on the job

for a decade!

The banks start to fail.
Where are those "free market" advocates now? Trying to protect the asses of the Big Bank CEOs....

[BridgeTheGap]

2. "didn't seem overly concerned" - That's their job

As soon as they throw up a red flag, the markets nose dive. I think they are inclined to paint a rosey picture until the kettle has boiled over.

[EVDebs]

3. They should never have repealed Glass-Steagall nt