The lure of leverage

Three government actions led to the crisis the U.S. financial system is experiencing. Here's a close look at the part each played.

By PATRICK DELANEY
Minneapolis StarTribune

(Patrick Delaney, formerly a corporate and securities partner at a Minneapolis-based law firm, is a corporate consultant and writer.)

During the past 10 years, lenders engaged in many reckless activities, including profligate mortgage origination by Fannie Mae and Freddie Mac and the insurance giant AIG's issuance of huge dollar numbers of credit default swaps. But the glut of leveraged mortgage debt that has given rise to the crisis gripping the U.S. financial system was enabled by three government actions that could be reversed.

First, major investment banks were relieved of the federal net capital rule limiting the amount of debt they could contract.

Secondly, the Glass-Steagall Act, separating investment and commercial banking, was repealed. And, third, regulation of derivative securities was abolished. Let's take these one at a time.

(More here.)