In a transcript released by the FDIC of Sheila Bairs testimony before congress, she cites two main legislative causes for the banking crisis, and a third ancillary cause arising due to the other two causes, the Shadow Banking System.The two legislative causes are FIRREA and FDICIA. Ms. Bair:"The last major financial crisis—the thrift and banking crisis of the 1980s—resulted in enactment of two laws designed to improve the financial regulatory system: The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). Combined, FIRREA and FDICIA significantly strengthened bank regulation, and provided banks strong incentives to operate at higher capital levels with less risk, but these regulations have also created incentives for financial services to grow outside of the regulated sector."She continues by naming this growth outside of the traditional regulated banking sector as the 'Shadow Banking System.' I am sure we have all heard that term before, but what is it really? Ms. Bair continues:"In the 20 years following FIRREA and FDICIA, the shadow banking system grew much more quickly than the traditional banking system, and at the onset of the crisis, it's been estimated that half of all financial services were conducted in institutions that were not subject to prudential regulation and supervision. Products and practices that originated within the shadow banking system have proven particularly troublesome in this crisis. In particular, the crisis has shown that many of the institutions in this sector grew to be too large and complex to resolve under existing bankruptcy law and currently they cannot be wound down under the FDIC's receivership authorities."Well, she doesn't really say! But it sounds really bad. Its like, if 20 years ago, the shadow banking system was the size of this Twinkie, then today, it would be a Twinkie 35 feet long weighing approximately 600 pounds. Thats a big Twinkie!See all of Ms. Bairs remarks here: call to legislators: dismantle the Shadow Banking System!Chris ButterfieldRE/MAX Preferredwww.SLREO.com801-440-8800
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  • Chris, I am facinated by the whole process. I've had c-span running on my pc in the background while I'm working.Seems to me that many dropped the ball.
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