The December 5, 2012, Lab seminar was led by Edmond J. Safra Lab Fellow and financial journalist, Gregg Fields. During his fellowship, Gregg will examine how the growing axis of interdependence between Wall Street and Washington blunts the efficacy of regulatory institutions. For the Lab seminar, Gregg presented a case study examining the implications that financial deregulation, particularly of credit-default swaps, and subprime-lending practices had on the Miami real estate market. In doing so, he considered the hand that the Clinton Administration's repealing of the Glass-Steagall Act in 1999, and the Commodity Futures Trading Act of 2000 had in precipitating the economic downturn. Participants of the Lab seminar discussed the impact the Dodd-Frank Act will have on setting the framework for future financial regulation, as well as the role Washington must play in exerting leadership on global financial issues.
Gregg began his presentation with a brief discussion of the subprime-lending practices that preceded the mortgage meltdown in the U.S. prior to 2008. Lab participants then discussed how perverse lending incentives coupled with a lack of regulatory oversight of the derivatives market precipitated the financial collapse. Citing an inexorable demand for condominiums and the predatory practices of banks that made the Miami real estate boom possible, a conversation ensued between Gregg and seminar participants about how federal financial regulations, or lack thereof, can have real and lasting effects on a local economies. In a specific example, Gregg demonstrated how the failure of BankUnited and subsequent efforts of the FDIC epitomized systemic corruption in both the banking industry, as well as the regulatory capacity of the government. Once Miami's largest financial institution with over $12 billion in assets, and a pioneer of the Option-ARM mortgage, BankUnited undoubtedly played a role in the housing crisis. At a cost of $5.7 billion to the FDIC, BankUnited failed in early 2009. Despite this, the FDIC, after stripping the bank of its toxic assets, sold the institution to private equity investors for $900 million. Within 2 years BankUnited went public, suggesting private equity had nearly tripled its investment.
From the standpoint of institutional corruption, seminar participants considered the fact that because there was no transparency of the derivatives market; it made it much easier for insiders on Wall Street to manipulate pricing of these financial instruments and profit. Further, because there was no data, it was impossible for outsiders to evaluate risk. One seminar participant commented that it was one massive intellectual error using housing data for the last 40 years to price risk and make systemic assumptions about risk. There was then talk about how asset bubbles develop, and some ideas were put forth concerning methods to mitigate future risk.
In summary, Lab seminar participants discussed the widespread risk-laden lending practices of the mortgage industry coupled with the simultaneous deregulation of financial oversight in Washington in the decades leading up to the housing crisis of 2008. There was talk about how lack of transparency, complexity, and perversion of incentives all contributed to institutional corruption within the financial industry.