The Devil's Derivatives

CHAPTER FIVE

Regulatory Capture

Back in the 1980s, Fed chairman Paul Volcker decided banks needed a “speed limit” to curb their risky lending practices, but the large, sophisticated banks created collateralized loan obligations (CLOs) to evade the new rules. Volcker’s successor, Alan Greenspan, argued that regulators should not impede the investment innovations, and in 1998, new rules loosened the restraints on the big banks. It was soon obvious, however, that regulators didn’t have the skills or power to prevent banks from abusing the system. Given a last chance to tighten the rules in 2005, they blew it.

The Speed Trap

Looking back from today, years after the 2007–2008 crisis brought the banking system to a halt, a question often asked is, ...