The federal courts accepts as authoritative the definition of “unsafe or unsound practice” offered to the Congress in a 1966 memorandum from the chairman of the Federal Home Loan Bank Board, one　 of the Federal bank regulatory agencies that would be granted cease and desist authority through the legislation that was then being considered.

Chairman [John] Horne defined the provision in the following way: Generally speaking, an “unsafe or unsound practice” embraces any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which,

if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds. -James R. Cristie, Fannie Mae and Freddie Mac: Scandal in U.S. Housing

To appreciate how far we’ve traveled thanks to Greenspan in terms of the amount of stock market pain required to obtain a helping hand from the Fed, note that in October 1987, when the Fed abandoned its previous tightening policy and slashed interest rates, the Dow Jones Industrial Average had fallen nearly 40 percent from its highs of that summer. Quite a contrast to the minuscule amount of damage inflicted on stock prices in August 2007 when the Fed sprang into action. Of course in 1987,

Greenspan had onl　y recently taken over from Paul Volcker, a man who worried about the soundness of the U.S. Currency and financial system above all else. Therefore, stock market participants had not yet come to expect the Fed to protect them from losses.

Under Greenspan’s reign, however the U.S. financial system came to depend on assistance from the Fed whenever it had taken on too much risk, and fall 2007 was another such occasion. Rather than take a loss, financial institutions wanted

to be bailed out. Financial deregulation, a process routinely championed by Greenspan, had helped to create this predicament. So had the Chairman himself, when he specifically suggested to homeowners that they take out adjustable-rate mortgages in 2004, just months before the Fed was set to raise interest rates 17 times over the next two years.

During Greenspan’s tenure, the creative destruction component of capitalism was routinely suppressed. The main consequences of this suppression

was a loss of fear. Thus, the normal risk reduction response to periodic financial pain never occurred, as Greenspan wouldn’t even allow small crises to run their course. Instead, as people lost respect for the idea that they might lose money, risk taking continually escalated until the situation reached the point where it is now: the United States, individually and collectively, is swimming in an ocean of debt that had been rapidly ratcheting higher.

...Greenspan’s major shortcoming—and critical flaw—was not his mistakes but his refusal to admit them. Thus, he never learned from his errors in judgment, repeating them time and again over the course of 19 years. -William A. Fleckenstein with Frederick Sheehan, Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve

creation of credit derivatives

http://www.portfolio.com/views/columns/wall-street/2008/10/15/Credit-Derivatives-Role-in-Crash

Death by Derivative (time line)

…the reason why the Federal Reserve Bank of New York engineered the rescue of the Long Term Capital Management hedge fund in September 1998 was fear that the collapse of the fund would have exposed to public view the sloppy performance of the world’s great financial institutions—and the careless, trusting supervision that had permitted this overconfident crowd of Ph.D. economists, mathematicians, and gamblers to carry positions in excess of $100 billion,

and derivative contracts with nominal values over $1 trillion, on a capital base of less than $2 billion. I had occasion six months after the rescue to describe what they were doing for scholarly publication. They were “selling volatility”—that is, they were betting that prices in the option markets, and in markets where assets were valued according to their “optionality,” overcharged the buyers of options by assuming greater volatility than was probable from the historical record. It

was thus safe for people smarter than the market to sell options, especially when they could be paired in ways that paid off whether the market rose moderately or fell moderately. Because the gains per trade from these apparently sure things were very small, the game had to be played with enormous quantities of borrowed money. If markets moved further than mathematical probabilities said they were supposed to move, however, the losses from an inability to cash the winning positions

in a single day of tight credit might eat up years of profits. The Chicago futures exchanges have a saying that exactly covers the LTCM case: “Traders who sell volatility eat like chickens and shit like elephants.” -Martin Mayer, The Fed: The Inside Story of How the World’s Most Powerful Financial Institution Drives the Markets (2001)

“The proper funding of the present debt,” Hamilton concluded, “will render it a national blessing.” Hamilton then added a big qualification that many scholars have missed, noting that the maxim that “public debts are public benefits” was “liable to dangerous abuse” and should not invite “prodigality.” Careful administration of taxation was so instrumental to “rendering public credit immortal,”

Hamilton argued, “that he ardently wishes to see it incorporated, as a fundamental maxim, in the system of public credit of the United States, that the creation of debt should always be accomplished with the means of extinguishment.” In other words, no borrowing without taxation. (Aye. This seems like a joke today.) -Robert E. Wright,
One　 Nation Under Debt: Hamilton, Jefferson, and the History of What We Owe

Thomas E. Woods Jr.
Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse
Regnery Publishing, Inc. 2009

Since many people have trouble grasping what a trillion means, one　 way to visualize it is that a trillion seconds ago, no one　 on this planet could read or write. The ancient Chinese dynasties and the Roman Empire had not yet come into being. None of the founders of Christianity, Judaism or Islam had yet been born. That was a trillion seconds ago—and we are talking about trillions of dollars.


When you open the floodgates, you cannot tell the water where to go.

Thomas Sowell
The Housing Boom and Bust
Basic Books 2009

If Greenspan was cocky about the genius of central bankers, Bernanke is even more so.

Ron Paul
End the Fed
Grand Central Publishing 2009

Richard A. Posner
A Failure of Capitalism: The Crisis of ’08 and the Descent into Depression
Harvard University Press 2009

Jerome R. Corsi
America for Sale: Fighting the New World Order, Surviving a Global Depression, and Preserving USA Sovereignty
Threshold Editions 2009

For much of his time at the Fed, he had detected a certain lack of respect from Wall Street. Part of the problem was that he was not out of the central banker mold with which financial types traditionally felt comfortable. In the ninety-five-year history of the Federal Reserve, eight men had served as president of the Federal Reserve Bank of New York—and every one of them had worked on Wall Street as either a banker, a lawyer, or an economist. [Timothy] Geithner, in contrast, had been a career Treasury technocrat, a protégé for former secretaries Lawrence Summers and Robert Rubin. His authority was also somewhat compromised by the fact that, at forty-six, he still looked like a teenager and was known to enjoy an occasional day of snowboarding—and that he was given to punctuating his sentences with “**ck.”

When the South Korean economy almost collapsed in the fall of 1997, Geithner helped shaped the U.S. response. On Thanksgiving Day, Geithner called Summers at his home and calmly laid out the reasons the United States had to help stabilize the situation. After much debate within the Clinton administration, the plan that emerged—to supply Seoul with billions of dollars on top of a $35 billion package from the International Monetary Fund and other international institutions—bore a close resemblance to Geithner’s original proposal. The following year, Geithner was promoted to Treasury under secretary for international affairs.

In his heart, [Dick] Fuld knew that his Korean gambit was a Hail Mary pass. Lehman’s own banking operation in Seoul was effectively a mirage; it had never produced any business significant enough even to warrant Fuld’s attention. He had also been warned repeatedly by just about everyone in the office that there were some serious doubts about the players involved.

Andrew Ross Sorkin
Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis—and Themselves
Viking 2009