The non-depository system grew to exceed the size of the regulated depository banking system,
[4] but the investment banks, insurers, hedge funds, and money market funds were not subject to the same regulations. Many of these institutions suffered the equivalent of a
bank run,
[5] with the notable collapses of
Lehman Brothers and
AIG during September 2008 precipitating a financial crisis and subsequent recession.
[6]
The government also repealed or implemented several laws that limited the regulation of the banking industry, such as the repeal of the
Glass-Steagall Act and implementation of the
Commodity Futures Modernization Act of 2000. The former allowed depository and investment banks to merge while the latter limited the regulation of financial derivatives . . . GSE (
government-sponsored enterprise) loans were less risky and performed better than loans securitized by more lightly regulated Wall Street banks.
[8] They also suggest that CRA (Community Reinvestment Act) loans mandated by the government performed better than subprime loans that were purely market-driven.
[7][8] They also present data which suggests that financial firms that lobbied the government most aggressively also had the riskiest lending practices, and lobbied for relief from regulations that were limiting their ability to take greater risks.
[8] In testimony before Congress both the
Securities and Exchange Commission (SEC) and
Alan Greenspan claimed failure in allowing the self-regulation of
investment banks.
[10][11]Further, the five largest investment banks at the core of the crisis (including Bear Stearns and Lehman Brothers) were not subject to the CRA or other depository banking regulations, and they did not originate mortgages.
[12][1]
