Small banks were not in a position to do the kind of damage to the economy that the larger institutions ended up doing, not because they were less "greedy", they simply didn't have the assets to create the complicated credit swaps between mortgages/credit cards/insurance and package their collateralized debt holdings into securities - that's something only a large financial instiution can do. In fact they were making bad loans and them selling them in volume to the larger banks out of sheer greed. The smaller banks that couldn't dump their bad debt on a larger bank are having trouble staying afloat as about 40 small regional banks have gone under in the last year.
I wasn't addressing anything about damage potential. I was simply stating all financial banks had a choice when making those mortgages, and the larger ones had a choice in buying those bundled packages. They did so out of greed despite common sense, and have paid for it. In a way you are proving my point, those smaller banks that willingly chose to make bad mortgages are now suffering for it or failed and have been closed.
The laws that I mentioned were written so that the larger financial firms could colaborate with each other to concoct complicated credit derivatives with as little oversight from the SEC as possible. That's why an insurance company like AIG was selling mortgage derivatives - without the repeal of Glass-Steagall and the further erosion of checks and balances in the Commodities Modernization Act the credit crisis never happens.
From what I've read derrivatives were created in 1997 and were not impacted by the Glass-Steagall Act, and especially ignored by the Commodities Modernization Act. What was most interesting to me about the Commodities Modernization Act was the deliberate insertion of a loophole for energy corporations by Enron lobbyists, which subsequently lead to the Enron collapse.
If we had a laissez-faire economy it would be easy to blame corporate greed and leave it at that; but we don't... ultimately it comes down to the government's failure to safeguard our economy by allowing the foxes, not only into the henhouse, but they let them redesign it too. It's no accident or coincidence that as soon as regulations that had been on the books since the depression of the 30's were repealled that the economy was alowed to spiral out of control.
To use your argument, we can't legislate away greed just as we can't legislate away stupidity.
Yes, Greenspan failed miserably when stating in 2005 that the credit default swap industry didn't pose enough of a risk to require strict oversight or regulation. Considering it was something well over $145 trillion I don't see how Greenspan would believe such a thing. But even if he had regulated them, and The Glass-Steagall Act hadn't been repealed in various pieces, once the housing market bubble broke we would still be mired in this mess. Just like Madoff's ponzi scheme, everything broke down once the housing market quit going up. Homeowners were sticking with it expecting their already grossly price-inflated homes to only increase in value... the majority of the homes that were overpriced saw the biggest losses as they fell back down to sustainable levels.
Something regulation couldn't and can't fix is how the financial system works. In the world of finance cash bonuses are often just as or more important than the base salary... the idea being the more money they earn or revenue they generate then the larger their respective bonuses will be. Obviously this creates a conflict of interest where financial managers, execs, and others will be willing to take massive amounts of risk just so they can pull even larger bonuses, and is exactly what they did. Whatever Congress does do, there will always be new workarounds devised to cheat the system or turn a profit by greedy people.
The repealing of the Glass-Steagall Act (by the Gramm-Leach-Bliley Act) didn't suddenly cause it, it only helped in my view. Market conditions were already set up, housing prices had been climbing since the early 90's, and credit was plentiful. Throw in greed due to incentives to take risks for larger bonuses and the credit default swap cookie jar that every major financial institution had their hand in because they were lucrative options, and it was a powder keg. The US financial system has never, ever been anywhere close to as leveraged as it was during the last 10 years, and might not be again for some time.
