Inside the Meltdown

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SHEILA BAIR ... FDIC [Federal Deposit Insurance Corp.], established 75 years ago in the Great Depression. ... How does it feel being head of FDIC during another grand crisis? It 's a very important place to be right now. We 're getting a lot of media attention, and I think that 's positive because I think the FDIC is all about public confidence. That 's how we maintain the stability with people having confidence in our brand and our insurance guarantee, and I think we 've done that fairly successfully. We have seen a lot of stability. People are keeping their money in banks, which is good. ... I think we 'll be judged by how history judges us, whether we continue to be effective in trying to stabilize the banking sector and…show more content…
But they didn 't really look at the underlying mortgages, either. They relied on rating agencies, and they didn 't really look at the underlying mortgages. They just relied on mathematical models and say: "Oh, well, it 's overcollateralized by 30 percent. My gosh, we couldn 't have 30 percent of the mortgages going bad here, so we 're going to give it a AAA rating." So nobody really looked at the human faces behind these mortgages to see if they were actually affordable and sustainable. How could this happen? It was a breakdown at every step of the way, and regulators included. The majority of it was done outside of insured depository institutions. But there were some banks that were doing it, too. And I think that was more in response as they were losing market share to third-party originators who were the shadow banking system -- pretty much completely outside the regulatory system. They could get funding from Wall Street securitizations, and again, the risk was being passed on to investors who also weren 't looking at the underlying mortgages. And borrowers, ... it was still working for them so long as the housing market was going up. Everybody 's compensation incentives, financial incentives, were short-term, not long-term. There are a lot of lessons to be learned to this, but if there 's one, it 's that the compensation structures, especially for the originators, needs to be
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