Daily Commentary: Net Capital Rules and the Credit Crisis

Two articles worth reading on the 2004 change in net capital rules for investment banks are highlighted in today's links. I think these two articles capture the latest thinking on how regulatory changes helped to shift portfolio preferences or leverage amongst investment banks leading up to the crisis. What's interesting about the crisis is that it was not necessarily a crisis of Glass-Steagall deregulation i.e. caused by the repeal of Glass-Steagall. After all, the biggest casualties were the broker-dealers. What we did see was an orgy of mortgage financing and this financing was centered not just on the books of traditional lending originators i.e. the banks but in great measure at the broker dealers, Bear Stearns, Lehman Brothers, and Merrill Lynch and to a lesser degree Goldman Sachs a...

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