From what I have read and to the best of my knowledge. Until the Derivatives market is addressed.
Derivatives—Financial Voodoo for the Few In the 1970s the wizards of Wall Street and their advisors introduced a set of financial instruments called derivatives. They were theoretically designed to lower risks for buyers and sellers, including those in recent times involved in Mortgage-Backed Securities (bonds). The primary use of derivatives is called hedging.
In some respects, derivatives were (and are) insurance-like contracts designed to protect, say, bond investors, from default by the bond issuers. The name, derivative, is used because the value of specific instrument is based on (derived from) something else.
The last few years, the complexity and prevalence of derivatives has escalated so that today there are futures, swaps, options, and other exotic hedges available to the wise and un-wise. All together, derivatives have accelerated and deepened the current economic crisis.
A very thin layer of people know how derivatives work, or don't work. For example, the two people who won a Nobel Prize (1997) for figuring out a new way to price derivatives co-founded Long-Term Capital Management, one of the early, highly-leveraged, hedge funds. It went bankrupt (1998).
In 2000, a well-orchestrated financial services industry persuaded Congress to allow a huge, unregulated market in derivatives, which are traded privately. Their estimated market value on October 13, 2008 was $531 trillion. And losses from derivatives, in association with Mortgage-Backed Securities, are what helped bankrupt giant Lehman Bros in September. Losses on derivatives also led to the government bailout of another giant, the insurer, AIG, in recent weeks, a bailout that is not yet finished.
Why did Congress take a hands-off approach? Note this paragraph from a front-page story titled: How Congress set the stage for a meltdown.
The bill barring most regulation of derivative trading was inserted into an 11,000-page budget measure (in Congress) that became law as the nation was focused on the disputed 2000 presidential election (Bush vs. Gore). The inserted bill was sponsored by Republican Senators Phil Gramm of Texas and Richard Lugar of Indiana, with support from Democrats, the Clinton administration, and then-Federal Reserve chairman Alan Greenspan. Few opposed it. USA Today Oct. 13, 2008.
Here is an October 22, 2008 observation on derivatives that has caused a bit of a stir: "When unconstrained by good regulations, derivatives can be financial weapons of mass destruction." This quote is from an opinion article in the Wall Street Journal by Darrell Duffle, professor of finance at Stanford University's Graduate School of Business.
4. Congress Protects its Babies From 2003-2005, during the middle of the George W. Bush administration, there were sporadic attempts by isolated individuals to curb the risky investments being made and encouraged by the two, government-sponsored mortgage giants, Fannie Mae and Freddie Mac. But Congress, along with the Federal Reserve Bank and the administration, looked the other way. Both huge agencies had the implicit backing of Congress; both were able to borrow money at below-market rates; and both had public shares trading on the stock market, so they had plenty of investors cheering them on. The agencies boomed, even in the face of accounting scandals in 2003 and 2004. And the executives of the agencies were paid tens of millions of dollars.
Then the housing bubble popped. And the house of cards with a foundation of simple mortgages started collapsing.