Page 227 - TrumpsEconEra_Flat

Trump’s Economic Era

When the government established the Securities
and Exchange Commission (SEC) in 1934, it set banks’
debt to capital ratio at 12 to one, which meant that a
bank had to have at least one dollar in reserve to lend
out 12 dollars. The SEC abolished this debt-to-net-
capital rule in 2004 when it allowed large investment
banks to determine their debt to income levels based on
their risk management computer models. Instead of
adhering to the twelve to
one ratio, the new norm
The crisis had become became forty-to-one;
a financial meltdown of banks could invest 40
epic proportions. dollars with only one
dollar in reserve.

The forty to one debt to capital ratio made
enormous profits possible in the derivatives market.
But, when the economy began to head south in 2007,
this excessive leverage led to the collapse of all five
investment banks, Goldman Sachs, Bear Stearns,
Morgan Stanley, Merrill Lynch, and Lehman Brothers.
Lehman had assets worth $691 billion. In comparison,
when GM went bankrupt several years later, it had
assets worth just $91 billion. By September 2008, the
crisis had become a crisis of epic proportions.

To stem the tide, the Federal Reserve allowed
these investment banks to purchase commercial banks,
and thus the Fed granted these new entities holding
bank status. The Fed offers holding companies the same
protection as commercial banks.

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