WASHINGTON — The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down.
...
The program Mr. Cox abolished was unanimously approved in 2004 by the commission under his predecessor, William H. Donaldson. Known by the clumsy title of “consolidated supervised entities,” the program allowed the S.E.C. to monitor the parent companies of major Wall Street firms, even though technically the agency had authority over only the firms’ brokerage firm components.
The commission created the program after heavy lobbying for the plan from all five big investment banks. At the time, Mr. Paulson was the head of Goldman Sachs. He left two years later to become the Treasury secretary and has been the architect of the administration’s bailout plan.
The investment banks favored the S.E.C. as their umbrella regulator because that let them avoid regulation of their fast-growing European operations by the European Union. ...
http://www.nytimes.com/2008/09/27/business/27sec.html?th&emc=th
This is the crux of the matter. The US investment banks were growing their European operations in order to peddle toxic mortgage backed securities to foreign holders of US dollars. The dollars were being recycled back to the US to support the $500 to $600 billion / annum trade deficit.
In effect, the US' housing stock was being sold to foreigners in return for crude oil and manufactured goods.
What the bailout does is to have the government buy up the mortgages, and puts the taxpayer on the hook to pay off the trade deficit that has been run up in the last 8 years.
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