So incompetent it is scary, the US fed has allowed banks to fund their liabilities in subsidiaries with depositors funds. From naked capitalism:

"Note that many banking experts, post the S&L; crisis and now, recommend the reverse, "narrow banking", which requires banks to invest depositors' funds only in the very safest assets. This is the exact opposite of the sort of regulatory measures needed to improve the health of the banking system. Expediency trumps soundness.

What a horribly useless Administration and Federal Reserve. If this mess wasn't picked up during Greenspan's early tenure and the Clinton Administration, then it should have when the Bush Administration came into office. The political and fiscal incompetence is seeping into criminal - especially when it is other people's money such as taxpayers and depositors.

I am really having trouble understanding this. At the height of the subprime lending I did not use that form of mortgage. I payed the 20% down and then took a fixed rate mortgage. I am fiscally wary most of the time and the subprime mortgages seemed to good to be true. Turns out that was true, not for lenders, but for investors in those securities.

I can understand the wish to create a financial product that will enable those that cannot get into a fixed rate loan to have access to a higher risk mortgage; but that does not allow for the fraud that went on around it. Nor does it get policy makers off the hook for allowing dodgy financial practices to occur at these shadow lending institutions and banks such as Bears-Stearn and Lehman.

Most of the policy makers and overseers move back and forth between Wall Street and Federal Government. It should not have been a surprise for these bankers to see. We could argue conspiracy, self-interest, etc but the Federal Reserve is a permanent institution that should have institutional memory and public interest.

The avoidance of this issue must have been a deliberate policy choice. Given the use of public money to bail out the collapsing US financial sector it was a bad policy.