CDO Squared, Anyone?

Along with Martin Hellwig, I think that the other bright light in the field of finance is Gary Gorton of Yale. He has published several very interesting papers on historical banking panic episodes; see here. He gives a detailed account of the subprime mortgage market and the financial innovations associated with it in his paper entitled "The Panic of 2007."

In this paper, he describes the nuances of subprime mortgages; in particular, how their particular design made them very sensitive to the underlying asset price (unlike conventional mortgages). Evidently, this was by design (there was no other way for creditors to make money servicing this particular demographic).

He goes on to describe how these subprime mortgages were packaged into mortgage backed securities (MBS). This is a common form of securitization (although, the design of these also differed in a subtle, but important manner, from standard securitizations). As with other securitizations, mortgages were pooled and then tranches were formed; e.g., a senior tranche, a mezzanine tranche, and an equity tranche.

This type of securitization has an economic rationale. Higher rated tranches can be sold to insurance companies and pension funds (whose liabilities are longer term in nature). In principle, the originator of the MBS should could then hold on to the junior (equity) tranche. This gives the originator the incentive to construct a sound MBS; as the originator is the first in line to potential losses.

What I do not understand is what followed. These MBS were then used as backing for new securities, called Collateralized Debt Obligations (CDOs). For example, the mezzanine tranche of the MBS (rated BBB) would then be divided into senior, mezzanine, and junior tranches. The mezzanine tranche of this CDO would then be divided again into senior, mezzanine, and junior tranches (a CDO squared). The senior tranches of the CDO squareds would be assigned AAA ratings!

I do not understand the economic rationale for this further subdivision of the original MBS. I presume that there must be one (perhaps to get around some government regulations?). Is there an expert in finance out there that can help me out? I have had little luck in finding anything that explains the motivation for why CDOs exist.

Martin Hellwig on the Financial Crisis

Tired of all that sanctimonious drivel spewing from the likes of Dani Rodrik and Willem Buiter? Head aching from the cacophony of shrill voices rejoicing at the end of the world?

Then consult the good doctor Martin Hellwig; see here.

He also has a very nice article entitled "International Contagion: The Result of Information or Rhetoric?" that is well worth reading.

Would be interested to hear what people think.

Brad DeLong: Bad Economist, Good Historian?

In the lead up to his debate with Michele Boldrin on fiscal policy, DeLong cannot hide his sense of pride in proclaiming that "I am not a macroeconomist; I am an economic historian."

As the debate unfolded, he (unintentionally, no doubt) supplied us with ample evidence confirming his lack of theoretical training (to be more precise, his reliance on those "really useful ad hoc models" that appear sufficient to organize anyone's thinking on macroeconomic phenomena).

At one point, for example, he presented some data showing that employment was falling even in states that were not heavily exposed to subprime mortgages. The implication we were presumably to draw from this fact is that the current downturn is nothing more than an old-fashioned decline in "aggregate demand" (the cause of which is conveniently ignored, as this requires some deep-thinking). The corollary is that a large government fiscal stimulus is obviously desirable to mitigate the (unexplained) decline in private-sector "demand."

There are, of course, competing theories that are consistent with what an historian (or econometrician) might interpret as an "exogenous decline in aggregate demand." Many of these theories are no more or less crazy than DeLong's preferred theory (his Econ 101 macroeconomics principles course notes). He apparently does not feel the need to temper his opinion by the humility that any good scientist should feel by the difficulty associated with discriminating among several competing hypotheses. Yes, there is no doubt that DeLong is a bad scientist.

But then, DeLong is not a scientist; he is a self-proclaimed historian. Someone who documents previously unknown facts and provides data that challenges preconceived notions. Someone like Joel Mokyr, for example (read his delightful The Lever of Riches). I am sure that DeLong has made useful contributions in his field (actually, I really enjoyed reading his piece on America's peacetime inflation). But I now have a little cloud of doubt over whether we should trust him even here.

I am not an economic historian; but I have done some reading on economic history. And in particular, I have done a fair bit of reading on Herbert Hoover; whose opinions and policies were shamelessly distorted by DeLong in his debate with Boldrin. Bob Murphy drives this point home splendidly. Consider, for example, what DeLong said:

"Now Prof. Boldrin is following a very old trail, all right, his trail was in fact the ruling theory behind the Hoover Administration's policies in the 1930s. And to quote from President Herbert Hoover's autobiography, during his administration economic policy was made by quote "the leave-it-alone liquidationists headed by my Secretary of the Treasury Mellon, who felt the government must keep its hands off the economy and let the slump liquidate itself."

Inexplicably, DeLong fails to inform his audience of what follows this quote in Hoover's autobiography:

"But other members of the Administration, also having economic responsibilities- Under Secretary of the Treasury Mills, Governor Young of the Reserve Board, Secretary of Commerce Lamont and Secretary of Agriculture Hyde--believed with me that we should use the powers of government to cushion the situation."

Any good (or honest) economic historian must know that Hoover was no laissez-faire apologist. As the world's foremost mining engineer at the turn of the last century, Hoover saw first-hand and disapproved strongly of the speculative manias that frequently arose in his industry. As head of the Belgian Relief effort of WW1, Hoover orchestrated a massive interventionist effort that literally saved the lives of tens of millions Europeans. As Secretary of Commerce in the 1920s, he lobbied frequently for banking reform (lobbying efforts that were repeatedly quashed by the Governor of New York; none other than FDR) and warned of a growing mania in stock prices. His interventionist tendencies in the early days of the Great Depression were frequently blocked by the Democratic Congress (FDR accused him of being a reckless spendthrift). Most of "FDRs" New Deal policies were lifted wholesale from Hoover himself. If you do not believe this, then consider this quote from one of FDR's early advisors (Raymond Moley, writing in Newsweek, June 14, 1948):

"When we all burst into Washington...we found every essential idea (of the New Deal) enacted in the 100-day Congress in the Hoover administration itself. The essentials of the NRA, the PWA, the emergency relief setup were all there. Even the AAA was known to the Department of Agriculture. Only the TVA and the Securities Act was drawn from other sources. The RFC, probably the greatest recovery agency, was of course a Hoover measure, passed long before the inauguration."

Is DeLong a good economic historian? I'll let you be the judge.

Multiplier Mischief

The current debate over the size of the "government spending mulitiplier" is a perfect measure of the sway that conventional economic theorizing continues to grip the minds of people who should know better.

At the center of the theorizing is the income-expenditure identity: Y = C + I + G. This identity is not a theory; it is something that is true by definition. The theory comes in by way of behavioral assumptions that are imposed on C and I. All that is left is to determine how an exogenous change in G manifests itself as a change in Y. The government spending multiplier is dY/dG. Now all economic historians have left to do is to try to estimate the size of dY/dG. They frequently "discover" that dY/dG > 1. That is, it appears that for every dollar the government spends, the national income appears to increase by more than a dollar. Conclusion: Obama's stimulus package is a good idea.

There you have it. The only puzzle remaining is why it takes 4 full years of training to receive a PhD in macroeconomic theory; and why it should take a further 6 years to become a tenured professional by publishing papers examining what we all know to be the self-evident truth embedded in this "really useful ad hoc model."

Unfortunately, I am apparently one of few who have trouble absorbing this simple theory. But perhaps there is still some hope for me. I just need a few questions answered.

[1] What does this theory predict concerning the optimal level of Y? Is more Y always to be preferred to less? When Y was expanding rapidly above trend during WW2, were people really made materially better off? Were people made happier by their long hours employed in military manufacture and European adventures? Did people really enjoy the rationing of foodstuffs and gasoline associated with the increase in G? Was the general destruction of capital (both physical and human) during WW2 really associated with increasing wealth levels?

[2] Do *measured* increases in Y associated with increases in G correspond in any meaningful way to *true* increases in Y? Do we not know that when the government pays for something, the "value" of this purchase is measured by cost (instead of market-value) by the National Income and Product accountants? Is this not a serious problem in assessing the "true" value of an increase in G? Are measured government spending multipliers simply a figment of this questionable accounting exercise?

[3] What are we to make of multiplier estimates that are above unity? Is this a linear approximation? Does it represent the value of the marginal dollar spent? (If it does not, then is the implication that the entire economy should simply be nationalized?).

[3] Do the "microeconomic" details concerning the added G not matter at all? Does it matter, for example, that almost $100 million in "stimulus" money is being directed to the Milwaukee Public School system to construct new schools (a district that has been closing schools as a result of declining attendance; see here)? Are people still willing to argue that "digging up holes and filling them in" is a wise use of economic resources?

[4] What does this simple theory identify as the "cause" of recession? An exogenous decline in private sector "sentiment?" What does this mean? Is this purely pyschological? Can we not expect private sector agents to make estimates of the future based on the best information available? Does the government have better information? If so, why does it not make it available? Can declining consumer and business sector "confidence" not be reasonably interpreted as a symptom, rather than a cause, of any economic downturn? How can we know, one way or the other? What evidence can be brought to bear on the idea that recessions are "inefficient?" Is the arrival of a harsh winter that freezes construction to a halt also inefficient? Should the government promote construction activity during a freezing winter?

[5] What is the government spending multiplier in Japan since 2000?

[6] Should we follow Christina Romer's advice and take employment as a metric of economic welfare? Has she not studied economic theory? (Actually, I know the answer to this last question--it is no). I recall reading an article from the TASS news agency, published in 1957 that "the unemployment rate in the Soviet Union, as in previous years, was equal to zero." Should we seek "full employment" along the old Soviet model? Is this how we are to measure success?

I have many more questions, but these will do for now. Of course, some of these questions are rhetorical in nature. But many are not; I genuinely do not know the answers to them. Evidently, the likes of Romer, DeLong and Krugman do know the answers to them. But perhaps this is because none of these esteemed academics are macro theorists. They likely view my ignorance on these matters as evidence supporting their proposition that too much macroeconomic theory distorts the mind. Thank goodness we have these clear-thinking folk around to set me straight!

Willem Buiter: Economicus Ignoramus

Oh my, this is rich. Here we have Willem Buiter, self-proclaimed genius and mediocre economist extraodinaire, suddenly discovers that there is a problem with the development of "Anglo-American" macroeconomic theory. See his little diatribe here.

We all have our own pet peeves with the way macroeconomic theorizing has progressed over the last few decades. My own is with the the so-called "New-Keynesian" paradigm (Woodford); which is clearly the "mainstream" view adopted by most policymakers (until recently, that is).

My beef with the NK paradigm is this in a nutshell. It is a model that ignores money and typically, financial markets too. It embeds unexplained "frictions," like sticky prices. It embeds conceptually vacuous "shocks" like "mark-up shocks" or "inflation shocks." It focusses on the policy problem of "stabilizing" the economy in the face of these little itty-bitty shocks. It is not a model designed to understand financial crisis. It is a model designed to legitimize what central bankers always believed they should be doing in the first place: adjust the short-term interest rate to stablize the economy around a predetermined long-run trend. This is why the NK model is the dominant paradigm; and this is why those that promote this view land all the cushy consulting jobs. Among those that promote this view include our very own Herr Buiter. Here are some links to the courses he teaches on the subjects: see here. Good job, Willem. One can easily see how your students (and yourself) were well-prepared to deal with the current financial market crisis with your "very useful ad hoc models" of the economy.

Of course, most economists who have worked to develop the NK paradigm are honest researchers with a sincere desire to understand how the economy works and how policy might be designed to meet worthy social objectives. Evidently, Herr Buiter has a different view:

Research tended to be motivated by the internal logic, intellectual sunk capital and esthetic puzzles of established research programmes rather than by a powerful desire to understand how the economy works - let alone how the economy works during times of stress and financial instability. So the economics profession was caught unprepared when the crisis struck.

I presume that he is talking about himself here; he should not attribute his own objectives to others in this manner.

Let's see what else he has to say...

The most influential New Classical and New Keynesian theorists all worked in what economists call a ‘complete markets paradigm’.

This is clearly evidence that he has no idea of what he is talking about. The complete markets paradigm is the Arrow-Debreu model; and this is patently not what "New Classical" and "New Keynesian" theories assume.

In a world where there are markets for contingent claims trading that span all possible states of nature (all possible contingencies and outcomes), and in which intertemporal budget constraints are always satisfied by assumption, default, bankruptcy and insolvency are impossible. As a result, illiquidity - both funding illiquidity and market illiquidity - are also impossible, unless the guilt-ridden economic theorist imposes some unnatural (given the structure of the models he is working with), arbitrary friction(s), that made something called ‘money’ more liquid than everything else, but for no good reason. The irony of modeling liquidity by imposing money as a constraint on trade was lost on the profession.

No, Mr. Buiter, the irony of modeling liquidity by imposing money as a constraint was not lost on the profession (see the work of Neil Wallace and Randall Wright, for example); it was lost on a subset of the profession of which you belonged.

It is clear that, when searching for an appropriate simplification to address the intractable mess of modern market economies, the starting point of ‘no markets’, that is, autarky or no trade, is a much better one than that of ‘complete markets’.

The conclusion, boys and girls, should be that trade - voluntary exchange - is the exception rather than the rule and that markets are inherently and hopelessly incomplete. Live with it and start from that fact. The benchmark is no trade - pre Friday Robinson Crusoe autarky. For every good, service or financial instrument that plays a role in your ‘model of the world’, you should explain why a market for it exists - why it is traded at all. Perhaps we shall get somewhere this time.

Oh thank you Professor Buiter; thank you for this. Let us begin by modeling exchange by assuming an economy populated by a single Robinson Crusoe. Yes, this should help. And let us model the exchange process as "involuntary" exchange instead of voluntary exchange. Perhaps we will get somewhere this time indeed. Good luck. I'm sure that you will lead the way.

Even during the seventies, eighties, nineties and noughties before 2007, the manifest failure of the EMH in many key asset markets was obvious to virtually all those whose cognitive abilities had not been warped by a modern Anglo-American Ph.D. eduction.

And so where is Herr Buiter's theory that would replace the EMH? I am very much looking forward to my de-programming from such an enlightened and worldly individual.

The EMH is surely the most notable empirical fatality of the financial crisis. By implication, the complete markets macroeconomics of Lucas, Woodford et. al. is the most prominent theoretical fatality. The future surely belongs to behavioural approaches relying on empirical studies on how market participants learn, form views about the future and change these views in response to changes in their environment, peer group effects etc.

Clearly, he does not understand the EMH. We probably do have some things to learn from behavioral approaches; but I would not want this ignoramus to lead the charge.

I believe that the Bank has by now shed the conventional wisdom of the typical macroeconomics training of the past few decades. In its place is an intellectual potpourri of factoids, partial theories, empirical regulaties without firm theoretical foundations, hunches, intuitions and half-developed insights. It is not much, but knowing that you know nothing is the beginning of wisdom.

I too hope that central banks are now led to place less weight on the "conventional wisdom" expoused by Buiter and others. It is indeed a good thing to be humbled by the realization of the limits of our theorizing. But to expouse a program of ignorance "without firm theoretical foundations" is going too far. Too far that is, unless you are Willem Buiter, economicus-ignoramus ready for hire.

DeLong vs Boldrin on Fiscal Stimulus

The following links are from Greg Mankiw's blog. The first is a statement by Brad DeLong, explaining why the large fiscal stimulus package can be expected to work; see here.

Any good scientist will try to support his or her views by pointing to the evidence. What is the evidence that large fiscal stimulus packages have worked in the past? DeLong gives us three examples:

[1] The 2003-2005 housing boom, facilitated by loose monetary policy;
[2] The 1996-1998 internet boom;
[3] The post 1982 boom following the easing of monetary policy, the Reagan tax-cuts, and increase in military expenditure.

He goes on to write:

These are just three examples of a general principle: each major business-cycle expansion we have seen has been driven by a leading wave of spending—by some group that became enthusiastic about their prospects and decided to greatly increase its spending. And that pulled employment and production up.

I view this as evidence that DeLong should have his degree in economics revoked.

This is the best he can do? The first two examples have nothing to do with fiscal policy. The suggestion that the 1980s boom would not have occurred absent the Reagan tax cuts and increased military spending is dubious at best. Moreover, he neglects to point to the several cases we know of demonstrating the converse (with Japan being the most notable recent example).

His thesis appears to be that a significant increase in "confidence" is followed by an increase in spending and an increase in production. This much is no doubt true. Whether this "starry eyed" optimism begins in the private sector or the public sector is, in his view, irrelevant. This is almost surely not true. Confidence in the private sector is ultimately based on information that signals the expected productivity of capital investment (these expectations can turn out to be wrong ex post, of course). In short, private sector confidence is a by-product of changing fundamentals; that is, confidence is symptomatic and not causal. Confidence cannot be manufactured out of wishful thinking; which is the approach that fiscal policy appears to based on.

For more sober appraisal, I refer you to Michele Boldrin's take on this; see here.

Our "Deregulated" Financial System?

I used to love watching "60 Minutes" as a kid. Unlike "60 Minutes," however, I eventually grew up (although, not everyone around me agrees). Perhaps you have seen their recent report that places the blame for the current financial market turmoil squarely on those that "deregulated" the U.S. financial market; see here.

Is the U.S. financial system really an example of laissez-faire capitalism run amok? This certainly appears to be the bill of goods being marketed by the religious left and other clear-thinking people. It is unfortunate, as far as this view is concerned, that it contradicts reality so violently. The truth of the matter is that the financial market is by far the most heavily regulated sector in any “well-developed” economy.

If you already knew this, there is no need to read further. But for those of you who may be surprised by this, let me document just some of the federal agencies that play a major role in the U.S. financial market. Of course, I don't expect anyone to read what follows carefully: it is far too long to keep anyone's attention for any length of time. But I suppose that this is precisely the point that I am trying to make. Take a deep breath now...

The U.S. Department of the Treasury

Naturally, I begin with the U.S. Treasury. Here is their mission statement:

Serve the American people and strengthen national security by managing the U.S. Government’s finances effectively, promoting economic growth and stability, and ensuring safety, soundness, and security of the U.S. and international financial systems.

Again, in their own words,

The Department of the Treasury's mission highlights its role as the steward of U.S. economic and financial systems, and as an influential participant in the global economy.

If we are to take this seriously, I suppose it implies that the U.S. Treasury takes responsibility for the current global financial crisis.

The Treasury currently consists of 12 bureaus. I highlight the 5 here that have a direct bearing on the financial system. See: http://www.treas.gov/bureaus/

[1] Bureau of the Public Debt

These are the guys responsible for selling and redeeming U.S. government bonds. They are also useful bean counters. If you visit their website, you’ll see that they keep a precise measure of the outstanding dollar value of the U.S. federal debt (to the penny). As of this writing, this debt amounts to $10,877,144,501,237.52. This is almost 11 trillion dollars; or roughly $36,000 per American.

Who is backing this debt? The American taxpayer of course. And of course, not all Americans pay taxes. Children do not pay taxes. Drug dealers and the unemployed do not pay taxes. According to the IRS, almost 33% of tax filers in 2004 did not pay taxes. You get the picture. It is probably not unreasonable to guess that each American taxpayer is on the hook for $100,000. And this does not include “off balance sheet” items, like social security.
Fortunately, the Bureau of Public Debt has a mechanism in place to help deal with this burden. On one of their webpages, they answer the question: “How do you make a contribution to reduce the debt?” Here is the answer:

Make your check payable to the Bureau of the Public Debt, and in the memo section, notate that it is a Gift to reduce the Debt Held by the Public. Mail your check to: Attn Dept GBureau of the Public DebtP. O. Box 2188Parkersburg, WV 26106-2188

[2] Community Development Financial Institutions Fund

Here is their mission statement:

Through monetary awards and the allocation of tax credits, the CDFI Fund helps promote access to capital and local economic growth in urban and rural low-income communities across the nation.

Through its various programs, the CDFI Fund enables locally based organizations to further goals such as: economic development (job creation, business development, and commercial real estate development); affordable housing (housing development and homeownership); and community development financial services (provision of basic banking services to underserved communities and financial literacy training).

In short, this federal department extends credit to low-income high-risk individuals. Where have we heard this before? This department is also responsible for implementing President Obama’s American Recovery and Reinvestment Act of 2009 (Recovery Act). According to their website:

It is an unprecedented effort to jumpstart our economy, create or save millions of jobs, and put a down payment on addressing long-neglected challenges so our country can thrive in the 21st century. The Act is an extraordinary response to a crisis unlike any since the Great Depression, and includes measures to modernize our nation’s infrastructure, enhance energy independence, expand educational opportunities, preserve and improve affordable health care, provide tax relief, and protect those in greatest need.

[3] The Inspector General

Conducts independent audits, investigations and reviews to help the Treasury Department accomplish its mission; improve its programs and operations; promote economy, efficiency and effectiveness; and prevent and detect fraud and abuse.

In short, this department does nothing.

[4] Office of the Comptroller of the Currency (OCC)

The Office of the Comptroller of the Currency (OCC) charters, regulates, and supervises all national banks. It also supervises the federal branches and agencies of foreign banks. Headquartered in Washington, D.C., the OCC has four district offices plus an office in London to supervise the international activities of national banks.

The OCC was established in 1863 as a bureau of the U.S. Department of the Treasury. The OCC is headed by the Comptroller , who is appointed by the President, with the advice and consent of the Senate, for a five-year term. The Comptroller also serves as a director of the Federal Deposit Insurance Corporation (FDIC) and a director of the Neighborhood Reinvestment Corporation.

The OCC's nationwide staff of examiners conducts on-site reviews of national banks and provides sustained supervision of bank operations. The agency issues rules, legal interpretations, and corporate decisions concerning banking, bank investments, bank community development activities, and other aspects of bank operations.

National bank examiners supervise domestic and international activities of national banks and perform corporate analyses. Examiners analyze a bank's loan and investment portfolios, funds management, capital, earnings, liquidity, sensitivity to market risk, and compliance with consumer banking laws, including the Community Reinvestment Act. They review the bank's internal controls, internal and external audit, and compliance with law. They also evaluate bank management's ability to identify and control risk.

In regulating national banks, the OCC has the power to:

Examine the banks.
Approve or deny applications for new charters, branches, capital, or other changes in corporate or banking structure.
Take supervisory actions against banks that do not comply with laws and regulations or that otherwise engage in unsound banking practices. The agency can remove officers and directors, negotiate agreements to change banking practices, and issue cease and desist orders as well as civil money penalties.
Issue rules and regulations governing bank investments, lending, and other practices.

The OCC's Objectives

The OCC's activities are predicated on four objectives that support the OCC's mission to ensure a stable and competitive national banking system. The four objectives are:

To ensure the safety and soundness of the national banking system.
To foster competition by allowing banks to offer new products and services.
To improve the efficiency and effectiveness of OCC supervision, including reducing regulatory burden.
To ensure fair and equal access to financial services for all Americans.

So you see, how could we expect to see anything to wrong with such extensive government oversight?

[5] Office of Thrift Administration (OTS)

The OTS supervises a national thrift industry that is built on the bedrock of the American dream of homeownership—supplying affordable home financing for Americans from all walks of life.

The industry has a long history dating back to 1831 with the establishment of the first savings association, the Oxford Provident Building Association, which made home loans and offered savings accounts. Today, the charter is a vibrant, sophisticated model for running a retail financial services business.

Home mortgages remain a staple of the thrift industry. However, the array of financial products and services offered by many institutions and their holding companies paint a modern-day portrait of great diversification within the industry based on size, complexity, and business strategy.

Three unique advantages of the federal thrift charter foster this diversification:

Preemption – The federal thrift charter operates under a comprehensive framework of federal regulations that supersede state and local laws on lending and deposit taking activities. This provides a uniform national standard for lending and deposit taking, thereby reducing regulatory burden and increasing the efficiency of operations at thrift institution. This authority supports the delivery of low-cost credit and other services to the public, while maintaining consumer protections and promoting the safety and soundness of federal thrifts and the nation’s financial industry.

Branching – Federal thrifts enjoy the distinctive ability to establish branches nationwide, seamlessly and without restriction, under a single charter and a single regulator.

Single Supervisor – Savings and loan holding companies, and their thrift subsidiaries and affiliates, operate under the consolidated supervision of a single federal regulator, the OTS.
The thrift charter is employed by some of the largest financial enterprises in the world, as well as small, one-office savings associations. Financial institutions from across the nation and a number of international financial firms have found that the thrift charter and the experienced, responsive workforce of the OTS provide an ideal framework for conducting retail banking operations and related financial services activities. The charter enables these institutions to meet the needs of their customers and to innovate effectively, compete, and prosper in today’s fast-paced financial marketplace.

Today’s “fast-paced” financial marketplace indeed!

Other Government Regulatory Agencies

http://www.treasurydirect.gov/instit/statreg/statreg_links.htm

[1] U.S. Commodity Futures Trading Commission (CFTC)

Congress created the Commodity Futures Trading Commission (CFTC) in 1974 as an independent agency with the mandate to regulate commodity futures and option markets in the United States. The agency's mandate has been renewed and expanded several times since then, most recently by the Commodity Futures Modernization Act of 2000.

[2] Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress that maintains the stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships.

[3] National Credit Union Association

The National Credit Union Administration (NCUA) is the independent federal agency that charters and supervises federal credit unions. NCUA, backed of the full faith and credit of the U.S. government, operates the NCUSIF insuring the savings of 80 million account holders in all federal credit unions and many state-chartered credit unions.

[4] Federal Reserve Board

Here you go: another fine example of laissez-faire capitalism (a government legislated monopoly on the paper money supply and sweeping regulatory powers). For details, see: http://www.federalreserve.gov/pf/pf.htm