- In 1988, banking regulators imposed the Basel capital requirements on all banks. These rules gave banks an incentive (via a preferential capital charge) to hold GSE-issued MBS instead of actual mortgages.
- In 1991, the Federal Deposit Insurance Corporation Improvement Act allowed the Federal Reserve to make emergency loans to investment banks. (Previously, these loans were only available to commercial banks.)
- In 1998, regulators changed the Basel capital rules via the market risk amendment. This change effectively expanded the risk categories large banks used to estimate their regulatory capital and also lowered the capital charge on GSE-issued MBS.
- In 2001, regulators changed the capital rules again. The recourse rule gave many private-label MBS the same low-risk weight as the GSE-issued MBS. It also extended preferential capital treatment to various other types of asset-backed securities (ABS).
- The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act expanded several key safe harbors from bankruptcy provisions. As a result, firms using the derivatives known as swaps, as well as the short-term loans known as repurchase agreements (repos), had preferred creditor status in any bankruptcy filing. (Congress expanded derivatives priorities in 1982, 1984, 1994, 2005, and 2006 as well.)
Originally published in Forbes. This and more can be found at http://www.forbes.com/sites/norbertmichel/2016/08/10/the-big-short-a-great-movie-not-a-policy-prescription