Fall2008, testimony in congressional hearings looking into credit rating agencies was that unregulated loan originators were paying the rating agencies for triple-A ratings when both knew that they didn't deserve triple-A.

The comments that the seeds were sown for the "misaligned business process" and "conflict of interest" in the early 70s when they changed from buyers paying for the ratings to the sellers paying for the ratings.

then there is the "Man Who Beat The Shorts" (reference that the street was punishing him for the following observation)
http://www.forbes.com/personalfinance/global/2008/1124/042.html

from above:

Watsa's only sin was in being a little too early with his prediction that the era of credit expansion would end badly. This is what he said in Fairfax's 2003 annual report: "It seems to us that securitization eliminates the incentive for the originator of [a] loan to be credit sensitive. Prior to securitization, the dealer would be very concerned about who was given credit to buy an automobile. With securitization, the dealer (almost) does not care."

... snip ...

There was a new online computer services startup that I interviewed with in the late 60s ... but didn't join. They were starting to specialize in providing historical stock price and other financial information. In the early 70s, they bought the pricing service division from one of the rating agencies (about the same time that the rating agencies switched from buyers paying for the ratings to the sellers paying for the ratings).

related blog:

The Baseline Scenario; What happened to the global economy and what we can do about it; When Will Senator Dodd Start Taking Yes For An Answer?
http://baselinescenario.com/2010/04/25/when-will-senator-dodd-start-taking-yes-for-an-answer/

comments in the above mentions breaking news item:

Berkshire-Backed Exemption Said to Be Cut From Bill
http://www.bloomberg.com/apps/news?pid=20601087&sid=aSYvNjrXciGc&pos=6

some of the blog entries also weigh in with references to Gramm & derivatives:

25 People to Blame for the Financial Crisis; Phil Gramm
http://www.time.com/time/specials/packages/article/0,28804,1877351_1877350_1877330,00.html

from above:

He played a leading role in writing and pushing through Congress the 1999 repeal of the Depression-era Glass-Steagall Act, which separated commercial banks from Wall Street. He also inserted a key provision into the 2000 Commodity Futures Modernization Act that exempted over-the-counter derivatives like credit-default swaps from regulation by the Commodity Futures Trading Commission. Credit-default swaps took down AIG, which has cost the U.S. $150 billion thus far.

... snip ...

Gramm and the 'Enron Loophole'
http://www.nytimes.com/2008/11/17/business/17grammside.html

from above:

Enron was a major contributor to Mr. Gramm's political campaigns, and Mr. Gramm's wife, Wendy, served on the Enron board, which she joined after stepping down as chairwoman of the Commodity Futures Trading Commission.

... snip ...

Phil Gramm's Enron Favor
http://www.villagevoice.com/2002-01-15/news/phil-gramm-s-enron-favor/

from above:

A few days after she got the ball rolling on the exemption, Wendy Gramm resigned from the commission. Enron soon appointed her to its board of directors, where she served on the audit committee, which oversees the inner financial workings of the corporation. For this, the company paid her between $915,000 and $1.85 million in stocks and dividends, as much as $50,000 in annual salary, and $176,000 in attendance fees

... snip ...

Greenspan Slept as Off-Books Debt Escaped Scrutiny
http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=aYJZOB_gZi0I

from above:

That same year Greenspan, Treasury Secretary Robert Rubin and SEC Chairman Arthur Levitt opposed an attempt by Brooksley Born, head of the Commodity Futures Trading Commission, to study regulating over-the-counter derivatives. In 2000, Congress passed a law keeping them unregulated.

... snip ...

Wendy Gramm fairly quickly replaced Born before stepping down to join Enron's board.

What I find interesting is the NYT quote...

“Do very large institutional investors need investor protection from other financial institutions that sell them securities?” he asked, implying that the answer was no....

How dumb would that institution be buying a private placement bond without documentation of the underlying assets. Surely it's investors in very large institutions who need protection?

SOX supposedly gave SEC additional powers for throwing executives in jail for fraudulent reporting. However, possibly because SEC didn't appear to be doing anything, GAO started database of financial filings that appeared to be fraudulent.

'Financial Statement Restatements: Trends, Market Impacts, Regulatory Responses, and Remaining Challenges'
http://www.gao.gov/cgi-bin/getrpt?GAO-03-138

from above:

While the average number of companies listed on NYSE, Nasdaq, and Amex decreased 20 percent from 9,275 in 1997 to 7,446 in 2002, the number of listed companies restating their financials increased from 83 in 1997 to a projected 220 in 2002 (a 165 percent increase) (table 1). Based on these projections, the proportion of listed companies restating on a yearly basis is expected to more than triple from 0.89 percent in 1997 to almost 3 percent by the end of 2002. In total, the number of restating companies is expected to represent about 10 percent of the average number of listed companies from 1997 to 2002.

... snip ...

along with

Financial Statement Restatement Database
http://www.gao.gov/new.items/d03395r.pdf

and more recent update (2006)

Financial Restatements: Update of Public Company Trends, Market Impacts, and Regulatory Enforcement Activities
http://www.gao.gov/new.items/d06678.pdf

and:

Financial Restatement Database
http://www.gao.gov/new.items/d061053r.pdf
and update (2006)
http://www.gao.gov/special.pubs/gao-06-1079sp/

from above:

The database consists of two files: (1) a file that lists 1,390 restatement announcements that we identified as having been made because of financial reporting fraud and/or accounting errors between July 1, 2002, and September 30, 2005, and (2) a file that lists 396 restatement announcements that we identified as having been made because of financial reporting fraud and/or accounting errors between October 1, 2005, and June 30, 2006.

... snip ...

some possible spinning of gao reports:

1) sox audits have no effect on fraudulent filings
2) sox audits motivated public companies to increase fraudulent filings
3) if it hadn't been for sox audits, every public company would have been making fraudulent filings

SOX also supposedly had SEC to look at rating agencies ... but they don't appear to have done anything but:

Report on the Role and Function of Credit Rating Agencies in the Operation of the Securities Markets; As Required by Section 702(b) of the Sarbanes-Oxley Act of 2002
http://www.sec.gov/news/studies/credratingreport0103.pdf

This somewhat corresponds with comments by person testifying in congressional hearings into Madoff who had tried for a decade to get SEC to do something about Madoff.

I agree with your definition of banking and that's all I agree with. I don't think there is any evidence that securitization is more efficient. I do think there is evidence that it enhances liquidity but that is definitely not the same thing. I think the fundamental problem is that there is too much liquidity.

Money is both a store of value and a medium of exchange. We have completely abandoned the former in pursuit of the latter. Markets do a terrible job of assessing value in relatively illiquid goods such as housing. The fundamental truth is that no one knows what those assets are actually worth and the whole thing is an act of faith. Central banks are integral to that act of faith. They may be the financial equivalent of security theater but such financial theater shouldn't be underestimated.