It’s about time we all knew who the bad guys were. In September of 2008, the bankruptcy of the US investment bank, Lehman Brothers, and the collapse of the largest insurance company on earth, American International Group (AIG), triggered a global economic recession that damaged financial institutions internationally, cost the world tens of trillions of dollars and left 30 million people unemployed. This larger than life conspiracy was no accident and is rooted in a deep history of unrestrained greed and an out of control industry. By reading ticklemybrain's double feature on the story behind the crisis inspired by the remarkable, eye opening documentary film, Inside Job by director and producer Charles Ferguson, the next time you decide to blame the sloppy economy for your working woes, you'll be able to narrow the blame down just a tad:
1. trip down memory lane: Following the Great Depression, a severe worldwide economic depression occurring between 1929 and 1940, the United States witnessed 40 years of economic prosperity in a regulated financial industry: (1) Commercial banks, where people stored their money, were local businesses that were not allowed to gamble with depositor savings. (2) Investment banks, which did not take deposits, handled stock and bond trading and operated as partnerships meaning that partners were putting up only their own money at risk.
2. going public: In the 1980s, everything changed as investment banks went public, giving them huge amounts of stockholder money and room for incredible growth.
3. deregulation and the first mini crisis: President Ronald Reagan’s administration began a 30-year period of financial deregulation: the removal of government regulations that constrained the operation of market forces. In 1982, saving and loan companies were deregulated allowing them to make risky investments with depositor savings. Eventually, all these companies failed costing innocent families more than 120 billions dollars, pennies compared to crisis looming in the near future. When one American financier, Charles Keating, was being investigated, he hired Alan Greenspan who informed regulators that he saw no harm in allowing Keating to invest the money of the people, oblivious to the harm being done. Keating eventually went to prison, but Greenspan was punished by becoming chairman of America’s central bank, the Federal Reserve.
4. citi wants to travel: In 1998, Citicorp and Travelers Group joined forces to form Citigroup, the largest financial services corporation in the world at the time. This merger directly violated the Glass Steagall Act, a law that separated bank types according to their business; it was literally illegal to make this acquisition. Yet one year later, under the reign of President Bill Clinton, the Gramm Leach Bliley Act was passed resulting in the removal of barriers in the market among banking, securities and insurance companies prohibiting one any one institution from acting as any combination of an investment bank, a commericial bank and an insurance company.
5. dot com mini crisis: Investment banks, between 1995 and 2000, caused a massive bubble of Internet stocks, which crashed in 2001 and caused five trillion dollars of investment losses. An investigation revealed that investment banks had promoted companies they knew would fail! Companies given the highest possible ratings to the public were referred to privately as pieces of junk.
6. cooking the books: It was also during this time that the worlds biggest financial firms were caught in finest forms of fraud. An example or two? Our friend, Citibank, helped funnel 100 million dollars of drug money out of Mexico. You’ve all seen Enron in your textbooks; maybe they failed to mention that Citibank, JP Morgan and Merrill Lynch all helped good old Enron conceal fraud.
7. weapons of mass destruction: Beginning in the 1990s, deregulation and technology advancements led to the invention of what one of the world’s richest men, Warren Buffet, referred to as weapons of mass destruction: complex financial products called derivatives. Trying to understand derivatives is like trying to understand how CEOs on Wall Street managed to walk away from the crisis with their fortunes intact, pointless. All you need to know is that derivatives allowed bankers to gamble on virtually anything: the rise or fall of prices, the success of a company and even the prospect of rain tomorrow.
8. anyone for a game of monopoly? By 2001, the thrones of the financial industry were occupied by five investment banks (1) Goldman Sachs (2) Morgan Stanley (3) Lehman Brothers (4) Merrill Lynch and (5) Bear Stearns, two financial conglomerates (1) Citigroup and (2) JP Morgan, three securities-insurance companies (1) AIG (2) MBIA and (3) AMBAC and three rating agencies (1) Moody’s (2) Standard and Poor’s and (3) Fitch.
9. loan milestone: You borrow money to buy yourself the new iPhone as you can’t imagine life without your personal assistant, Siri. The person who lends you the money expects you to pay him or her back and a result, is obviously careful when lending his or her own money, especially when the ball game changes from a $600 phone to a full fledged loan for a home. This explanation is the loan definition that most of us are accustomed to. But of course, beginning in the year 2000, the new loan structure that would govern the financial industry would be referred to as securitization and would be slightly more confusing: (1) Lenders would make loans, especially mortgages, and would then (2) sell them to investment banks. (3) Investment banks combined thousands of mortgages and other types of loans to create derivatives called collateralized debt obligations (CDOs). (4) The investment banks sold the CDOs to investors. (5) Now, when homeowners paid back their duly owned loans, the money went to investors all over the world, and not the original lender who practically forgot he or she made a loan. (6) To top it all off, investment banks paid rating agencies to evaluate CDOs, and most of them were given AAA ratings, basically, the equivalent of an A+ on your final exam.
10. who cares: (1) Lenders didn't care anymore about whether a borrower could repay them, so they started making loans to whomever; the butcher, the baker and the candlestick maker. The riskiest type of loan was called the subprime loan (more appropriately called the second-chance loan) and meant making loans to people who may have trouble paying it back! The subprime loan was the leading type being offered in loan world and the CDO's created from such dangerous loans were still receiving the A+ stamp of approval. (2) The investment banks didn't care; the more CDOs they sold, the higher their profits. (3) The rating agencies, paid by investment banks, had no liability if their ratings were wrong, so why would they care either.
Hundreds of billions of dollars were flowing through the securitization chain and the money rolled in… to the kind people that allowed practically a newborn child to take a loan, the kings and queens of Wall Street.
Read our second feature to see how and why the bubble exploded and its devastating consequence on the world's economies.
Sources --> Content: (1) inside job - documentary film by charles ferguson (2) www.time.com - 25 people to blame for the financial crisis (3) www.imf.org - the thirty five most tumultuous years in monetary history: shocks and financial trauma (4) www.economist.com - bad, or worse (5) www.bloomberg.com - global recession risk grows as US damage spreads (6) www.reuters.com - three top economists agree 2009 worst financial crisis since great depression; risks increase if right steps are not taken (7) www.nytimes.com - financial crisis was avoidable, inquiry finds Images: (1) www.weheartit.com - binoculars (2) www.weheartit.com - fingerbull (3) www.anes-w.tumblr.com/ - don't understand it (4) www.weheartit.com - dive down (5) www.weheartit.com - green (6) www.weheartit.com - only up