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The Global Financial Crisis

A short overview on how the GFC came to be. Apologies if it feels like one big economy lesson.

Ramis Arbi

on 9 March 2013

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Transcript of The Global Financial Crisis

The big bang boom The Bubble The Great Recession started in November of 2007 The Global Financial Crisis Deregulation How? Wall Street power holders, their excessively well-paid lobbying army, their greatly contributed-to sitting legislators and, most blatantly, the self-righteous Street executives have systematically eviscerated the muscle and bones from the regulatory bodies charged with protecting the citizens from banks' self-destructive greed. What did it do? a. Slackened the obligatory reserve limits banks keep in non-interest bearing accounts at U.S Federal Reserve banks. b. Gave birth to a five-membered committee, the Depository Institutions Deregulation Committee to cut down federal interest rate ceilings on deposit account over a six year period. c. Escalated Federal Deposit Insurance Corp . (FDIC) coverage from $40,000 to $100,000. d. Allowed depository institutions, including savings and loans and other thrift institutions, access to the Federal Reserve Discount Window for credit advances. e. Pre-empted state usury laws that limited the rates lenders could charge on residential mortgage loans f. Allowed savings and loans to make commercial, corporate, business or agricultural loans of up to 10% of their assets and raised the allowable ceiling on direct investments by savings institutions in nonresidential real estate from 20% to 40% of assets. The final breaching of the wall occurred in 1998, when Citibank was bought by Travelers. The deal married Citibank, a commercial bank, with Travelers' Solomon, Smith Barney investment bank and the Travelers insurance business. which was technically illegal But the constant flow of money to lobbyists and into legislators' campaign coffers was paying off for the banking interests. in short the banks were prime On April 28, 2004, in a fitting and perhaps flagrant final act of eviscerating prudent regulation, the SEC ruled that investment banks may essentially determine their own net capital. In the 2000s, the industry was dominated by: Five investment banks: i. Goldman Sachs
ii. Morgan Stanley
iii. Lehman Brothers
iv. Merrill Lynch
v. Bear Stearns Two financial conglomerates: i. Citigroup
ii. JPMorgan Chase Three securitized insurance companies: i. AIG
ii. MBIA
iii. AMBAC) The three rating agencies: i. Moody’s
ii. Standard & Poors
iii. Fitch). Investment banks bundled mortgages with other loans and debts into collateralized debt obligations (CDOs), which they sold to investors. Problem was that these CDOs were so complex that they themsleves didnot know in depth their values. Rating agencies gave many CDOs AAA ratings. cha ching....its the big bucks talking Subprime loans led to predatory lending. Many home owners were given loans they could never repay. Goldman-Sachs sold more than $3 billion worth of CDOs in the first half of 2006. Goldman also bet against the low-value CDOs, telling investors they were high-quality. During the housing boom, the ratio of money borrowed by an investment bank versus the bank's own assets reached unprecedented levels. The credit default swap (CDS), was akin to an insurance policy. Speculators could buy CDSs to bet against CDOs they did not own. The three biggest ratings agencies contributed to the problem. AAA-rated instruments rocketed from a mere handful in 2000 to over 4,000 in 2006. The consequential effects of the poorly considered policies were vast. The lego house started toppling one piece at a time In 2008, Bear Stearns ran out of cash The Federal Government had to take over Fannie Mae and Freddie Mac, which were on the verge of collapsing. Lehmann Brothers collapsed and went into bankruptcy causing a rupture in the commercial paper market. Merrill Lynch was taken over by the Bank of America Ironically all these entities had either AA or AAA ratings. The insolvent AIG was taken over by the Government. The Congress was requested for $700 million to bail these banks out. The market for CDOs collapsed and investment banks were left with hundreds of billions of dollars in loans, CDOs and real estate they could not unload. THE GLOBAL FINANCIAL SYSTEM WAS FULLY PARALYSED. President George W. Bush tried to rescue the financial sector and, out of desperation, signed the Troubled Asset Relief Program. But the slope at which the global market was falling was too steep. And it continued falling. Layoffs and foreclosures accelerated unemployment to hit 10% in the US and the European Union. The last hit was in December 2008, when GM and Chrysler faced bankruptcy. IT WAS UNDOUBTEDLY What about the men who unknowingly engineered this waterfall? The top executives walked away safely, because the laws that would have gone against them were already out of this picture. So technically their actions were legal. As a result, the major banks grew in power and doubled anti-reform efforts. Academic economists had for decades advocated for deregulation and helped shape U.S. policy. They still opposed reform after the 2008 crisis. Some of the consulting firms involved were the Analysis Group, Charles River Associates, Compass Lexecon, and the Law and Economics Consulting Group (LECG). Many of these economists had conflicts of interest, collecting sums as consultants to companies and other groups involved in the financial crisis. The Infidels Present to you
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