Whatever floats your boat...
As it so happens, the Academy Award winner for best documentary, Inside Job, is about the U.S.'s current global economic screw-up.
It has so much information and it's not hard to follow so I'm definitely planning on using it next year (if not this one).
Undoubtedly, my students will still be grappling with the fallout by the time they graduate (as will their children, most likely), and I want to be real with them enough so that they're prepared to face the current state of the so-called "American Dream". I think it's an excellent lesson in hubris, too.
Anyhow, I started taking notes and figured I'd drop 'em here in the chance that others may benefit. I'd be shocked if anyone actually reads through the whole thing, but there it is. Cheers!
The global economic crisis of 2008 cost 10,000,000 people their homes, their jobs, or their savings. This is how it happened.
Year 2000, Iceland
A great place to live and raise a family.
Then comes deregulation.
Banks are privatized.
Three banks bring Iceland’s economy to its knees.
Regulators do nothing.
A third of them are put on the bank’s payrolls.
PART ONE: HOW WE GOT HERE
After the Depression, 40 years of economic growth.
Not a single financial crisis.
Industry’s tightly regulated.
Most banks are small local businesses, prohibited from speculating with depositors’ savings.
Investment banks handle stocks and are small investment partnerships.
Partners front money so they shy away from big risks and watch the market carefully.
financial industry explodes
Banks go public giving them huge amounts of money to invest.
Partnerships become obsolete.
People on Wall St start getting rich.
From 1978 to 2008
a banker’s average salary goes from 47 to 100K.
For everyone else, it starts at 45 and goes up 3K during that same span of time.
Reagan chooses Don Regan as Treasury Secretary (Merrill Lynch CEO)
With support of his party, economists, & financial lobbyists, Reagan begins push for deregulation.
George Soros uses the metaphor of an oil tanker to describe the financial sector at this point.
It’s enormous. Compartments (regulation) that kept the oil from sloshin’ around and capsizing the tanker have been taken away.
The tanker now has a much greater probability of sinking, taking with it its precious cargo.
Savings & Loan companies are successfully deregulated.
Without oversight, they begin making risky investments
Example: Charles Keating is one S&L financier (now the most well-known).
He hires Alan Greenspan as his advisor.
Greenspan praises his “no-risk business sense”
the first financial crisis
S & L’s begin losing depositors’ savings.
100’s of S & L companies fail.
Taxpayers pay the cost- 124 billion (and for some, their life’s savings)
1000’s of S & L execs go to jail, including Keating.
Greenspan goes on to become chairman of US central bank, The Federal Reserve,
and is reappointed by Clinton and Bush Jr.
Under Clinton, deregulation continues.
Treasury Sec. Robert Rubin (Goldman Sachs CEO) and Larry Summers (Harvard economics professor) are key players
By late 1990’s
financial sector is consolidated into a few gigantic firms that are so large, their failure could threaten the whole system.
Clinton Administration helps them grow even larger.
CitiCorp and Travelers merge to form CitiGroup, largest financial services company in the world
Merger violates the Glass-Steegal Act, passed in 1934, after the Great Depression
The Act, up to this point, has prevented banks from engaging in risky investment activities with consumer deposits.
Federal Reserve (Greenspan) says nothing, gives them an exemption for a year.
Summers and Rubin urge Congress to pass the Gramm-Leach-Bliley Act (some called it the “CityGroup Relief Act”)
It overturns Glass-Steegal and clears the way for future marketers.
Rubin later makes $126 million as Vice Chairman of Citigroup (hence, the Act’s nickname)
The second crisis
Investment banks fuel a massive bubble in Internet stocks followed by a crash in 2001.
5 trillion in investments are lost in a short amount of time.
The Securities and Exchange Commission (federal agency created during the Depression to regulate investment banking) does nothing.
Eliot Spitzer (NY Attorney General) investigates.
He finds that investment firms promoted Internet companies they knew would fail.
Stock analysts were being paid for how much business they brought in.
What they said publicly was different from what they said privately.
Companies with high ratings had no value.
Investment banks didn’t deny it.
Their defense: Everyone was doing it. In-house analysts should not have been taken seriously by investors.
Ten investment firms settle for a total of 1.4 billion (for conflicts in their firm’s stock research) and promise to change their ways.
Since deregulation began, the biggest firms are caught laundering money, defrauding customers, and cooking their books.
Beginning in the 1990’s
Deregulation and advances in technology lead to an explosion of complex financial products called “derivatives”
Economists and bankers claim they make markets safer, but in reality, they cause instability.
The Cold War ends, high tech turns to financial markets to work with investment firms (weapons of mass financial destruction)
Regulators, politicians, and business people poo poo the threat financial innovation poses to the industry.
Using derivatives, bankers start gambling on virtually anything.
By the late 1990’s
derivatives are a $50 trillion dollar, unregulated market.
The CFTC attempts to regulate.
Brooksley Born, former derivatives manager,
appointed by Clinton to chair Commodities Futures Trading Commission (the CFTC), which oversaw the derivatives market
and her Deputy Director, Michael Greenberger, issue a proposal to regulate derivatives.
Clinton’s Treasury Department (Larry Summers) responds by strong-arming them to stop.
Afterwards, Greenspan, Rubin, and FCC Chairman Arthur Levitt issue a statement condemning Born, saying it’s out of the CFTC’s jurisdiction.
They recommend legislation to keep derivatives unregulated on the basis they’re privately negotiated by professionals so it’s unnecessary.
Born and Greenberger are overruled by Clinton Admin, then by Congress.
Sen. Gramm (R-TX) ultimately pushes legislation through to exempt derivatives from regulation on the basis they unify the market.
After leaving the Senate, Phil Gramm becomes Vice-Chairman of UBS. His wife serves on the board at Enron.
Larry Summers later makes $20 million as a consultant to a hedge fund that relies heavily on derivatives
Congress passes Commodity Futures Modernization Act (written with the help of financial industry lobbyists), which bans regulation of derivatives.
Use of derivatives and financial innovation explodes
Bush Jr takes office.
Financial sector is now vastly more powerful, profitable, and concentrated than ever before.
THERE ARE FIVE INVESTMENT BANKS
TWO FINANCIAL CONGLOMERATES
THREE SECURITIES INSURANCE COMPANIES
AND THREE RATINGS AGENCIES
Linking them all together is the “Securitization Food Chain”.
Securitization is a new system which connects trillions of dollars in mortgages and other loans with investors all over the world
It used to be you got a loan from an investor who expected you to pay back.
It took decades to repay so lenders were careful.
HOME BUYERS--> LOCAL LENDERS
Now there’s “securitization” whereby the people who make the loan are no longer at risk if there’s a failure to repay.
HOME BUYERS LENDERS INVESTMENT BANKS INVESTORS
Loan Payments --> --> --> --> --> --> --> --> --> -->
In the new system, LENDERS sell the mortgages to INVESTMENT BANKS.
INVESTMENT BANKS sell the home mortgages along with other stuff to create “complex derivatives”.
They bundle them all together and call them “CDO’s” (Collateralized Debt Obligations).
INVESTMENT BANKS pay RATINGS AGENCIES to rate the CDO’s based on their profitability and then sell them to INVESTORS.
HOME BUYERS who were previously paying a monthly mortgage to a lender are now paying out to investors from all over the world.
Most are unaware.
The ratings for these CDO bundles go like this:
Junk --> BB
High ratings make CDO’s popular with retirement funds because they only purchase triple A-rated securities
The system’s now a ticking time bomb.
No regulation, no one seemingly on the hook.
A green light to pump out more and more loans.
Feeding frenzy in the securitization food chain!
Each year, mortgages quadruple.
Each year, there’s a huge increase in the riskiest loans (subprime).
This leads to a massive increase in predatory lending.
All incentives for mortgage brokers are based on selling predatory loans (now the most profitable).
Borrowers are needlessly placed in expensive subprime loans (because the banker makes more),
and many loans are knowingly given to people who won’t be able to repay them.
PART II: THE BUBBLE