Diving Head First into the 2008 Financial Crisis: An In-Depth Analysis of What Happened

The level of criminality and corruption that caused the 2008 financial crisis is astonishing. The fact that Wall Street and the major banks made such an enormous profit, got bailed out with tax payers dollars, were never prosecuted says it all. Not only this, but they left a wake of destruction and ruined families behind.

Let's delve deep into the financiers who caused a global recession, lost 10s of trillions of dollars of other people’s money, while getting filthy rich), resulted in over 30 million people becoming unemployed, and doubled the national debt of the US.



A Review of the 2008 Global Financial Crisis (inspired from the movies “The Big Short”, “Inside Job”, “Too Big to Fail”)

Looking back as far back as when Greenspan was Fed Chairman.

This isn't written as a finely sewn-together essay, I need to warn you in advance. But I did try to capture the main sequence of events, figures, and other stats and details that seemed pertinent to this mind-blowing story.

Note: I've included some additional links and editorial comments here and there.

Notes from “Too Big to Fail”

· Pre Bear Stearns collapse, over 70 mortgage companies had collapsed in a matter of months

· $ 30 billion from the government goes to toxic real estate investments

· The movie opens up to Richard Fuld, CEO and Chairman of Lehman Brothers calling another Lehman Brothers executive as they hop off the helicopter, “We’re down 21%.. on paper, I just lost $90 million. We gotta start stacking sand bags..”

· Countrywide, Bear Stearns, Lehman Brothers Collapses

· “The markets will sell big on things they think will not happen”

· “They knew. They knew the taxpayers would bail them out” -They were greedy, they just didn’t care

· Banks took this $ from the taxpayers, paid themselves hug bonuses, and also likely used that very money to lobby congress to battle any future reform

· Blamed everyone else – immigrants, poor people, even teachers

· “Once the dust had settled, $5 trillion in pensions, real estate value, 401K savings & bonds had disappeared”

· In the USA alone, 8 million people lost jobs and 6 million lost their homes

Notes from “Inside Job”

Morgan Stanley in 1972 had a total of 110 personnel, 1 office, and capital of $12 million.

“Now” (at the time of “Inside Job” documentary), they had over 50,000 personnel, offices all over the world, and capital of several billion dollars

Some Characters Involved:

· Paul Volcker – Financial Economist at Chase Manhattan Bank, Worked as under-secretary of the Treasury for international monetary affairs (with a salary of $45K at the time), Former Federal Reserve Chairman 1979-1987

· en.wikipedia.org...

· Dominique Strauss-Kahn – Managing Director of International Monetary Fund (IMF)

· en.wikipedia.org...

· George Soros – Billionaire, Chairman of Soros Fund Management, Investor, “Philanthropist”

· en.wikipedia.org...

· Barney Frank – Chairman, Financial Services Committee, US House of Representatives

· en.wikipedia.org...

· David McCormick – Chief Lobbyist under Secretary of Treasury, Bush Administration

· en.wikipedia.org...

· Scott Talbott – Lobbyist with Financial Services Roundtable, one of the most powerful organizations in Washington

· www.bloomberg.com...

· Andrew Sheng – Chief Advisor, China Banking Regulatory Commission

· en.wikipedia.org...

· Lee Hsien Loong – Prime Minister, Singapore

· en.wikipedia.org...

· Christine Lagarde – Finance Minister, France (now the Managing Director of IMF)

· en.wikipedia.org...

· Gillian Tett – US Managing Editor, The Financial Times

· en.wikipedia.org...

· Nouriel Roubini – Professor at NYU Business School, Senior Economist, Council of Economic Advisors 1998-2000

· en.wikipedia.org...

· Glenn Hubbard – Chief Economic Advisor, Bush Administration, Dean, Columbia Business School

· en.wikipedia.org...(economist)

· Eliot Spitzer – Former Governor of NY, 2007-2008, Former Attorney General of NY, 1999-2007

· en.wikipedia.org...

· Samuel Hayes – Professor Emeritus of Investment Banking, Harvard Business School

· www.hbs.edu...

· Charles Morris – Author, “Two Trillion Dollar Meltdown”

· en.wikipedia.org...

· Donald Regan – Treasury Secretary under Reagan in the 80s (also CEO of Merrill Lynch Investment Bank) “Reaganomics”

· en.wikipedia.org...

· 30 years of financial lobbying = deregulation

o In 1982, deregulated savings and loan companies to make risky investments with depositors money. By the end of the 80s, hundreds of savings & loans companies failed and cost taxpayers $124 billion, wiping out the life’s savings of many Americans.

o Thousands of executives went to jail for looting their companies.

· Charles Keating (who would later find himself in prison) was a key figure in the 80s savings and loans crisis (en.wikipedia.org...) - he also hired Alan Greenspan

· Alan Greenspan (en.wikipedia.org...) was later appointed by Reagan as Chairman of America’s Central Bank, the Federal Reserve

o Greenspan wrote to legislators saying there was “no risk” in regard to the savings and loans deregulating

· Under Bill Clinton and G. W. Bush administrations, Greenspan is reappointed

o Robert Rubin (en.wikipedia.org...) Investment Bank, Goldman Sachs and later appointed as Secretary of Treasury under Clinton – he helped deregulate the financial industry’s underwriting guidelines. (Side note: he is also the co-chairman of the Council on Foreign Relations.. but that’s another topic entirely)

o By late 90s, Financial System powerhouses consolidated into a few that were “so big”, their collapse could threaten the global economy

o By 1998, Citicorp (the largest financial services company in the world) merges with Travelers to form “Citigroup”, violating the Glass-Steagall Act (www.investopedia.com...)

o Congress passes “Gramm-Leach-Bliley Act” or “Citigroup Relief Act” to overturn Glass-Steagall, clearing the way for future mergers (www.investopedia.com...)

o Since all of this deregulation, banks have been caught laundering money, defrauding customers (and the government), cooking their books, again, and again, and again.

§ JP Morgan was caught bribing government officials

§ Riggs Bank laundered money for Chilean dictator Augusto Pinochet (www.washingtonpost.com...)

§ Credit Suisse laundered money for Iran, violating US sanctions (was later fined $536 million for this) www.nytimes.com...

§ Citibank helped funnel drug money for the Cartels out of Mexico www.bloomberg.com...

§ Freddie Mac fined $125 million for accounting fraud

§ Fannie Mae fined $400 million for accounting fraud (overstated their earnings by over $10 billion)

§ UBS was charged with fraud for helping the wealthy avoid paying their ‘fair share’ of taxes. They even refused to cooperate with the US government. They were fined $780 million

§ Citibank, JP Morgan, & Merrill Lynch helped the infamous Enron conceal fraud – they had to pay fines as a result but as part of the settlement they did not have to admit any wrongdoing

o Derivatives market – unregulated, betting on the rise or fall of prices, you can bet on the bankruptcy of a company, you could even “bet” on the weather using derivatives

o CFTC proposed derivatives regulations, but the Clinton Treasury Department – Larry Summers and 13 bankers called up Brooksley Born (chair of CFTC) and ordered her to stop pushing for these regulations

o Alan Greenspan, Robert Rubin and Arthur Levitt also all condemn Brooksley Born

o On 12/21/2000 the Clinton Administration and Congress block the reform with the “Commodity Futures Modernization Act” (written with the help of financial lobbyists of course)

o In 2001 under Bush, we had:

§ 5 investment banks (Bear Stearns, Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch)

§ 3 Securities Insurance Companies (AIG, MBIA, AMBAC)

§ 2 Financial Conglomerates (Citigroup and JP Morgan)

§ and 3 ratings agencies (Moody’s, Standard & Poor’s, and Fitch)

o What linked them all together was what’s known as the “Securitization Food Chain”

o The people who make the loan are not at risk if there’s a failure to repay. Now you can see why this is problematic.

o Previously, a mortgage payment would go straight back to the lender (the bank). Banks were careful about who they would approve for a mortgage because they wanted to ensure they get repaid.

o With the new system, investment banks combine thousands of mortgages (and other loans like car loans, student loans, credit card debt, etc) to , complex derivatives called Collateralized Debt Obligations (CDOs). Investment banks then sell the CDOs to investors. So that mortgage payment that used to go directly back to the bank, now went to investors.

o Investment banks paid ratings agencies to evaluate the CDOs. Many are given triple A rating, the highest possible rating.

o Lenders don’t care about if a borrower could repay – they begin making riskier loans.

o Investment banks didn’t care either – the more CDOs they sell the better.

o The ratings agencies (paid by investment banks) had no liability if their triple A ratings were wrong – green light to keep pumping out risky loans.

o 2000 and 2003 number of mortgage loans almost quadrupled – maximizing volume and collecting their fees.

o Mid 2000s, “sub-prime” loans (which are the riskiest) are being bundled together in those CDOs, and still received their triple A rating

o Investment banks actually preferred these subprime loans, because they have a higher interest rate and therefore = higher profitability

o Predatory lending shoots way up

o Borrowers had borrowed on average 99.3% of the price of their new home, and 2/3 of these loans were rated Triple A, or as safe as Government Securities (thank you honest Ratings Agencies )

§ The CEO at the time was Henry Paulson, the highest paid CEO on Wall St (and would later would be Secretary of the Treasury when the financial crisis occurs)

§ Paulson had to sell his $485 million worth of Goldman Sach when he became Secretary of the Treasury, but because of a law passed by the first President Bush, he didn’t have to pay a single penny in taxes on it, saving him $50 million

o At this time, already a third of these sub-prime mortgages had defaulted

o Goldman Sachs sold at least $3.1 Billion worth of these toxic CDOs in the first half of 2006

o The number of people who could get mortgages went way up, housing prices went up, this led to the biggest bubble in history, as 100s of billions of dollars flow through the securitization chain each year

o Between 1996 and 2006 real home prices effectively doubled

o During this time, sub-prime loan lending increased from $30 billion a year in funding to over $600 billion a year

o Bonuses on Wall Street spiked

o Lehman Brothers was a top underwriter for these sub-prime loans

o Their CEO, Dick Fuld, took home $485 Million

o Through the Home Ownership & Equity Protection Act, the Fed Reserve Board had broad authority to regulate the mortgage industry, but Alan Greenspan refused to use it

o Robert Gnaizda (of Greenlining Institute) worked with Greenspan for 20 years, and kept trying to illustrate the problems with the mortgage industry – Greenspan never budged

o The Securities and Exchange Commission conducted NO major investigations of the investment banks during the bubble

o The SEC Office of Risk Management was reduced to a staff of ONE

o Investment Banks would borrow more and more money to try to create more CDOs – if a bank could borrow 3X as much money as they actually held, they would have a 3:1 leverage ratio

o Henry Paulson, CEO of Goldman Sachs in 2004, lobbied the SEC to relax limits on leverage, allowing banks to sharply increase their borrowing – SEC unanimously approves

o Investment banks were leveraging at levels of 33 to 1 – this meant that a tiny 3% decrease in the value of their asset base would leave them insolvent

o Another ticking time bomb in the financial industry – AIG selling huge volumes of credit default swaps.

o An investor purchases credit default swap pays AIG quarterly premium. If CDO went bad, AIG promises to pay investor for their losses. Speculators could ALSO buy credit default swaps from AIG in order to bet against CDOs they did not own

o Credit Default Swaps were unregulated, and AIG didn’t need to put any money aside for potential losses. Instead, AIG paid employees huge bonuses as soon as contracts were signed. This was another giant ticking time bomb

o Joseph Cassano, CEO of AIG personally made $315 million

o In 2007, auditors alerted AIG executives that there was going to be an issue. One of these auditors, Joseph St Denis, resigned in protest after Cassano repeatedly blocked him from investigating the situation with Credit Default Swaps

o In 2005, Raghuram Rajan, then the Chief Economist for the International Monetary Fund (IMF), delivered a paper at the annual Jackson Hole symposium, the most elite banking conference in the world

§ Central bankers of the world were present – Alan Greenspan, Ben Bernanke, Larry Summers, Tim Geithner

§ Title of the paper was “Has Financial Development Made the World Riskier”, and the conclusion was that it most definitely had

§ The paper focused on incentive structures that generated huge cash bonuses based on short-term profits (the Credit Default Swaps, predatory lending, etc.), but which imposed no penalties for later losses

§ Rajan stated in his paper that these incentives could bring down these banking firms, or even the entire global system

§ Larry Summers shut down Rajan’s proposed conclusions and was obviously determined to silence these conclusions out of fear of new regulations on the financial industry

o Lehman Brothers had 4 private jets, including 767s, and an additional helicopter

o One group that purchased these (now worthless) securities, was the Public Employees’ Retirement System of Mississippi, which provides monthly benefits to over 80,000 retirees. They lost millions of dollars and are now suing Goldman Sachs

§ Average Annual Retirement Benefits for a Mississippi Public Employee: $18,750

§ Hank Paulson’s Compensation in 2005: $31,000,000

o By late 2006, Goldman was not only selling these toxic CDOs, but was also actively betting against them, while pressing customers to buy more of them, proclaiming they were “high-quality investments”

o Goldman bought around $22 billion worth of credit default swaps from AIG

o It was so much, Goldman realized AIG might go bankrupt

o Goldman spends $150 million insuring themselves against AIG’s potential collapse

o In 2007, Goldman goes further by selling CDOs specifically designed so that the more money their customers lost, the more money Goldman Sachs made

o Senator Carl Levin (D-MI), Chairman of the Governmental Affairs Subcommittee in 2008 is interviewing Goldman Sachs executives about “Timberwolf Securities” Goldman had sold to investors:

§ Levin: “$600 million dollars of Timberwolf Securities is what you sold. Before you sold them, this is what your sales team was telling to each other… ‘Boy, that Timberwolf was one #ty Deal”

§ Daniel Sparks, Former Mortgages Department had of Goldman Sachs (2006-2008) responds: “This was an email to me in late June, after the transaction.”

§ Levin: “No, no. You sold Timberwold after as well.”

§ Sparks: “We did trades after that. Yeah. Okay.

§ Levin: The next e-mail – take a look. July 1, ’07 -- tells the sales force, ‘The top priority is Timberwolf’. Your top priority to sell is that ‘#ty deal’. If you have an adverse interest to your client, do you have the duty to disclose it? To tell that client of your adverse interest?”

§ Daniel Sparks claims he is “trying to understand the question”, but is avoiding answering

· Senator Susan Collins (R-ME), Ranking Member of Homeland Security & Governmental Affairs Committee also interviews Goldman Members

o Collins: “Do you believe you have a duty to act in your clients’ best interest?

o Fabrice Tourre, Executive Director of Structured Products Group Trading of Goldman responds: “Senator, I will repeat, we have a duty to serve our clients by showing prices on transactions that they ask us to show prices for.” (another dodgy answer, who would’ve guessed)

· Senator Levin again: “What do you think about selling securities which your own people think are crap? Does that bother you”

· Lloyd Blankfein, Chairman & CEO of Goldman Sachs: “I think they would… is that a hypothetical?”

· Levin: “No, this is real. We heard it today.”

· Blankfein: “I heard nothing today that makes me think anything went wrong.”

· Levin: “Is there not a conflict when you sell something to somebody, and then are determined to bet against that same security, and you don’t disclose that to the person you’re selling to? Do you not see a problem?”

· Blankfein: “In the context of market making, that is not a conflict.”

· Repeatedly, Goldman’s executives dodge questions, deny accountability, and “see nothing morally wrong” with these dealings that contributed to the 2008 financial crisis, with statements like “I think it’s very unfortunate to have that on email.”, yet deny actually “feeling” that it was wrong in any way.

· Hedge fund manager John Paulson made $12 billion betting against the mortgage market.

· When Paulson ran out of Mortgage Securities to bet against, he worked with Goldman Sachs and Deutsche Bank to create more.

· A year later, Morgan Stanley made hundreds of millions of dollars, while the investors had lost almost all of their money

· Hedge funds Tricadia and Magnetar also made billions betting against CDOs they had designed with Merrill Lynch, JP Morgan, and Lehman Brothers.

· The CDOs were sold to customers as “safe” investments

· Ratings agencies like Moody’s, Standard & Poor and Fitch rated these securities as triple-A

· These ratings agencies also made billions of dollars giving high ratings to these risky securities

· Moody’s (largest ratings agency) quadrupled it’s profits between 2000 and 2007

· These agencies were based on the ratings they would give securities – higher ratings meant a better quarterly performance

· Hundreds of billions of securities were being rated every year

Some of the individuals involved in the documentary, "Inside Job"

· Larry Summers (en.wikipedia.org...) Harvard Economics Professor

· Robert Gnaizda (en.wikipedia.org...) –former director of Greenlining Institute

· Willem Buiter (en.wikipedia.org...) – Chief Economist, Citigroup

· Andrew Lo (en.wikipedia.org...) – professor & director, MIT Laboratory for Financial Engineering

· Michael Greenberger(www.marketswiki.com...) – former Deputy Director (1997-2000), Commodity Futures Trading Commission

· Satyajit Das – Derivatives Consultant, Author of “Traders, Guns & Money”

· Frank Partnoy – professor of Law & Finance, University of California, San Diego

If you want to learn more, here are some important terms that will help paint the image a little clearer:

· Sub-prime mortgage backed securities

· Credit default swap

· Collateralized debt obligation (CDO)

· Synthetic CDO

· Starting in 2015, “Bespoke Tranche Opportunity” came back (way after this '08 crisis), basically they are CDOs...

· International Swaps & Derivatives Association (one would need at least $1.5 Billion for ISDA agreement)

· American Securitization Forum

Other topics for you to research if you'd like to learn more

Exchange Stabilization Fund

Insider Trading

Counterparty Risk Management Policy Group III www.crmpolicygroup.org...

Federal Reserve Bank Trading Floor

US National Debt usdebtclock.org...

a reply to: FamCore

Yes too many regulations on the financial industry lead to this./sarc



,

a reply to: FamCore

Very good! I hope this does well. I know its a serious chore such epic threads.

This is an important topic in my upcoming film... Although i can mostly only handle it in broadstrokes as its only one amonst many of "The Darkest Patterns" shaping our world all running in parallel.

The way i handle it is mostly about the post911 setup, the way regular folks were suckered into it, and the congressional coverup... For me the part i always emphacize about it being deliberate is how right as the housing values collapse graph is dropping off the screen the engineered oil prices graph spikes off the chart reminiscent of the 1970s. Thing about it was oil supplies nothing had changed except the big money supercomptuer speculator firms worked overtime for a year to artificially drive the prices up the way it played out. To me this was the ultimate FU We Own You move the combined effort. That is what killed the jobs while everyone all the sudden their homes werent worth paying off even if they could.

Another dynamic playing out at that same time was highly matured big firm superconputer High Frequency Trading was just emerging.

a reply to: FamCore

Wow, what a great write up. Time and dedication on a subject that affects us all, every single day.

Thank you

I wonder, if they ever brought back mark to market on their securities, would it still crash the system? To my knowledge they never reinstated those rules. Or with high frequency trading and the FED being pretty much the entire equity market and buyer of last resort, is a crash even possible? Unless they want it to crash that is.

a reply to: FamCore

Thanks for posting this FC.

It is absolutely astounding, that the abusers of Western society sit naked before us, and we do nothing.

Instead: we busy ourselves with mindless distractions.
It doesn't make any sense really.

It's a big club, and we ain't in it.

the greedy swines. may they end up penniless and on the streets.

a reply to: FamCore

Outstanding thread. Should be taught to every high school and college student.

Here's a flashback to the start of the stock collapse.

a reply to: seasonal

The situation is worse today I think. The major financial institutions have become even more brazen since Dodd-Frank was put in place. Now that they don't expect to get a bail out from the gov, the major banks all have a "Bail In Provision" in which they can seize your deposits in order to cover them in a bad situation - we already saw this in Cypress...

Damn, now I am pi$$ed off. Really upset that they pulled this off. No one went to jail. Minor fines were imposed that were probably less than %5 of the total profits they made off of this fraud. Just the cost of doing business.

I raptly sat through this and paid as much attention as I could starting in early 2007. They fricken got away with this. We even paid them, bailed them out and made them whole in the end. Paulson and that little fink Geithner shouldn't be walking free. They should be in jail with the rest of the largest investment banks and GS as the head of the levitation. But instead we relaxed the laws for them. We removed Glass–Steagall so these large banks could start playing in the equity markets. They take their clients money and then bet against them raking in the profits.

Mother (*$#(*@(*&$__@_)$(*(@*(*$()#)_(@_(09 ...... time for a drink.

And nothing has changed....I lost my retirement in O8 and had to reenter the work force.

Oh well, I started out with nothin and still got most of it left....

but some people that are depending on Trump to MAGA are in for a big surprise!! Believe me!! DT is content to deregulate even more and that will be the end of the middle class with uncontrolled inflation with wages staying the same.

Just more trickle down, how'ed that work out last time?

originally posted by: ClovenSky
Mother (*$#(*@(*&$__@_)$(*(@*(*$()#)_(@_(09 ...... time for a drink.

Way ahead of you there mate

But seriously, how, HOW are NONE of these criminals in jail? Oh wait, our politicians are all whores and liars, and are being paid by lobbyist's for these people.

Barney Frank in 2005: What Housing Bubble?

A speech by Barney Frank on the House Floor in 2005 where he refutes any concern about a housing industry bubble and advocates for the government to continue expanding home ownership.

A New Way to Teach Economics

The project is a collaborative effort that emerged after the world financial crisis of 2008–9, and the ensuing Great Recession, when many students (and teachers) complained that existing textbooks didn’t do a good job of explaining what was happening.

In many countries, groups of students demanded an overhaul in how economics was taught, with less emphasis on free-market doctrines and more emphasis on real-world problems.

But it treats perfectly competitive markets as special cases rather than the norm, trying to incorporate from the very beginning the progress economists have made during the past forty years or so in analyzing more complex situations: when firms have some monopoly power; people aren’t fully rational; a lot of key information is privately held; and the gains generated by trade, innovation, and finance are distributed very unevenly. The core curriculum also takes economic history seriously.

www.newyorker.com...

For your reference - this text is available online for free.

You forgot "Margin Call" as a fictional reference. And, IMO, it was the most thought provoking and well done.

a reply to: FamCore

Holy smokes! Puttin' in the work! Thanks for putting this together FC. Flagging for later read.

Inside job was a great documentary.