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I think this is a financial crisis more extreme and more serious than that of the s. One alarming scenario would be if banks still burdened with toxic assets were forced to carry out major value adjustments which could worsen the crisis again. US and global housing prices continued to slide, and forced selling of exotic mortgage securities into an illiquid market led to lower asset valuations and more forced selling — a kind of self-fulfilling downward spiral that made a bad situation even worse.

In fact, these forced sales of assets were very damaging. It was wise when Wall Street was foolish. Fannie and Freddie confessed to huge losses of their own, and mega-insurer AIG appeared to be a toxic dump. I have great, great confidence in our capital markets and financial institutions. General conditions in the business world will get worse, but it will only last a while. More dominos fall Then came September , which set in motion the second, much larger, round of toppling.

With losses rising at all of the major banks, the rumor mill was working overtime on who might follow Bear Stearns down the tubes — and the leading candidate was Lehman. In the span of just a few short weeks the storied bank suffered cancelled credit lines, strained liquidity, doomed capital-raising efforts, and short selling pressure. The global financial market has ceased to function, putting in danger the necessary flow of money to businesses and families on which all of us depend in our daily lives. It was all quite real.

In fact, the Lehman collapse forced every major country to step up and guarantee, in some form, the bank deposits of retail clients in order to prevent massive bank runs. Goldman and Morgan Stanley became bank holding companies, and Merrill Lynch sold itself at a discount to Bank of America, marking the end of the US investment banking sector. Housing values were still sliding, mortgage securities were being downgraded and forced selling and deleveraging were causing asset prices to fall.

The resultant losses for those revaluing their trading books every day created more red ink and more need for capital — but there was simply no private capital to be had. Critically, banks were still not lending to one another. No wonder then that no bank could trust another, and no one could trust our banks. No wonder then that our system of credit — the lifeblood on which the economy depends — froze.

Similar bailout mechanisms were created in other countries.

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Only Iceland emerged as the odd man out, almost literally seeing its entire banking system slip into the ocean. By any standard, that is what really has the public so angry. They were designed to prevent a financial virus from infecting the entire economy The other knock-on effects were obvious: weak consumer sentiment and thus spending and continued softness in housing prices with a bottoming-out remaining on hold till And though capital coffers were replenished and credit loosened up, the damage had been done — trillions of dollars in wealth had been destroyed, economies had suffered major setbacks, and the rules of the free market had been rewritten.

The reputation of banks rightly plummeted.

So, cheap credit, a housing bubble, and banks with weak risk controls, a proclivity for risky things and a love of big bonuses, led to massive trading and credit losses, a freeze-up in credit and, ultimately, a global recession with very significant unemployment — a disaster of horrific proportions, and one that should be laid squarely at the feet of the bankers as I shall describe further in the next few chapters.

But was it just the banks?

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Were they the only ones doing damage? Or were there other bad actors?

Who else needs to take some responsibility? Neither part of our economy acted completely independently of the other. So, the agencies have the keys to the kingdom. This became abundantly clear during and after the crisis, when evidence surfaced that all three had, in many cases, overstated the ratings of the mortgage-backed bonds and other structured products that were held by banks and investors. The mere fact that the agencies had rated literally tens of billions of dollars of such bonds meant that their role in the crisis was not insignificant.

Regulators Next in line are the regulators, government institutions that set policies that are meant to keep the financial markets on an even keel. So it came as a surprise. What did they do with the powers they had? Made mistakes. American politicians, central banks and regulators were just as eager as speculators to expand the housing bubble. They just had a bigger pump. Many implemented easy money policies during the first half of the decade, and these ultimately proved damaging.

In both cases — the equity bubble in and the credit bubble in — central banks were asleep at the switch. This group did very poorly indeed. There were warnings and they were not heeded. The Americans had tens of thousands of people involved in monitoring their financial sector but it did not help one jot. I think I am right in saying that these examples describe a case of serious regulatory failure. It relied on self-regulation that, in effect, meant no regulation; on market discipline that does not exist when there is euphoria and irrational exuberance; on internal risk management models that fail This light-touch regulation in effect became regulation of the softesttouch.

It underestimated the strength of the recession, underestimated the damage it was going to do. And underestimated what it was going to take. In fact, there were lots of problems: slow reaction time, bad communication, fractionalized structures, overlapping or underlapping responsibilities, turf battles, inadequate skills, overworked staff, ineffective sometimes even contradictory rules and regulations, and lack of scrutiny.

It is the consequence of efforts by regulatory, supervisory and private financial institutions to address previous sources of systemic instability. Risk management has improved significantly, and the major firms have made substantial progress toward more sophisticated measurement and control of concentration to specific risk factors Every single one of them failed to spot the seriousness of the risktaking that was going on. They both screwed up, but one earns more, so he is more responsible.

In fact, the Goldman trader might be more responsible than the case officer — but because of the risk that was created, not the paycheck that was received. The two issues need to be separated. In the end, the case officers failed to keep pace with what was going on, so they must share in some of the responsibility. Politicians Next I come to the political and legislative class.

As a group, politicians tend to be relatively unpopular amongst most of the citizenry, and when you consider some of what they said and did before and during the crisis, their profiles sink even further. In the main, politicians are meant to create the laws that govern all activities, including those that touch the financial system.

See No Evil - Uncovering The Truth Behind The Financial Crisis | E. Banks | Palgrave Macmillan

In looking at previous crises, it becomes pretty clear that politicians have had a tendency to blow with the prevailing wind: when financial regulation appears too stifling, they pass laws to deregulate. When a financial crisis appears, the political pendulum swings the other way — they conduct their witch hunts and then impose strict, sometimes unwise, laws, some of which wind up crimping business — until lobbyists and even constituents make enough noise, and persuade them to change the laws.

The cycle then starts anew. This means that politicians often add no particular value — and can arguably make things even worse. Unfortunately, their errors are compounded by their desire to promote unwise policies e. Same thing in this crisis. For instance, politicians missed lots of opportunities during the decade to bring derivatives generally, and credit derivatives specifically, under tighter control.

Dr. Evil’s Payday

Another example: a whole group of US politicians stuck their heads in the sand when it came to the fiscal health of Fannie and Freddie — trying to pretend that everything was okay, even as the two firms were promoting subprime, cooking their books, and apparently not controlling their risks properly — helping set the stage for a much bigger disaster. Fannie Mae and Freddie Mac, pressed by the U.

Fannie and Freddie paid whatever price was necessary to reach their affordable housing goals. Congress and the executive branch Numerous legislative proposals put forth in the first half of the decade to tighten controls on Fannie and Freddie were effectively shot down by the opposition — another shining moment in the history of the US Congress.

Predictably, many of these politicians have since attempted to disavow any culpability. Again, in the interest of getting the story straight, the politicians and their lobbying friends must accept their role in the fiasco — more on this group in Chapter 6.