Cause of the Financial Crisis

[kylinrouge.livejournal.com]

Apparently despite having the most detailed information available for the last 3 years, there is still some debate about the origins of the financial crisis. I hope to (who am I kidding?) put this to rest. The OWS protests in particular have spurred many pundits into declaring that they should be mad at themselves or the government, not at banks or Wall St. or anything like that. Such comments a gross revision of history, and I'm not talking about the early 1900s or 1950s, but 3 years ago!

In the beginning of the 1990s, the financial industry invented derivatives. Derivatives are bundles of different types of debt (credit card debt, student loans, mortgages, etc). The debts are bundled up and then sold to investors. These bundles of debt are called Collateralized Debt Obligations or CDOs. Investment banks then sold these CDOs to individual investors like people buying stocks with their 401k retirement funds etc.



30 years ago, if you got a home loan, you paid your money back to the lender. Since it was a long term loan, lenders were really careful about who they gave money to, they wanted to get paid back. Now, thanks to these CDOs, banks sold your debt to investors, so when you paid your mortgage payment, you were paying the investors back.

By the end of the 1990s, derivatives was a 50 trillion dollar unregulated market. Some attempts were made to regulate them but the bankers fought heavily against this. In December of 2000, the banks successfully lobbied Congress to pass the "Commodity Futures Modernization Act" officially banning any and all regulation of derivatives, and the bankers went hog wild raping the fuck out of the country.

This system was a ticking time bomb. Lenders didn't care anymore whether borrowers could repay, so they started making riskier loans. The investment banks didn't care either - the more CDOs they sold, the higher their profits. And the ratings agencies which were paid by the investment banks had no liability if their ratings of CDOs proved wrong. Since CDOs were unregulated, the banks did not have to set any money aside to cover the loans. If they went bad they actually still made money anyway, it was the investors who got fucked (your grandma's retirement fund).

Then the sub prime mess kicked in. In the early 2000s these banks were trying to make as many loans as possible. This lead to an increase in predatory lending. They started doing more and more sub prime loans with a variable interest rate, which was much higher than regular loans. Bankers made a higher commission for these because it made more money for the bank so they would even give these loans to people, even when they could have afforded a better, lower interest loan. They also gave these out to people they knew for a fact couldn't repay them, because again they were not responsible for the loan going bad, they still made a profit even if that happened thanks to the CDOs. Sub prime loans increased from $30 billion a year to over $600 billion a year over 10 years. Two thirds of the loans were rated AAA meaning they were as safe as government securities.

In 2004 the FBI was alerting looking into wide spread mortgage fraud abuses, inflated appraisals, doctored loan documentation, and other fraudulent activity. In 2005 the International Monetary Fund issued warnings of the crisis. In 2006 and 2007 Alan Sloan from Fortune Magazine started reporting on the housing bubble. In 2008 another top economist published a book about the pending crisis. Foreclosures skyrocketed, but meanwhile banks kept doing these scam mortgages -> CDO -> dogshit loans more than ever.

Then it all collapsed. Conveniently, at the same time these big banks were selling triple-A rated CDOs to investors, they were making huuuuge bets that they would fail, because they knew they were dogshit. So even as all of this started collapsing they were making record profits. In fact other big companies having to pay these winning bets is what made the whole economic collapse start (AIG, Lehmen Brothers, etc).

The people who got fucked were mostly huge retirement funds from all over the world. When this all collapsed countless teachers, firemen, policemen, and pretty much everyone under the sun with a 401k retirement fund got fucked over. People who were about to retire in a year or two now have to work another 10 or 20 to make up for it, at least.

No bankers who knew all of this was a scam and bound to collapse have been punished. In fact the highest paid CEO ever who was in on this mess big time, Henry Paulson, was the Secretary of the Treasury who arranged the huge bank bailouts. In the first half of 2006 (2 years after the FBI started warning people of this scam), he was still CEO of Goldman Sachs when they sold another 3.1 billion of these shitty CDOs. Then he became Bush's Secretary of the Treasury, and bailed out these big banks a couple years later. He even asked for there to be absolutely zero oversight and accountability for the trillions of dollars he was giving out. Even better, when he became Secretary of Treasury, he was required by law to sell all of his stock in Goldman Sachs (conveniently right before it collapsed), and thanks to a law passed by the first president Bush he didn't have to pay taxes on it saving him $52 million dollars.

No significant laws have been passed to prevent this from happening again. Just some weak bullshit that doesn't really help, and even that is getting crippled more and more.

Yay America!

Note: I had a lawyer friend help me write this, mainly confirmation of the many facts.

Comments

[underlankers.livejournal.com]

All those excuses amount to a perpetual refusal to admit that Rome's decision to entrust civil war and victorious generals with the succession was a horrific idea that would at some point backfire with civilization-destroying consequences when none of the generals ever successfully defeated the others. Change every other factor but leave the Secret of Empire intact and the thing goes boom anyway.