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Movie - Inside Job.docx

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Geography 3422A/B
Milford Green

Movie: Inside Job 2/26/2013 1:24:00 PM Global Recession – How We Got Here  Lehman Brothers bankruptcy initiated the stock market collapse  After the Great Depression the US had 40 years of steady growth without any major disruptions  Investment banks used to be small partnerships  Paul Volcker – chairman of the federal reserve 1979-1987  1980 – investment banks went public giving them large amounts of money in stocks  1982 – the Regan administration deregulated savings and loan companies allowing them to make risky investments with their investors money o By the end of the decade they had failed o Thousands of savings and loan executives went to jail for eluding their investors o Charles Keeting – paid Alan Greenspan (economist), where he praised Keetings expertise and said he saw no risk in allowing Keeting to invest his customers money, Keeting went to prison, but Greenspan was appointed chairman of the federal reserve  1990s – under the Clinton administration, deregulation continued o The financial sector had consolidated into a few large firms, each so large that the failure of one could threaten the whole system o 1998 – Citi Corp and Travellers merged to form Citigroup, the largest financial services company in the world  The merger was found to be illegal by an act passed after the Great Depression (Glass-Steagall) which restricted investment banks from engaging in risky banking practices  Greenspan was able to put off the law suit for a year, in which time the Gramm-Leach-Bliley Act, known as the “Citigroup relief act” was passed that trumped the Glass-Steagall Act and cleared the way for future mergers  Eliot Spitzer – governor of NY state o Investigation revealed that investment banks had promoted internet companies they knew would fail  Since deregulation began, the biggest financial companies have been caught committing fraud to their customers and laundering money over and over again o UBS was caught helping wealthy Americans evade taxes o Citibank, JP Morgan and Merrill Lynch all helped Enron conceal its fraud  Derivatives – claimed to have made markets safer, but actually made them more risky o Bankers could gamble on anything – rise and fall of oil prices, which companies would fail, etc. o Commodity Futures Trading Commission – set up to regulate derivatives, headed by Brooksely Bourne (and Michael Greenberger)  Clinton’s treasury department essentially directed her to stop trying to regulate because that was where all the banks money cam from  A bill was passed to essentially ban regulation of derivatives  Larry Summers – Treasury Secretary, 1999-2001, also didn’t want regulation  By 2001, the financial sector was dominated by a few large firms: o Investment banks:  Goldman Sachs  Morgan Stanley  Lehman Brothers  Merrill Lynch  Bear Stearns o Two financial conglomerates:  Citigroup  JP Morgan o Three securities insurance companies:  AIG  MBIA  AMBAC o Three rating agencies:  Moody’s  Standard and Poor’s  Fitch o Securitization food chain – linked the large firms together:  Home buyers  Lenders  Investment banks  Investors  Today the people who make loans are no longer at risk if others fail to repay o Then – mortgage payments would go straight to the local lender, lenders were careful o Now – lenders would sell mortgages to investment banks who would combine thousands of mortgages and other loans to creates derivatives called collateralized debt obligations (CDO)  The investment banks then sold CDOs to investors so when people paid their mortgages, the money went straight to investors all over the world  The investment banks paid rating agencies to evaluate the CDOs and many were given a AAA rating, which made CDOs popular with retirement funds o Problem - lenders didn’t care whether or not borrowers could repay so they would make riskier loans, investment banks sold more CDOs to increase their profits and rating agencies weren’t liable if their ratings were wrong  Between 2000 and 2003, mortgaged loans quadrupled  There was a huge increase in risky loans called subprime  When they were combined to create CDOs, many of them were still given AAA ratings  Investment banks actually preferred subprime loans because they carried higher interest rates which led to an increase in predatory lending The Bubble (2001-2007)  Since anyone could get a mortgage, housing purchases and prices increased dramatically  There was a similar housing bubble in the 1980s which caused a severe outcome o By 2007, housing prices had increased by 194%  Traders and CEOs on Wall Street took home massive incomes in the years during the bubble  Through the home ownership and equity protection act, the federal reserve board had brought authority to regulate the mortgage industry, but Greenspan refused to use it  During the bubble the investment banks were borrowing more to make more CDOs o The ratio between borrowed money and the banks own money was called leverage, the more they borrowed the higher their leverage – a tiny decrease in the value of asset base would leave them insolvent o In 2004, Henry Paulson, CEO of Goldman Sachs help lobby the SEC to relax limits on leverage to allow banks to increase their leverage  AIG – worlds largest insurance company o Selling large quantities of derivatives cal
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