Inside job is a documentary film that tells story behind the 2008 financial crisis. This financial crisis is neither a natural phenomenon nor part of an economic cycle but rather a man-made crisis. It is the result of the combined greed of these few people who tried to create something out of nothing at the expense of other people. They are the so called financial engineers who do not build bridges but dreams that turned into nightmares and the world suffered from it. This is a financial disaster that was the product of two elements: Wall Street greed and Regulatory failures.
Financial institutions must be well regulated and their operations & other activities must be closely monitored to prevent any abuses and to protect the interest of the public. Because once these financial institutions were deregulated, this is what happens.
- Iceland
In Iceland, their 3 major banks, Kaupping, Landsbankinn and Islandsbanki, were privatized and deregulated by the government as part of their financial experiment. These banks before do not borrow money abroad but after the deregulation, they started borrowing money outside of the country that amounted to $120 billion which is almost 10x larger than the GDP of their country that is only $13 billion. Since they are deregulated, these financial institutions are free to do any of their operations regardless of the risk it may involve. Sad to say but although something wrong is already happening, their regulators did nothing. Why? It is because 1/3 of their financial regulators work in these banks. Aside from borrowing abroad, these banks paid big bonuses to its executives and employees. They also gave big credits to some people who spent all of this borrowed money to buy luxurious stuffs from expensive boats to private planes. This created a financial bubble and resulted to the collapsed of these banks.
- U.S.
The deregulation of financial sectors combined with WallStreet greed caused the Internet bubble in 2000 and financial crisis in 2008. The deregulation allowed merging of banks so they get bigger which is not advisable because once they fail, it can bring the whole economy down. The deregulation also allows banks and other institutions to speculate using depositors’ cash. Depositors put their money in the banks believing that it will be safe not knowing that these banks use these deposits to speculate and put it in risky investment.
When investment banks speculated on internet stocks they knew will fail, then paid analysts to fool the public and hyped the stocks until its price skyrocketed, it resulted to the Internet bubble.
When financial institutions created derivatives as the securitization food chain was introduced to the public, it resulted to real estate bubble.
Warren Buffet said “Derivatives are weapons of mass destruction”. I agree with him. The introduction of these unregulated financial products is the instrument used by these financial wizards to defraud the public and to create value out of nothing.
In the traditional borrowing, if a borrower needs money, the bank conducts credit investigation first to ensure that the borrower is capable of paying the debt before granting the loan.
But on Securitization Food Chain
It makes banks/lenders to grant loans regardless of the ability of borrowers/home buyers to repay. Because the mortgages created on these loans by banks/lenders were bought by Investment Banks like the Lehman brothers and Goldman Sachs and combined them to create a complex derivative called CDO or collaterized debt obligation. Then this CDO were sold by Investment banks to investors. Investors earn from CDO when the home buyers make their mortgage/loan payment.
This system made borrowing easier and more loans are being granted as lenders are now more liquid because instead of waiting for the loan payment by the borrowers, they immediately received cash when investment banks buy these mortgages.
But here is the problem. Since the risk of default is not a concern anymore by the lenders/banks, they keep on granting loans to people regardless of their ability to pay. Investment Banks keep on buying these mortgages from banks to make more CDO out of it. The more CDO, the more profit. Knowing that these CDO are now risky so why will investors buy these? Well, they don’t know they are making risky investments on it. Because Investment Banks paid Rating Agencies like S&P and Fitch to give their CDO an AAA credit rating. Even those CDO created from the combinations of subprime loans or high risk loans were also given an AAA credit rating by these rating agencies. Now, these investors bought it, thinking that CDO’s are safe investments. It is just a matter of time before the worst financial crisis is waiting to happen.
SEC allowed lifting of the leverage limits or increased of the leverage ratio of the Investment Banks so that they can buy more loans/mortgages and create more CDO. Investment banks made big profits defrauding the public. They gave big bonuses to its executives and management. Many people from WallStreet took home big pay checks spending it with all the luxuries in life.
There is also another financial product created but this time by AIG or American International Group, an insurance company. It is called CDS or Credit default Swap, a derivative that is similar to a traditional insurance but unlike the traditional insurance where only you can insure what you own; in CDS everybody can insure your property. CDS were used to insure CDO where once CDO defaults; they will make payment of the total amount. AIG made profits from the premium paid on the CDS. Similar to the Investment banks, they also gave big bonuses to its employees. Actually, what is funny here is that even those Investment Banks like the Goldman Sachs bought CDS to insure themselves on risk of default of CDO they themselves created.
There was a real estate boom because home buyers can borrow more at ease. Real estate prices skyrocketed as the buy and sell of houses and other real estate’s financed through borrowing continued until the market became saturated with all these properties. After the real estate bubble, CDO defaulted because borrowers cannot pay anymore their mortgages/loans. AIG cannot pay investors and speculators who insured themselves against CDO. AIG collapsed and Lehman Brothers went bankrupt. US economy went down and many lost their money, jobs and houses.
It is really sad on how such things happened. The regulatory bodies failed to do their part in protecting the public. The top executives of these financial institutions who defrauded the public are still free and some of them even have positions in the government. There is even no attempt by the Obama government to recover the wealth from these people. No attempt to regulate the financial sector. Is the US government a WallStreet government?
