Too Big to Fail: The 2008 Financial Ponzi Scheme

TOO BIG TO FAIL: THE 2008 FINANCIAL CRISIS Ponzi Scheme WHO STARTED THIS? MARTIN FELDSTEIN ALAN GREENSPAN • Paid $40,000 to testify for extreme bank looter Charles Keating, and spoke of his sound business plans and expertise • Appointed Chairman of Federal Reserve, and reappointed by Clinton and George W. Bush • Professor of Economics at Harvard • President Reagan's Chief Economic Advisor and major architect in deregulation • From 1988-2009 he was on the board of directors for AIG & AIG Financial products ROBERT RUBIN LARRY SUMMERS • Treasury Secretary • Former CEO of Goldman Sachs • After getting Congress to pass the 'Gramm-Leach-Bliley Act" with Larry Summers, made $126 million as Vice Chairman of • Treasury Secretary • Harvard Economic Professor • Played a key role in deregulation and derivatives CitiGroup COMPANIES AND THEIR ILLEGAL ACTIVITIES AFTER DEREGULATION J.P.Morgan RIGGS LAUNDERED MONEY FOR CHILEAN BRIBING GOVERNMENT OFFICIALS DICTATOR AUGUSTO PINOCHET A FannieMae Freddie Mac CREDIT SUISSE ACCOUNTING FRAUD LAUNDERED MONEY FOR (OVERSTATED EARNINGS BY 10 BILLION BETWEEN IRAN IN VIOLATION OF US SANCTION ACCOUNTING FRAUD 1998-2008) % UBS ENRON CITIBANK, JP MORGAN, MERRILL LYNCH TRIED TO HELP CONCEAL FRAUD FRAUD FRAUD 2000 DOT COM BUBBLE INVESTMENT BANKERS PROMOTED INTERNET CO. THEY KNEW WOULD FAIL, SO MORE PEOPLE WOULD INVEST, THEN BANKS WOULD PULL OUT AT LAST MINUTE $5 TRILLION LOSS IN STOCKS DUE TO THE 2000 DOT COM BUBBLE HOW DID THIS HAPPEN? THE ORIGINAL SYSTEM HOME BUYERS' MONEY WENT TO THE LENDER THE NEW SYSTEM 1:1 INVESTMENT LENDERS BANKS CORPORATE BUYOUT DEBT COMMERCIAL MORTGAGES CDO HOME MORTGAGES CAR LOANS STUDENT LOANS COLLATERAL DEBT CREDIT CARD LOANS OBLIGATIONS LENDERS SOLD MORTGAGES TO LENDERS COMBIMED MORTGAGES WITH INVESTMENT BANKS OTHER LOANS CREATING COMPLEX DERIVATIVES CALLED CDOS INVESTMENT BANKS RATING AGENCIES INVESTORS NO UABILITY IF RATINGS CDO ... WERE PROVED WRONG CDOS WERE THEN SOLD TO INVESTORS INVESTMENT BANKS PAID RATING ALL OVER THE WORLD AGENCIES TO RATE CDOS CDO GOVERNMENT SECURITIES HIGHLY POPULAR WITH RETIREMENT FUNDS AAA RATING CDOS WERE GIVEN THE SAME RATING AS GOVERNMENT SECURITIES LENDERS NO LONGER CARED IF BORROWERS COULDN'T PAY BACK THE MONEY THE MORE THEY SOLD, THE HIGHER THE PROFIT 2001- 2007 7 FINANCIAL BUBBLE SUB-PRIME LOAN LENDING FUNDING WENT FROM $30B TO $600B $$$ HOUSING PRICES BETWEEN 1996 AND 2006 INCREASED 127% 2002 2003 2004 2005 2006 COUNTRYWIDE FINANCIAL: ISSUED OVER $97B IN LOANS MADE $11B IN PROFIT AVERAGE PRICES OF NEW HOMES SOLD IN U.S. FROM 1963 TO 2008 AS PRICES DECLINED, $2.50,000 BY SEPTEMBER 2008, AVERAGE U.S. HOUSING PRICES BORROWERS WITH HAD DECUNED BY OVER 20% FROM THEIR MID-2006 PEAK. ADJUSTABLE-RATE $200,000 MORTGAGES COULD $150.000 NOT REFINANCE TO AVOID THE HIGHER $100,000 PAYMENTS ASSOCIATED WITH RISING INTEREST 350,000 RATES AND BEGAN TO DEFAULT. FORECLOSURE PROCEEDINGS FROM 2006-2008 79% INCREASE 81% INCREASE $1.0 $20 $2.5 ONLY 54% 28% OF LOANS OF LOANS MET THEIR DID NOT MEET THE ORIGINATORS' UNDERWRITING MINIMAL STANDARDS OF ANY ISSUER STANDARDS 39% OF THESE LOANS WERE SECURITIZED AND SOLD EVERYONE VWAS OVER-LEVERAGED WHEN BANKS WERE REGULATED, THEIR LEVERAGE RATIO COULD NOT BE GREATER THAN 1:3, BUT DEREGULATION ALLOWED THE RATIO TO BE ANYTHING THEY WANTED, SENDING MANY BANKS TO 1:30 INVESTMENT BANK LEVERAGE 2003 VS 2007 2003 25 2007 15 10 GOLDMAN SACHS MERRILL LYNCH LEHMAN BROTHERS BEAR STEARNS MORGAN STANLEY CREDIT DEFAULT SWAP AIG CO. FINANCIAL PRODUCT IN LONDON ISSUED $500 BILLION WORTH OF CREDIT DEFAULT SWAPS AFTER CRASH AIG OWES > HOLDERS OF CREDIT DEFAULT SWAPS $13B AIG WAS TAKEN OVER BY GOV. IN 2008 CREDIT DEFAULT SWAP HOLDERS ARE PAID $61B THE NEXT DAY illiteits FIRM SOLD FOR 100 CENTS ON THE DOLLAR THIS COST TAX PAYERS $160 BILLION X2 = 400 CITI EMPLOYEES MADE $3.5B BETWEEN 2000 AND 2007 JOSEPH CASSANO X100 BILLION HEAD OF AIG FP, MADE $315M ALONE $14 BILLION WENT TO GOLDMAN SACHS ($4 GOLDMAN SACHS BOUGHT $22B IN CREDIT DEFAULT SWAPS FROM AIG IN 2006 BUSINESS ENTERTAINMENT BUDGET 5% OF COMPANY REVENUE WENT TOWARD BUSINESS MOST BUSINESS ENTERTAINMENT $ ACTIVITIES INCLUDED DRUGS AND S PROSTITUTION ENTERTAINMENT =$500 MILLION A YEAR BORROWERS PEOPLE WOULD BORROW UP TO 99.3% OF THE PRICE OF THE HOUSE THEY WERE BUYING x80 = 8,00O CDOS SOLD (KNOWN AS TOXIC CDOS) GOLDMAN SACHS ISSUED OVER $1.5T IN LOANS, RESULTING IN OVER $200B IN LOSSES BANKS WOULD ACTUALLY BET AGAINST MORTGAGES ONE THIRD HEDGE FUND MANAGER JOHN PAULSON, OF LOANS MADE $12 BILLION DEFAULTED BETTING AGAINST MORTGAGE MARKET CDO MARKET BEAR STEARNS RUNS OUT OF MONEY IN MARCH OF 2008 COLLAPSES IN ACQUIRED BY JP MORGAN FOR $2 A SHARE 2008 THE FIRM WAS BACKED BY $30B IN EMERGENCY GUARANTEES FROM THE FEDERAL RESERVE INVESTMENT RISK OF TOP FIRMS DAYS BEFORE THEIR COLLAPSE AAA ыlШ AAA: PRIME AA AA: HIGH GRADE A2 A2: UPPER GRADE NEW AAA RATINGS RATING AGENCY PROFITS (IN BILLIONS) MOODYS 2.5 STANDARD & POORS I FITCH 2000 2002 2003 2004 2006 2000 2001 2002 2003 2004 2005 2006 2007 ACCOUNTABILITY ANGELO MOZILO STAN O'NEAL JOSEPH CASSANO 1• Memill Lynch CEO • Made $90m between 2006 and 2007 • After the company collagsed, he recieved $161M in severance • Head of AIG • After the company collapsed, instead of being fired, he was hired on as a financia consultant for $1Ma month •Countrywide CEO • Made $470m between 2003 and 2008 Earned S d$140m from dumping Country Wide stocks 12 months before the company collapsed FINANCIAL SECTOR & GOVERNMENT EMPLOYS OVER 3,000 $5 BILLION WAS SPEND ON LOBBYING AND CAMPAIGN LOBBYISTS THAT'S 5 LOBBYISTS FOR EACH CONTRIBUTIONS MEMBER OF CONGRESS GOVERNMENT BAILOUTS $250 - $200 - $100 - $50 - MORGAN UBS GOLDMAN CITIGROUP BEAR CREDIT DEUTSCHE J.P. LEHMAN MERRILL STANLEY SACHS STEARNS SUISSE BROTHERS LYNCH PAY PER WORKER $100,000 BANKING $80,000 $60,000 $40,000 EVERYONE ELSE $20,000 1978 1998 2008 LEHMAN'S STOCK PRICES PLUMMETED IN 2008 $20 $15 $10 $5 $0 AUG 10 AUG 15 AUG 20 AUG 25 SEPT 1 SEPT 10 SEPT 15 SEPT 20 SEPT 25 WHEN THE FIRM WENT BANKRUPT THEY GOT TO KEEP ALL THE MONEY COUNTRY WIDE CORPORATE PROFITS WALL STREET BONUSES $3 B $35 B $30 B $25 B $2 B $20 B $15 B $1B $10 B $5 B $0 B $0 2000 2001 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 2007 THE SECURITIES AND EXCHANGE COMMISSION CONDUCTED NO MAJOR INVESTIGATIONS OF THE INVESTMENT BANKS DURING THE BUBBLE SAVINGS FROM BUSH TAX CUTS so $20,000 $40,000 $60,000 $80,000 $100,000 COLLEGE INSTITUTIONS AND DEREGULATION Since the 1980's academic econcmists have been major advocates for deregulation and have played powerful roles in shaping US government policy. Few warned about the crisis, and after the crisis many opposed reform. LAURA MARTIN FELDSTEIN FREDERIC TYSON MISHKIN GLENN HUBBARD LARRY SUMMERS • Professor of economics at Harvard President Reagan's chietpean of Columbia Business economic advisor and major architect of deregulation • From 1988-2009, he was during Bush a on the board of directors Paid $100,00 to testify in Tor ATG & AIG Financial the defense of pecple wuho Goldman Sachs •Professor of UC Berkeley Chair of economic advisors Director of national Economic Council During the Clinton administration Net worth $6-17 million in which he was paid $124.000 by Icelandic Treasury secretary Played a key role in the Chamber of Commerce to School write about Iceland's Chief economic advisor tministrationche joined the board of After leaving government deregulation of derivatives economic stability. While at Harvard, he made praising the Icelandic milions consulting to hedge financial sector - although funds I$2.596,171) and millions more in speaking fees - many from investment bankers their economy is failing did securities fraud Makes $250,000 a year being a board member at Metlife products WHERE ARE WE NOW? HOURS WORKED PER YEAR, PER PERSON US HOUSEHOLD DEBT $50,000 1,900 1,850 $40,000 1,800 $30,000 1,750 1,700 $20,000 1,650 1979 1989 1995 2000 2006 1980 1984 19s8 1902 1996 2008 ONLY 54,000 JOBS WERE CREATED IN MAY tiIIIIIitiiiiIii||| ONLY LESS THAN HALF OF WHAT WAS EXPECTED ONLY LESS THAN A THIRD OF WHAT IS NEEDED TO LOWER THE 9.1% UMEMPLOYMENT RATE X1000 = 187 JOBS A MONTH WE WOULD NEED TO CREATE TO REACH A HEALTHY UNEMPLOYMENT RATE BY 2020 AT THE CURRENT RATE WE ARE GOING, WE MIGHT GET HALFWAY THERE BY THAT TIME HALF OF AMERICANS SAY YOUTH UNEMPLOYMENT RATE IS NOW AT 24% THEY COULDN'T COME UP WITH $2,000 IN 30 DAYS WITHOUT SELLING SOME RATE: 9.1% OF THEIR POSSESSIONS. COMPARED TO THE OVERALL UNEMPLOYMENT FIRST TIME IN HISTORY AVERAGE AMERICANS ARE LESS EDUCATED AND LESS PROSPEROUS THAN THEIR PARENTS WHO IS IN CHARGE NOW? LEWIS SACHS BEN GARY LARRY MARK BERNACKE GENSLER SUMMERS PATTERSON • Obama reappointed him as Chairman of Federal • Head Commodity Future Trading Comissions • Obama's Chief Economic Advisor * Head of Tricadia • Senior Treasury Advisor Chief Staff of treasury department Former lobbyist of Goldman Sachs Reserve TIMOTHY EMMANUEL GEIHTNER MARY MARTIN FELDSTEIN RAHM WILLIAM SHAPRIO C. DUDLEY • Treasury Secretary • President of New York Federal Reserve during crisis • Played key role in paying Goldman Sachs 100 cents on the dollar Runs security and trades commissions • President of Federal Reserve Bank of New York • Obama's advisor • Obama's Chief of Staff • Made $320,000 being on the boerd of Freddie Mac • Former Chief Economist to Goldman Sadhs Sources http:en.wikipedia.arg/wkiLate-2000s_financial grisis Inside Job: Dooumentary Teo Big to Fait Movie HOURS WORKED TOP 1% %06 WOllo9 IN MILLIONS PRICE OF HOUSE 2007 2006 LEVERAGE RATIO %24