FINANCIAL CRISIS

OF 2008
• After the great depression USA saw a growth of financial sector for
straight 50 years
• In the year 1980 financial industry exploded and investment banks
went public
• This gave all the banks a take hold on stock holders money
• Bankers on Wall Street started getting rich at a multiplying rate

PART-1
HOW WE GOT
THERE
 Regan Administration

President
Ronald Regan
Year 1971

Donald Regan
Head of US Treasury
Also the CEO of Merrill Lynch

• In 1982 they started a 30year period of

Financial Deregulation
• Most of the banks had failed by the end of
1980 leading to first crisis of $124 billion
 Charles Keating

A famous banker
Investigation began on him in the year
1983
He had invested the depositor's money in
risky assets

Alan Greenspan
A famous economist
He praised Keating and told officially
that he saw no risk in Keating’s
Investment

Keating reportedly paid Greenspan

$40,000 for praising him
 President
Clinton

Robert Rubin Larry Summers

Bill Clinton Alan Greenspan
Head of US Treasury Head of US Treasury
President of USA Chairman of Federal Reserve
(1995-1999) (1999-2001)
(1993-2001)
CEO of Goldman Sachs Consultant to large
Hedge fund Firms
 Citibank-Travellers Merger

Later the Gram-Leach-Bliley(2000) act

This merger was illegal as it violated was passed
the Glass Steagall Act(1933)
This allowed any major financial
Instead of imposing a fine and institution to by other investment bank
cancellation of this merger Citi-Bank
was given a exemption of one year

This law gave way to future mergers of various banks

Later Robert Rubin joined the board
of Citigroup and made $126 million
 Dot-Com Bubble(2001)
Elliot Spitzer- Attorney General
• His investigation revealed that banks promoted
the stocks that new were sure to fail.
Ex: Info-space
Excite
• The internet crisis wiped out 5 trillion dollars of
market value
• The major banks in the world settled for $1.4
billion

Info Space Stock

Bear Stearns $80 million Morgan Stanley $125 million

Credit Suisse $200 million Merrill Lynch $200 million
Deutsche Bank $80 million Goldman Sachs $110 million
J.P. Morgan $80 million Citigroup $400 million
Lehman Brothers $80 million UBS $80 Million
 Some of the benefits taken by banks under deregulation
o Since deregulation world’s largest financial institutions have been known to
launder money
o Some of them are :
o J.P Morgan & Chase bribed govt. officials
o Riggs bank laundered money for Chilean dictator Augustos Pinochet
o Credit Ssuise for Iran’s nuclear program and was later fined $536mn
o Citibank helped launder money for Mexican cartels
o UBS helped wealthy Americans evade taxes worth at least 12bn dollars
and was fined $780mn
o Freddie Mac was fined $400mn for issuing unauthorized loans
o Fanny Mae overreported it’s earnings by $10bn and was fined $125mn
o CEO Franklin Raines( Budget director of Bill Clinton) got $52mn
in bonus
Franklin Raines Bill Clinton
 PART-11
THE BUBBLE
2000-2007
 Derivatives

Deregulation and innovations in financial technology led to

formation of complex financial products called Derivatives.

Economists and bankers claimed they made the markets

safer

By late 1990s derivatives was an unregulated market of 15

trillion dollars
Brooksley Born tried to regulate derivatives market in
1998

Larry Summers, Greenspan and Robert Rubin publicly

condemned her and issued a joint statement against
her on 24 July 1998 with a recommendation to ban
regulation of Derivatives
Brooksley
Finally in 2000 Phil Graham put a ban on derivatives ( Born
He later on went on to become the vice president of Head of CFTC
UBS)
Major Financial Banks Financial Conglomerates
• Goldman Sachs • J.P. Morgan Chase
• Bear Stearns • Citi Group
• Morgan Stanley
• Merrill Lynch
• Lehman Brothers
Rating Agencies
Insurance Companies
• Standard and
• AIG Poor’s
• AMBAC • Moody’s
• MBIA • Fitch
Securitization Food Chain
 Subprime Loans
SE CURITIZ ATI ON FOOD (as % of total loans)
CH AIN: CONTINUE D
• Lenders did not care if the customers
could repay the loan & went on to issue
riskier loans
• Subprime loans
• This led to increase in predatory lending &
investments worth millions flowing
through securitization chain
• Home prices skyrocketed and were even
higher than the 1970-80 housing boom
• Subprime lending increased from $30bn to Mortgages(in billions)
$600bn under the 8 years of Bush-Cheney
administration.
• Lehman brothers were the top underwriter of
subprime loans
• They issued loans worth $106Bn
• Richard fuld(CEO-Lehman Brothers) took home
$485mn in bonuses
• Countrywide alone issued $97bn in subprime loans
• Borrowers had borrowed almost 99% of the
mortgage
• 2/3rd of the loans were rated AAA by rating
agencies considered as risk free as govt securities
Goldman Sachs sold CDO’s worth $3.1bn in the first half of 2006
 BUSH Administration

• Henry Paulson was the Ex CEO of Goldman

Sachs.
• The time he became the secretary of USA
Treasury he had to sell his Goldman Sachs shares
worth $450mn
• He did not have to pay a single dollar for taxes
which amounted to $400 million

George W Bush Henry Paulson

President of USA Head of US Treasury
(1993-2001) CEO of Goldman Sachs

• One of the largest customers of Goldman Sachs was Public

• Employee Retirement System of Mississippi
Goldman Sachs on an average gave PERS of Mississippi on an average
$600,000 as annual bonuses gave $18.75k as annual salary
 Leverage
Leverage ratio
• Banks were borrowing more loans to create more 15:1
CDOs
• The ratio between borrowed money and banks own Leverage ratio
money was called leverage 3:1
• Higher are the banks borrowed higher was the leverage
• In 2004 Henry Paulson CEO of Goldman Sachs helped
lobby the Securities and Exchange to relax limits on
leverage allowing banks to sharply increase their
borrowings
• On April 28 2004 the SEC met and relaxed the limits
on leverage borrowings by bank
Credit Default Swaps • AIG was one of the largest
insurance company
• It was selling large quantity of
derivatives called Credit Default
swaps

• AIG did not keep any

money aside to cover the
loses if CDO’s went bad.
Instead it gave huge
bonuses all its employees
• AIGFP London office alone
issued CDS’s worth
$500bn
• Most of them were
backed by subprime
mortgages
• Joseph Cassano the head
of AIGFP made
$315dollars in bonuses
 Effects of CDS
• Goldman Sachs made one of the biggest bet against CDS
• They bought CDS worth $22bn
• The CDS was so high that the bank feared AIG will go
bankrupt hence they invested $150mn and insured
themselves against AIG’s imminent collapse
• In the year 2007 Goldman Sachs sold CDO’s specially
designed such that the more money their
customer's(investors) lost the more money the bankers
made
• They sold securities worth $600mn alone to Timberwolf.

• Hedge funds like Tricadia and Magnetar made billions by

betting against on CDO’s that were designed with
Meryl Lynch, J.P. Morgan etc.

• Profits of Moody’s, Stand and Poor’s profit rose

4 times.
• All most all the CDO’s rated by them were at
an average of DDD grade
 PART- 111
THE CRISIS
2008
 The Crisis
• On September 7 2008 H. • On 14 September
• On March 16 2008 Bear
Paulson announced federal take Merrill Lynch was
Stearns ran out of cash
over of Fannie Mae and Freddie also on Brink of
• It was acquired for 2 dollars a
Mac collapse.
share by J.P. Morgan
• These were two giant mortgage • But it was bought by
• The deal was backed in $30bn
lenders on brink of collapse Bank of America
by the federal reserve

Due to this even the commercial paper market fell

• On September 12 2008 Lehman Brothers
ran out of cash
• The only bank that was interested in
buying Lehman was Barclays a British bank
• British govt demanded that the bank was
backed by US Federal Govt. but later on
they denied the backing and Lehman
Brother was left unsold

• On September 15 it was found▪ that even AIG was on the

verge of collapse
•
• On September 17 AIG was taken over by the Federal
Govt
• On September 18 H. Paulson and Ben Bernanke asked the
congress to pay $700bn.They warned that the alternative
will be a catastrophic collapse
• As soon as AIG was bailed out its major prominent
customer was paid $16billion
• The federal govt. paid $160bn to banks in order to save
AIG
• Also H. Paulson and Ben Bernanke forced AIG to
surrender rights to sue Goldman Sachs
ON 4TH OCTOBER PRESIDENT BUSH SIGNED
A BAILOUT BILL OF $700BN TO BAILOUT ALL
THE BANKS
 Major Personalities Involved with crash
Fredric Mishkin
• Governor of Central Bank of America (2006-2008)
• Submitted resignation on 31st August 2008
• He made around $31mn as Governor and
consultant to hedge fund managers

Glenn Hubbard
• Chairman of council of economic advisors to President
Bush
• Made 250,000/year being on board of Capmark(mortgage
lender) that went bankrupt in 2009
• He also advised Nomura, KKR Financial securities, Metlife
etc.

Martin Feldstein
President Regans Chief economic Advisor(1981-1988)
Major architect of deregulation
Later served on the Board of Directors of AIG and AIGFP
Mary Schapiro
• Chairman and CEO of FINRA(2006-2009)
• FINRA was investment banking industry’s self
regulation body
• She served on regulatory boards of both
President Bush and Clinton

Laura Tyson
• Chairman of council of economic advisors to President
Bush and Director of National Council under Bush govt
• After leaving govt. job she joined Morgan Stanley
• She earned about $350,000/year other than bonuses in
compensation

Larry summers
• Head of Treasury under President Clinton
• He was majorly involved in deregulations
• He majorly earned by consulting hedge fund that
heavily relied on derivatives
• Summers net worth was reported to be $40mn
at the end of 2009
 Aftermath
• President Bush passed a law on taxes during the
bubble.
• There was a series of Tax cuts advised by Glen
Hubbard. The taxes were sharply reduced on
investment, gains, dividends, stock returns and
eliminated estate taxes.
• These tax cuts ended up favouring the richest that
belonged to top 1% of wealthy Americans

• Americans responded to the above changes and the crisis

in two ways one by working longer hours and another by
going into debt
• The average household debt increased more than ever
• The gap between the wealthiest and the poor widened
the most in America when compared to any other
developed country
• By 2009 26% of total wealth of America was held by top
1% wealthiest when compared to 2001 where there hold
on wealth was just 10%
 Obama Administration
• After the crisis before the election Obama pointed to wall street greed and promised its citizens reforms
• After taking office President always spoke about reforms to be bought in financial industry
• But when finally enacted in 2010 the financial reforms were weak. No actions were taken to prevent rating agencies from
doing fraud. No rules were made on financial lobbying and on compensation

Timothy Geithner Rahm Emanuel

Martin Feldstein
Head of Treasury Chief of Staff
Member of
Worked under BOD of Freddie
Obama’s Economic
H.Paulson Mac
recovery Advisory
Board

Larry Summers Laura Tyson Mary Shapiro

Chief Economic Member of Head of Securities
Advisor Obama’s Economic and exchange
recovery Advisory commission
Board
THANK YOU