PART 1: How we got here?

          Charles Keatings Alan Greenspan (Economist)(Chairman of American Central Bank, Swindler) Treasury Secretary (Robert Ruben){Former CEO of Investment Bank Goldman Sachs} Larry Summers (A Harvard Economics Professor) Financial Sector made hostage the Government CitiCorp merger violated the “Glass Stegal Act” enacted during Great Depression Congress passed “Gramm-Leach-Bliley-Act” (Citi Group Relief Act) Robert Rubin made $126 million as Chairman of Citigroup Monoply Power, Lobbying Power 2001, 5 Trillion dollars in Investment Losses o Investment Banks promoted Internet companies, they knew would fail o Stock Analyst paid on how much business they brought in o Hypocrisy (Public Statements Vs Private Statements) o 2002, Four Major Banks settled the case for 1.4 Billion $ and promised to change their ways  Money Laundring o Citi Bank helped funnel 00 Million $ of Drug Money out of Mexico CEO Frankly Rains (Fannie Mae overstated income by 10 Billion Dollars)z UBS fined $ 780 Million for helping evade Taxes to wealthy Americans Citibank, JP Morgan, Merrill Lynch helped Enron conceal Fraud. Complex Financial Products called “Derivatives” (Financial Deregulation, Technological Advancement) Commodity Futures Trading Company tried to regulate Derivatives, Clinton’s Treasury Department had an immediate response SEC Chairman “Arthur Levitt” Larry Summers (Treasury Secretary) Congress passed “Commodity’s Future Modernization Act” Collateralized Debt Obligations (CDO) Investment Banks sell CDOs to Investors and pay Rating Agencies to evaluate the CDOs. Securitization Food Chain Early 2000’s huge increases in “Riskiest Loans” called “Subprime Loans” Many of “Subprime Loans” combined to form CDOs received AAA rating. Investment Banks Preferred “Subprime Loans” because they carried higher interest rates. This in turn led to a massive increase in predatory lending.

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it could bet against CDOs it didn’t own and get paid when the CDOs fail.P Morgan and Lehman Brothers. They don’t speak about o Market value of the security o Volatility of its price              . SEC conducted no major investigation/audits of the Investment Banks during the Bubble On April 28. Consequently Insurance claims become proportionately larger. 2004. Credit Ratings are just “opinions”. Henry Paulson. Raghuram Rajan (Chief Economist IMF) delivered a paper at the annual Jackson Whole Symposium. the federal reserve board brought Authority to regulate Mortgage Industry but FED Chairman “Alan Greenspan” refused to use it. home purchases and housing prices sky rocketed Countrywide Financial Corp (The largest subprime lender). But unlike regular insurance “Speculators” could also buy “Credit Default Swaps” from AIG in order to bet against CDOs they didn’t own Regular insurance (insure property only once) The derivatives universe essentially enables anybody to actually insure the same property. These CDOs were sold to customers as “Safe Investments”. The hedge funds “Tricadia and Magnetar” made billions betting against CDOs they had designed with Merrill Lynch. AIG didn’t have to put aside any money to cover potential losses Joseph Cassano made 315 million In 2005. “Credit Default Swap” was an insurance policy for investors owning CDOs. Credit Default Swaps were unregulated. J. annual 31 Million $s By Purchasing Credit Default Swaps from AIG. allowing banks to sharply increase their borrowings Investment Banks “Leverage Ratio” increased to as much as 33:1 meaning that a tiny 3% decrease in the value of their asset base would render them insolvent AIG was selling huge quantities of derivatives called “Credit Default Swaps”. CEO of Goldman Sachs lobbied SEC to relax limit on “Leverage Ratio”.PART 2: THE BUBBLE(2001-2007)!      Since any one could get mortgage. lent 97 Billion Dollars in Loans Lehman Brothers top underwrite of Subprime lending and its CEO (Richard Fuld took home 485 million) Ponzi Scheme “Home Ownership and Equity Protection” Act. most elite banking conference in the world “Has Financial Development made the World Riskier?” Hank Paulson’s compensation in 2005.

” J. chain-reaction style. a crash.o Suitability as an investment PART 3: THE CRISIS          Ben Bernanke became Chairman Federal Reserve Board. Foreclosures in the US reached 6 million by early 2010. magnifying and spreading losses. Morgan wrote in a research note published today. allowing banks to sharply increase their borrowings . General Motors and Chrysler are facing Bankruptcy and as US consumers cuts back on spending. The poorest pay the most.   Financial Crisis Points in Statements Debt-Equity Ratio Leverage acts like an accelerator. the top year for Sub Prime lending. Over 10 million migrant workers in China lose their job. this has played a leading role. And in most meltdowns. and the universal assumption was that leverage would have to come down. fueling a downward cycle and. Henry Paulson. “The financial crisis showed that financial leverage had become dangerously high. from one borrower to another. indebted speculators had to keep selling to pay back their loans. Chinese manufacturers see sales plummet. 2004. the stock-market bubble was inflated by unprecedented amounts of margin debt. “Why Central Banks should burst bubbles” – Nouriel Roubini “An unsavory slice of Subprime” – Allan Sloan Repeated warnings from IMF “Who is holding the Bag” “The Two Trillion Dollar Meltdown” – Charles Morris “Fredric Mishkin” – Federal Reserve Board Governor 700 Billion Dollar Bail out package By December 2008. On April 28. In 1929. CEO of Goldman Sachs lobbied SEC to relax limit on “Leverage Ratio”. When stocks fell. ultimately.P.

the quality of the CDO depends on the quality of the assets in the portfolio and most important on the correlation of different risk classes (tranches). In a global market for debt. The sub-prime problem has caused panic beyond the US because. Lehman Brothers. A perfectly valid idea pushed to extremes by greed on both sides and woefully poor timing.. who will charge a higher price for the extra risk involved. The companies that received SEC approval to use its haircut computation method continue to use that method.e.[7] Financial reports filed by those companies show an increase in their leverage ratios from 2004 through 2007 (and into 2008). subject to modifications that became effective January 1.Since 2008. instead of holding loans on their balance sheets. the credit swaps market is not.. contracts can be traded — or swapped — from investor to investor without anyone .[8] The 2004 rule change remains in effect. Merrill Lynch. 2010 Financial Instruments and Credit Crisis CDO CDOs that had become a notable feature of the financial landscape hit a rough spot for being at the center of the financial storm. but financial reports filed by the same companies before 2004 show higher reported leverage ratios for four of the five firms in years before 2004. As a result. many commentators on the financial crisis of 2007-2009 have identified the 2004 rule change as an important cause of the crisis on the basis it permitted certain large investment banks (i. More and more banks began churning out CDO's to enable them to lend more and more and the buyers demanded more CDOs as they saw this as a way of improving returns in a time of artificially low interest rates. and Morgan Stanley) to increase dramatically their leverage (i. financial institutions almost anywhere in the world could have taken on the risk of the loans in return for what seemed an attractive return. the ratio of their debt or assets to their equity). lending banks have been offloading them to investors. However. That is somewhat in contrast with the nature of the CDO that tries to create value by constructing a portfolio of well diversified assets and reduce risk through diversification. Bear Stearns. Credit Default Swaps Banks and insurance companies are regulated. Goldman Sachs.e. SUBPRIME These loans can be extremely profitable for the lender.

The instruments can be bought and sold from both ends — the insured and the insurer. Commercial banks are among the most active in this market.overseeing the trades to ensure the buyer has the resources to cover the losses if the security defaults. Investors flocked to the swaps in the belief that big corporations would seldom go bust in such flourishing economic times. making the swaps a low-risk way to collect premiums and earn extra cash. JP Morgan Chase. . Bank of America and Wachovia were ranked among the top four most active Credit default swaps were seen as easy money for banks when they were first launched more than a decade ago. Citibank. Reason? The economy was booming and corporate defaults were few back then.

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