The Banking Crisis | Declassified

Hello, I’m Robin from Alltime Conspiracies In this episode we’ll look at the worst financial crisis to hit the world in over eighty years

We’ll examine how decisions made in the past led to the crash of 2008 – and how a culture of competitiveness and greed was allowed to grow in the heart of international finance This is The Banking Crisis Declassified The economic crash of 2008 was a financial disaster for everyone concerned, leading to significant unemployment, not just in America, but across the globe But the roots of the banking crisis can be traced back to the Great Depression in 1929 In 1933 Franklin Delano Roosevelt wanted to prevent a repeat of the Great Depression, which led to mass homelessness and unemployment rates of around 22%

So he signed the Glass-Steagall Act into law This effectively separated commercial, or high street, banks from large investment banks like Goldman Sachs or Lehman Brothers But in 1999 the Act was repealed The system of checks and balances that restrained investment banks from riskier opportunities had been removed Nobel Prize-winning economist Joseph Stiglitz and Senator Elizabeth Warren blame this de-regulation for the 2008 crisis

On the other hand, even President Barack Obama says the repeal of the Glass-Steagall Act didn’t cause the recession So what really happened? In 2001 America entered a slight recession Then the 9/11 attacks happened, massively damaging the US stock market

So the chairman of the US Federal Reserve, Alan Greenspan, reduced interest rates from 65% to 1% in an effort to boost market confidence This meant that the traditional method of investment, buying US treasury bonds, was less profitable

Instead, the lower interest rate made loans cheaper than ever Investment banks saw an opportunity to make billions by using cheap loans to invest in US real estate, which had increased in price by 10% year on year The scheme went like this

Homeowners needed mortgages to cover the high price of houses So they would secure one from a mortgage broker That broker would approach a local mortgage lender for the mortgage plus a commission The homeowners then take out a mortgage, buy the house and pay the loan back to the mortgage lender Everyone wins

An investment bank then buys the mortgage off the lender and combines it with thousands of other mortgages Now, every month the homeowners pay their mortgages directly to the bank The banks arranged all the mortgages they’d bought into three classifications based on how likely the person repaying the loan was to default on their mortgage There were Certain, or AAA loans; Okay, or BBB loans; and risky, or unclassified These classifications were then packaged into what is called collateralised debt obligations, or CDOs

Investors could buy shares in these CDOs At the time these were mostly safe as mortgage lenders preferred to sell to homeowners with stable incomes, who were less likely to default on their mortgage So investors, while the CDOs were safe, were making quite a lot of money Everyone was happy The problem came when investors and the banks wanted more and more of these CDOs

They demanded more than the regulated supply In response mortgage lenders reduced the requirements for a mortgage Now, people who were increasingly likely to default, could take out a mortgage These were called subprime mortgages These subprime mortgages and low interest rates continued to drive housing prices even higher

They also encouraged people to take out multiple mortgages But not all investors had confidence in the CDOs So they effectively took out insurance policies against the CDOs defaulting The banks then packaged these insurance policies into the CDOs, ready to be sold off again to investors, including other banks This is how the financial world became so entangled

If mortgage payers defaulted, the CDOs could fall, investors would claim their insurance and the banks would lose billions But as long as the credit ratings agencies kept giving out AAA and BBB ratings, the banks kept doing it The credit ratings agencies are paid by the banks, and the former senior president of Moody’s says the executive bosses “encouraged” analysts to give banks the ratings they wanted At first subprime mortgages seem like a good idea If someone defaults, the bank takes their empty house and sells it for a profit thanks to rising house prices

But as more and more people defaulted, more and more houses were being left empty and unsold Supply outstripped demand and house prices began to fall The house of cards began to tumble In mid 2007, inflation went up Countries like the UK and elsewhere increased interest rates to 5

5% This prompted a rise in mortgage rates, initiating a flood of defaults in repayments Then in August 2007, BNP Paribas froze its assets when it realised how dangerous CDOs were It was the first bank in the world to do so A month later, British bank Northern Rock realised it couldn’t sell enough mortgages to pay off its substantial debts

There was a run on the bank and it's no longer around Over the next year, global banks faced either bankruptcy, bailout or takeover as the real estate bubble burst Investment bank Bear Stearns was bought by JP Morgan Merrill Lynch was sold to Bank of America Lehman Brothers collapsed after losing $150 billion

Overall, CDOs are estimated to to have lost between $200 and $600 billion Meanwhile, countries around the world paid for the banks’ gambling In 2009 a 5 trillion dollar global stimulus package was agreed Economies throughout the Western world slowed to a crawl The U

S economy lost an estimated 648 billion dollars, as well as 55 million jobs The government diverted 373 billion dollars just to relieve both the financial sector and industries that suffered knock-on effects

Taxpayers bailed out mortgage lenders Fannie Mae and Freddie Mac, as well as AIG All three were considered too big to fail In 2010, the US passed the Dodd-Frank Wall Street Reform and Consumer Protection Act

This increased oversight and transparency in financial trading However, Gretchen Morgenson of The New York Times says this didn't go far enough She said “the nation’s financial industry will still be dominated by a handful of institutions that are too large (and) too politically powerful to be allowed to go bankrupt” The Financial Times called for the introduction of a Europe-wide act similar to “Glass-Steagall”, but it hasn't happened Simply put, the problem wasn't solved Governments and banks are now massively in debt because of the money they borrowed to save the system But currencies and the mortgage market are still weak

And in Europe, the first domino may be about to fall that will trigger an even worse recession But that's for another video All this has been merely prologue

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