That's what is happening with capitalism. I'm not the one to criticize that, as I would have acted like those in Wall Street if I were there, but my article in here is not about what I would have done, but to criticize what they had done, which wasn't good at all.
I think that someone which is not able to control their greed shouldn't be in this upper positions in the government or investment banks which a collapse in that banks could end up with a collapse in the financial system of the whole world and of all the economies participating in this globalized world.
There are some questions that at some point everyone are asking to themselves and do not find an answer on them. Which are, if the money hadn't been thrown to the bin, who did actually benefit from this crisis? Well, there are two possible and accurate answers to this questions, which I'm going to develop during this essay. The first one is that the individuals responsible for this crisis were the ones who actually got benefit of it, and the second answer would be that at some point, the benefits that actually had arose before the crisis were somehow not real.
Before Bush got into the power, the financial system was so concentrated than ever before he got into the power. They were five investment banks, two financial conglomerates, three insurance companies and three rating agencies. They were all unified by the securitization system, which allow them to actually put into circulation billions of dollars.
The banks were giving mortgages to individuals to buy the houses. This real state mortgages were grouped together with other mortgages, such as student mortgages, car ones and so on, and securitized and sold to investment banks, with the name of CDO, collateralized debt options. The rating agencies mostly valued that investments with AAA rating, the same rating that the government bonds had. The investment banks sold this CDOs to individual investors, and got a commission on selling them. The commercial banks also got a bonus by selling this CDOs to the investment bank, and with the money collected by selling them, they were able to give more loans, and to keep the commissions as benefits for the company and benefits from the CEOs and commercials from that banks.
In the old system, when a bank gave a loan, they expected the individual who was given the loan to repay it, and as that loan was mostly a long term loan, they checked very good the ability of that individual to pay it back. If that individual didn't payed the loan back, the bank had to assume the losses and re-sell the house, which was more illiquid than getting the loan payed back.
In the new system, banks didn't cared anymore about getting the payment of the loan back, as they sold this packages of loans to investment banks and got a fee out of it. So what it happened, is that banks started giving more sub-prime mortgages, which were mortgages that were not likely to be payed back, as they were securitized and sold, and some one else would have found the problem of the non payed back mortgage. The investment banks payed the rating agencies to put the rating on that securities, and after the subprime mortgages, they were all still giving a AAA rating or an A2 rating. If that investments were not given an AAA rating, it wouldn't had been so easy to sell them to other investors. The consequences was massive selling of this CDOs and a massive increase of the subprime mortgages. As the commercial banks were earning huge fees for selling this mortgages, and as investment banks were earning huge fees as well, they didn't had reasons to stop doing that. The prices of the houses start rising up up to 190% increasing in prices.
Goldman Sachs, was the one who was most into it. The reason behind the survive of it, was the buying of the Credit Default Swaps (CDS), of the AIG insurance company. While they were recommending that investments to his clients, they were betting to the failure of this investments with this CDS. They then realized that the amount of Credit Default Swaps that were holding, could even end up with the bankruptcy of AIG, so they started creating some new derivatives which were innovating financial instruments that were betting for the collapse of AIG. By doing so, they would cover themselves to the failure of the CDOs and the possible non paying back of the CDS.
The fact that that money that was pulled out from the system was not real money is the physical materials that were behind that. When the mortgages were given, they were packed as an investment which had a value, that value was subject to the summation of all coupons during the life of that CDO. But if the CDO is not payed back, its all wiped out and the value of that CDO is depreciated. While they could have a value of their assets (I'm just inventing the numbers in here) of 5B $ one day, they could have a value of their assets of just 10M $ the next day. That was the consequence of the collapse of Lehman Brothers and because Goldman Sachs covered itself with the CDS didn't collapse. The only ones who earned that huge amount of money were those ones who knew that was going to happen but that were to greedy to stop earning money in order to safe the system.
I think that this is the consequence of the human nature. Only a 1% of the population in that world would have been able to stop earning 435 M $ in a year, just as the CEO of Lehman Brothers did, in order to safe the world and prevent it to crash. But if we are not able to control that, someone else will have to do it.
When Obama got into the power, the financial sector in EEUU was more concentrated, and the banks remaining were bigger than ever before, Bank of America absorbed Merrill Lynch, Bearn Stearns was bought by JP Morgan Chase and AG Edwards was bought by Wachovia. Obama promised that he would put more regulation to the banks to prevent this to happen again, and that will change the people that was into the power and was responsible for that crash. Everyone was very happy with that, but when the moment of the regulation began, the new regulations were weak, as that is a Wall Street government. The ones responsible for that financial crisis got back into the power, Timothy Geithner was named treasury secretary, Geithner was the president of the New York Reserve Fed before the crisis, and one of the key players on the decision to pay Goldman Sachs the 100% of the bets of the collapse of AIG and the CDS. The new president of the New York Fed Reserve is William C. Dudley, the former chief economists of Goldman Sachs, whose paper with Glenn Hubbard praised derivatives.
Only the ten - fifteen year period time will tells us what will be the performance of this economy. The history tells us that every ten or fifteen years there is a huge bubble that ends up with a crisis, and we will have to see what will be the next one. The person who is in charge of the performance of the country on that year will have in his hands the ability to stop that or to keep going with that. Its very strange that someone who is into the power is not able to see that things and to stop them. Something dirty is behind that and as citizens we should be able to know it. But greedy is greedy, and the individuals who grasps all, not always looses all, but makes some institutions which they are in the charge of them loosing all.
Marc Ramon Hernández
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