2008 Financial Crisis The Causes and Costs of the Worst Crisis Since the Great Depression

[Mac1958]

What Caused the 2008 Financial Crisis and Could It Happen Again?

I still don't understand the cause of the financial crisis. I try to wrap my head around it.

What does this mean?

The Gramm-Rudman Act was the real villain. It allowed banks to engage in trading profitable derivatives that they sold to investors. These mortgage-backed securities needed home loans as collateral. The derivatives created an insatiable demand for more and more mortgages.

I think if I could understand this paragraph I would better understand the financial crisis of 2008.

Have we recovered? Or how long will it be?

The Meltdown was too complicated to explain in a few paragraphs - and while some of the movies on it (The Big Short, Too Big to Fail, Inside Job) are very good, I'd imagine they'd be tough to follow without an investing and/or financial background. I've seen a few good videos on YouTube, but the same issue may apply.

Barron's has a piece on the 7 best books written on the Meltdown: The 7 Best Books About the Financial Crisis

I wouldn't use a political website as a source on the Meltdown. Most of the opinions will be partisan in nature, so they'll be very skewed. And there are a lot of people whose only "knowledge" of what happened came from political sources. Which means there's a lot of detail they simply don't know.

It's an interesting story and a cautionary tale, though. Good luck.
.

 

[NightFox]

Risk management is an oxymoron. There are always risks that cannot be calculated such as weather, seismic activity and political blunders.

That's what the investment bankers thought leading up to the crash of 2008 and 2001 and 1987 and 1929 and ..on and on.... it's never worked out well, just ask Dick Fuld.

The calculation of risk is done by participants in a healthy market as part of the price discovery process and risk gets priced appropriately, in an unhealthy (speculative bubble) market it's generally ignored and leads to mis-allocation of capital and loss. Risk management isn't limited to a single point in time (i.e. calculating all possible risk and variation beforehand), it's a process of observation, limiting exposure and disciplined response to variations in market conditions.

 

[g5000]

Part III

We have to talk about securitisation now.

You lend $200,000 to a borrower. Each month, that borrower sends you a payment, for the next 30 years. I'm going to refer to that monthly payment henceforth as a "revenue stream".

You then sell the paper on that loan to a group of investors.

Most likely, you sell the paper to a broker-dealer. The broker-dealer collects thousands and thousands and thousands of such paper.

The broker-dealer is now sitting on a massive revenue stream. A river that is deep and wide.

He can now sell pieces of that revenue stream to money managers (the guy managing your 401k) or to a college endowment fund, or a union, or the comptroller of a town or city.

Anywhere on the planet. The broker-dealer acquires investor cash from all over the planet, and he acquires borrowers from all over the planet.

For a fee.

The broker-dealer sits in the middle of this raging river of $70 trillion, directing the flow of cash from the investors to the borrowers.

For lots and lots and lots and lots of fees.

The broker-dealer bundles all those loans together into a "security". The investors are not buying specific loans. They are buying pieces of the total revenue stream.

Here's another key part of the crash. Pay attention.

I repeat: The investors are not buying specific loans. They are buying pieces of the total revenue stream. They do not know whence the money comes. They know the money is coming from loan payments, but that's about it.

Got it? This is very important.


Now a good and proper money manager is supposed to do "due diligence". They aren't just supposed to take the word of the broker-dealer that all those loans are solid. They are supposed to ask questions, and examine the quality of the loans.

But what REALLY happened is the broker-dealers took your money manager out to the World Series, and tossed him some hookers and blow. The broker-dealers became the money manager's best friend.

And you trust your best friend, right? Right? No need to ask too many questions. We're buddies!

Not only that, you have demanded your money manager increase your money by a lot. A lot, dammit! Or else!

And your money manager makes his living off the service fees he charges you for managing your money.

You want results. BIG results.

And that puts some pressure on your money manager to start taking some risks. Because only high risk investments get BIG results.

 

[NightFox]

Barron's has a piece on the 7 best books written on the Meltdown: The 7 Best Books About the Financial Crisis
.

Yep, IMHO good selection.... and the best news is, if you don't happen to pick up one or more of those, you can pick up one from the selection that's written after we do it all over again.

Because no matter how many times we do it, analyze the causes of how we did it and what we shouldn't have done, we're too stupid to learn from our mistakes so we keep doing it.

 

[Mac1958]

Barron's has a piece on the 7 best books written on the Meltdown: The 7 Best Books About the Financial Crisis
.

Yep, IMHO good selection.... and the best news is, if you don't happen to pick up one or more of those, you can pick up one from the selection that's written after we do it all over again.

Because no matter how many times we do it, analyze the causes of how we did it and what we shouldn't have done, we're too stupid to learn from our mistakes so we keep doing it.

Some improvements have been made, but yeah, not enough. Too Big To Fail remains, and that will pose a constant threat going forward.
.

 

[SaxxyBlues]

Part II

What if the only money on the entire planet which was available for lending was $200,000? Whoever held that teeny bit of money would be able to charge an almost infinite amount of interest.

The more money that is sloshing around looking for work to do, the easier it is to access that cash for borrowing. Therefore, the lower interest rates get. Since there are a lot of people who want to throw their money at borrowers, the borrowers have a universe of options, and thus are able to borrow at bargain basement rates.

So guess how much money was sloshing around looking for work at the dawn of the Millennium?



A lot.



And I mean...a lot.






We're talking seventy trillion dollars of loose cash.


$70,000,000,000,000



And all that money was looking for hands to thrust itself into. All that money was looking for borrowers.


Who had all that money, you may be wondering.

Retirees, Middle Eastern princes, teachers unions, labor unions, firefighter unions, municipal funds, college endowment funds, trust fund kids, Donald Trump, George Soros, the Rockefellers, and so forth and so on.

Not just here. All over the world. Ireland had cash. Iceland had cash. Germany had cash. Sweden, Switzerland, Italy...you get the idea.

And some of that seventy trillion was YOURS. Your 401k, your IRA, your stock options, your whole life insurance policy. And so forth.

You wanted your money to be put to work and made bigger, right? Right?

But you don't know how to do that. So you hired a money manager to figure it out for you.

A funny thing about money managers. As they started to manage more and more of other people's money, the smarter they thought they were.

But they weren't that smart. Not really. They were pretty stupid, actually. They were bought off by the brokers for the price of some hookers and blow and box seats at the World Series and shit.

No, really. I am not kidding.

These guys took your money and gave it to some greedy brokers who swore they had the world's safest investments.

Because even a tiny slice of $70,000,000,000,000 in fees is still a shit ton of money.

The brokers were making a killing off fees moving all that sloshing cash around and putting it to work. That's all they cared about.

So the ideal job would be a mortgage broker?

 

[william the wie]

Part II

What if the only money on the entire planet which was available for lending was $200,000? Whoever held that teeny bit of money would be able to charge an almost infinite amount of interest.

The more money that is sloshing around looking for work to do, the easier it is to access that cash for borrowing. Therefore, the lower interest rates get. Since there are a lot of people who want to throw their money at borrowers, the borrowers have a universe of options, and thus are able to borrow at bargain basement rates.

So guess how much money was sloshing around looking for work at the dawn of the Millennium?



A lot.



And I mean...a lot.






We're talking seventy trillion dollars of loose cash.


$70,000,000,000,000



And all that money was looking for hands to thrust itself into. All that money was looking for borrowers.


Who had all that money, you may be wondering.

Retirees, Middle Eastern princes, teachers unions, labor unions, firefighter unions, municipal funds, college endowment funds, trust fund kids, Donald Trump, George Soros, the Rockefellers, and so forth and so on.

Not just here. All over the world. Ireland had cash. Iceland had cash. Germany had cash. Sweden, Switzerland, Italy...you get the idea.

And some of that seventy trillion was YOURS. Your 401k, your IRA, your stock options, your whole life insurance policy. And so forth.

You wanted your money to be put to work and made bigger, right? Right?

But you don't know how to do that. So you hired a money manager to figure it out for you.

A funny thing about money managers. As they started to manage more and more of other people's money, the smarter they thought they were.

But they weren't that smart. Not really. They were pretty stupid, actually. They were bought off by the brokers for the price of some hookers and blow and box seats at the World Series and shit.

No, really. I am not kidding.

These guys took your money and gave it to some greedy brokers who swore they had the world's safest investments.

Because even a tiny slice of $70,000,000,000,000 in fees is still a shit ton of money.

The brokers were making a killing off fees moving all that sloshing cash around and putting it to work. That's all they cared about.

So the ideal job would be a mortgage broker?

That depends on how good UE is in your state.

 

[g5000]

Part IV

The borrowers: Homebuyers, corporations, car buyers, college students, credit card users, governments (local, state, federal, countries), Donald Trump, etc.

The lenders/investors: Saudi princes, the Rockefellers, college endowment funds, banks, unions, governments (local, state, federal, countries), Donald Trump, etc.

The broker-dealers: Goldman Sachs, Lehman Brothers, Merrill Lynch, Bear Stearns, JP Morgan, Morgan Stanley, Wellington Management, PGIM Limited, N M Rothschild & Sons, LANDESBANK, etc.


Mortgages can be and are securitized. Corporate loans can be and are securitized. College loans can be and are securitized.

Just about any revenue stream can be securitized.

Hell, you can even securitize a hooker's future income. Seriously! It would be illegal here, but it could be done. I giggle whenever I think about it.

Anything which can be securitized can be sold to investors.

A security made up of mortgages is called a "mortgage backed security". MBS. (Not to be confused with Mohammed bin Salman).

MBS revolutionized mortgage lending. It opened up the market to millions and millions and millions of people around the world who otherwise would never have been able to own a home.

And it worked pretty well for a very long time.

Every once in a while, someone would fuck things up out of greed, and the markets would crash.

But we never learned, and we didn't send the biggest crooks to jail. And this emboldened succeeding generations to even greater fraud.

 

[g5000]

Part II

What if the only money on the entire planet which was available for lending was $200,000? Whoever held that teeny bit of money would be able to charge an almost infinite amount of interest.

The more money that is sloshing around looking for work to do, the easier it is to access that cash for borrowing. Therefore, the lower interest rates get. Since there are a lot of people who want to throw their money at borrowers, the borrowers have a universe of options, and thus are able to borrow at bargain basement rates.

So guess how much money was sloshing around looking for work at the dawn of the Millennium?



A lot.



And I mean...a lot.






We're talking seventy trillion dollars of loose cash.


$70,000,000,000,000



And all that money was looking for hands to thrust itself into. All that money was looking for borrowers.


Who had all that money, you may be wondering.

Retirees, Middle Eastern princes, teachers unions, labor unions, firefighter unions, municipal funds, college endowment funds, trust fund kids, Donald Trump, George Soros, the Rockefellers, and so forth and so on.

Not just here. All over the world. Ireland had cash. Iceland had cash. Germany had cash. Sweden, Switzerland, Italy...you get the idea.

And some of that seventy trillion was YOURS. Your 401k, your IRA, your stock options, your whole life insurance policy. And so forth.

You wanted your money to be put to work and made bigger, right? Right?

But you don't know how to do that. So you hired a money manager to figure it out for you.

A funny thing about money managers. As they started to manage more and more of other people's money, the smarter they thought they were.

But they weren't that smart. Not really. They were pretty stupid, actually. They were bought off by the brokers for the price of some hookers and blow and box seats at the World Series and shit.

No, really. I am not kidding.

These guys took your money and gave it to some greedy brokers who swore they had the world's safest investments.

Because even a tiny slice of $70,000,000,000,000 in fees is still a shit ton of money.

The brokers were making a killing off fees moving all that sloshing cash around and putting it to work. That's all they cared about.

So the ideal job would be a mortgage broker?

You can make a nice big honest living as a mortgage broker, yes. With the satisfaction you are helping people get into homes, and you are helping investors grow their money.

What happened during the bubble, though, is that a lot of brokers got greedy and succumbed to temptation. And this led to a downward spiral where brokers who wanted to be honest started telling themselves, "Well if I don't do this, someone else will and they will get all the fees."

That's how corruption spreads, and spreads quickly.

 

[boedicca]

What Caused the 2008 Financial Crisis and Could It Happen Again?

I still don't understand the cause of the financial crisis. I try to wrap my head around it.

What does this mean?

The Gramm-Rudman Act was the real villain. It allowed banks to engage in trading profitable derivatives that they sold to investors. These mortgage-backed securities needed home loans as collateral. The derivatives created an insatiable demand for more and more mortgages.

I think if I could understand this paragraph I would better understand the financial crisis of 2008.

Have we recovered? Or how long will it be?

That's not what caused it. For a good analysis, I highly recommend:

https://www.amazon.com/Reckless-End...uption-Armageddon/dp/0805091203&tag=ff0d01-20

Many parties contributed to the meltdown, but a huge culprit was Fanny Mae and its "web of influence".

Book Review: Reckless Endangerment by Gretchen Morgenson and Joshua Rosner

 

[g5000]

What Caused the 2008 Financial Crisis and Could It Happen Again?

I still don't understand the cause of the financial crisis. I try to wrap my head around it.

What does this mean?

The Gramm-Rudman Act was the real villain. It allowed banks to engage in trading profitable derivatives that they sold to investors. These mortgage-backed securities needed home loans as collateral. The derivatives created an insatiable demand for more and more mortgages.

I think if I could understand this paragraph I would better understand the financial crisis of 2008.

Have we recovered? Or how long will it be?

The question is NOT "will it happen again?" but is rather "WHEN will it happen next?"

It will happen during a Trump presidency; period.

Hang on to your nutz.

I started a topic back in...2012, I think...called the Fed's Doomsday Bond Bubble Machine. I'll link to it later.

When the next crash comes, it won't be Trump's fault.

Well, actually it will be Trump's fault. But no more his fault than it will be everyone else's fault, too.

Keep reading my posts. I am going to explain how the last crash was EVERYONE's fault.


My biggest fear is that in the next crash, we won't be talking about banks that are Too Big To Fail. We'll be going under because the banks are now Too Big To Save.

 

[skews13]

What Caused the 2008 Financial Crisis and Could It Happen Again?

I still don't understand the cause of the financial crisis. I try to wrap my head around it.

What does this mean?

The Gramm-Rudman Act was the real villain. It allowed banks to engage in trading profitable derivatives that they sold to investors. These mortgage-backed securities needed home loans as collateral. The derivatives created an insatiable demand for more and more mortgages.

I think if I could understand this paragraph I would better understand the financial crisis of 2008.

Have we recovered? Or how long will it be?

That coupled with 2 wars that were being added to the credit card, 2 trillion in tax cuts in another failed trickledown economy, with unlimited spending on borrowed money and voila, crash and burn.

Don’t look now, but the same thing is happening right now. Everything is just fine.

Until it’s not.

 

[caddo kid]

What Caused the 2008 Financial Crisis and Could It Happen Again?

I still don't understand the cause of the financial crisis. I try to wrap my head around it.

What does this mean?

The Gramm-Rudman Act was the real villain. It allowed banks to engage in trading profitable derivatives that they sold to investors. These mortgage-backed securities needed home loans as collateral. The derivatives created an insatiable demand for more and more mortgages.

I think if I could understand this paragraph I would better understand the financial crisis of 2008.

Have we recovered? Or how long will it be?

The question is NOT "will it happen again?" but is rather "WHEN will it happen next?"

It will happen during a Trump presidency; period.

Hang on to your nutz.

I started a topic back in...2012, I think...called the Fed's Doomsday Bond Bubble Machine. I'll link to it later.

When the next crash comes, it won't be Trump's fault.

Well, actually it will be Trump's fault. But no more his fault than it will be everyone else's fault, too.

Keep reading my posts. I am going to explain how the last crash was EVERYONE's fault.


My biggest fear is that in the next crash, we won't be talking about banks that are Too Big To Fail. We'll be going under because the banks are now Too Big To Save.

The next crash will be the last crash. Coming soon to a hood near you.

 

[g5000]

Part V

I'm going to talk about mortgages and corporate loans from here on. I am putting aside all the other revenue streams out of convenience. They played only a small part in the crash, and are not important.

Okay.


For decades, the biggest players in the MBS market were "Fannie and Freddie". These were Government Sponsored Entities (GSEs) established a long time ago. I think Freddie was established during the Great Depression, and Fannie came along in the 70s. I'm too busy to look it up right now.

Fannie is short for Fannie Mae. Freddie is short for Freddy Mac.

Basically, any security sold by the GSEs had the backing of the full faith and credit of the United States government. Even though they are private corporations, the GSEs had an implicit guarantee that their securities would never let you down. You would always get your investment back, and make a tidy profit to boot.

No. Matter. What.

Here's the thing the hacks don't tell you: The GSEs were supported by both major parties. Bigly. In fact, just about every big name in politics was on the board of the GSEs, or were paid consultants to the GSEs, or had some other fiduciary connection to the GSEs.

The GSEs ensured not only their survival, but their very dominance, by owning all of Washington.

After the crash, during the 2012 election cycle, Newt Gingrich tried to pretend he had always been an enemy of the GSEs. When you have time, read this post: Newt's a lying sack of shit.


Aaaaaanyhoo...the GSEs dominated the MBS market for decades.

And Wall Street was jealous of that.

Then one day, someone invented the CDO...

 

[g5000]

Part VI

It's going to get really complicated from here. This is usually where the hacks' eyes glaze over. But stick with me. I will keep it as simple as possible.

All right.

First, I will touch on the CRA. The Community Reinvestment Act. This was a law passed during the Carter Administration which required banks to make a certain percentage of their loans to minorities. That's because banks had, up to that time, practiced something called "redlining".

Redlining is the practice of not making loans to negroes who want to live where you don't want them to live. The banks would literally draw red lines on maps where white people did not want any negroes moving in. The banks coordinated to keep negroes in a tight geographical area.

They really screwed the pooch, and so the federal government stepped in with all kinds of equal opportunity laws, one of which was the CRA.

Somehow, the bigots have gotten it into their pointy heads that this 1970s law somehow suddenly caused a subprime bubble 30 years later!

When I am done, you will understand how they got this completely backwards, upside down, and just plain wrong.

But for now you need to know that not one single broker-dealer was subject to the CRA. The CRA had no jurisdiction over the broker-dealers.

I am not kidding. Not Lehman, not Bear Stearns, not Merril, not Goldman, not any of them.

So much for the CRA...


But before we dig deeper into that, I have to explain what a CDO is, and what the Commodities Futures Modernization Act (FDMA) is.

 

[The Sage of Main Street]

Derivatives must be understood first. This is insured gambling, The merest threat of its collapse brought the dogs to heel.
Notice that the food supply did not change, armies did not mobilize, invasion was not threatened. Yet, the world teetered on the brink of destruction; or so it was made to seem.
The brink was really of financial failure.

Barrels Rolling Down Easy Street

Pretty much ignore everything the presstitutes are paid to say caused it. One thing that leaves is the jump in jihadi Arab price-gouging to $140 a barrel. That suddenly made it impossible for the banksters to follow their apparently reasonable plan to divest themselves of their toxic holdings. Just like rapids running into an unforeseen waterfall, the brink was invisible because of Bush did nothing to slow down Islam's goal of world conquest. And it got an appeasing weakling elected.

 

[The Sage of Main Street]

2008 was mild compared to what is coming. Go ahead and blame it on Trump, though he'll only be a contributing factor and not be the cause. 18 years of the federal reserve pumping up Wall St with interest free money, inconceivably massive federal and consumer debt and no money in personal savings will be the cause.

"Boo!" Scares Bozos

We've had decades and decades of that scare story. It is nothing but a ragged Halloween mask.

 

[g5000]

Part VII

Sometime during the late 90s, I forget the exact year, some geniuses at JP Morgan invented the Collateralized Debt Obligation.

That's a mouthful, so we'll call it a CDO from here on.

The CDO is kind of like a MBS, but different.

With an MBS, if borrowers default, all the investors who own pieces of that MBS lose equally.

Not so with a CDO.

Let's stick with the revenue stream idea, and think of it as an actual river of water flowing from borrowers to investors.

As an investor, you can choose what size cup you would like to buy. You can then dip this cup in the river once a month as the borrowers make their payments.

But the price of the cups is inversely proportional to the size of the cup. The smaller the cup, the more expensive it is. But you get to dip your cup in the water first.

The bigger the cup, the cheaper it is, but you have to wait for everyone with smaller cups to dip theirs in the river first.

In more technical terms, those who buy the top "tranches" (slices) earn a smaller interest rate on their investment, while those on the lower tranches earn higher interest on their investment.

Broker-dealers liken a CDO to a pie or a tower, and so they talk slices (tranches). I prefer a stream with cups. Whatever.

The bottom slices are "equity tranches". Then you have senior tranches, and in some cases "super senior" tranches above that.

The bigger the cup you buy, the bigger the risk you are taking, in return for bigger returns.

And remember, folks, you were demanding your 401k money manager to bring you big returns. Which actually meant you were demanding your money manager take big risks.

So...yeah. You were at fault for this mess, too. Oh yes you were.

 

[sparky]

The Meltdown was too complicated to explain in a few paragraph

Because only high risk investments get BIG results.

But we never learned, and we didn't send the biggest crooks to jail. And this emboldened succeeding generations to even greater fraud.

My biggest fear is that in the next crash, we won't be talking about banks that are Too Big To Fail. We'll be going under because the banks are now Too Big To Save.

Glass–Steagall legislation - Wikipedia fits here

They knew the fractional banking could only support so much 'creation of valuation'

and that's really the simple man's take on our bubble economy (appologies g5000) ,

creating value out of thin air
~S~

 

[The Sage of Main Street]

Risk management is an oxymoron. There are always risks that cannot be calculated such as weather, seismic activity and political blunders.

Whoever Degrades Language Degrades Thought

That's not what oxymoron means. And the lazy Diploma Dumbos who gave it the meaning of "a contradiction in terms" are the same phonies who lecture us on economics.