The Warning: Video
Alan Greenspan, “The Wizard”, was awarded the Presidential Medal of Freedom in 2005 for his work as Fed Chairman
– worked in the government since the Ford administration
– his philosophy was to have the government stay out of the finance industries way
o free market, pro-business, lack of regulation
Robert Rubin was appointed by Bill Clinton as Treasury Secretary
– worked with Greenspan and both agreed that the less regulation, the better
– worked over the boom period of the 90’s
– Larry Summers also worked as the U.S. Treasury Department Official
The Commodities and Futures Trading Commission (CFTC) viewed the boom skeptically
– regulated agriculture futures and derivatives
o swaps, basically bets between companies and banks laying off risk. Insurance policies that various players on Wall Street enter into to prevent unforeseen calamaties
– Brooksley Born became President of the CFTC in 1996
o Believer in government regulation
o Disagreed with Greenspan on whether or not fraud should be enforced
Born discovered a whole market of “over the counter derivatives” that were being traded without regulation
– market had no transparency and plenty of room for fraud
o there was no record keeping and the government had no way of knowing how many contracts were out there
– in 1993, Bankers Trust, had sold derivatives to Proctor and Gamble
o Bankers Trust took advantage of P&G because they did not understand the complexity of derivatives
Bankers were lobbying Greenspan, Summers and Rubin to prevent Born from regulating derivatives
– this made Born more interested in the issue
– the SEC Chairman also was lobbied to dissuade Born from introducing the bill to regulate derivatives
– Capitol Hill grilled Born on her decision in the summer of 1998
o Senators stated that there was no problem and the bill would risk the thriving financial market
o Six weeks later, a Hedge fund (Long Term Capital Management, LTCM) had collapsed due to what Born had worried about
Many banks were invested with LTCM and thought they were all investing by themselves due to the lack of regulation
After four days, the Fed acted
– 14 Wall Street banks got together and bought the fund to prevent it from collapsing
– Congress was told by Greenspan that this was an anomaly and it should not introduce regulations of derivatives
Born resigned after her agency was gutted
By 2007, the derivatives market had exploded to $595 trillion and it was heavily invested in real estate
The market collapse of 2008 was because of this
-Rubin joined top management at Citi Group, which received over $100 billion of taxpayer money
– Larry Summers became Barack Obama’s chief financial officer
The CFTC still does not have the ability to regulate derivatives
Greenspan retired and realized that de-regulation was a flawed philosophy after the 2008 collapse
Summers also now supports derivative regulation but the financial lobby is still against the regulations
Wall Street- Part 1
In the Fall of 2011, Occupy Wall Street was formed and spread to cities across the world and called for radical changes to banking
Finance managers are noticing that the financial industry is becoming too complex for basically anyone to understand
In June 1994, a group of bankers from JP Morgan came together to brainstorm ways to manage risk
– they discussed ways to enable financial institutions to pass risk between them
o to separate the risk of a loan going bad to the loan itself
credit default swaps: a kind of derivative that ensures a loan against default
o farmers used derivatives to protect themselves against crop prices
also used in the commodities market
Exxon was the first credit default swap with JP Morgan
Swaps allowed companies and governments to shed risk that they did not want to take, and therefore take additional risks
In 1998, JP Morgan ramped up their operation and began writing up swaps for bundles of debt instead of single companies
– they then began selling derivatives on any and all portfolios whether the bank owned them or not (synthetic collateralized debt obligations (CDO’s)
– risk could not easily be traded and fueled a worldwide credit boom
– the market was unregulated and out of view
Risk however cannot be removed completely. It can only be moved from one party to another party.
The banks lobbied hard against banking legislation
– Legislation was led by Brooksley Born
Citi Corp persuaded lawmakers that Glass-Steagall should be repealed under Clinton administration
– was a depression era set of regulations
– banking grew and derivatives thrived in the shadows
– Credit default swaps could be introduced to new markets
o Mortgage related credit risk
o High rating and a high yield
Places with high levels of population growth attracted bankers
– sub-prime lending is giving to people with low credit
– You can set up a security fund of sub-prime mortgages which are packaged together to create a higher yield
– A wave of lending abuse occurred where lenders gave money to people that they knew had no way of paying back the moneyA core group of banks in Germany were buying basically any and all sub-prime loan
By the end of 2005, the total outstanding value of credit default swaps was in the trillions and doubling every year
– JP Morgan understood what was going on in terms of risk; some other banks and regulators did not
Housing prices started to drop in 2006
– Goldman Sachs took advantage of the declining market
o They bet against their own clients
When the clients lost money, their clients gained
A core group of banks in Germany were buying basically any and all sub-prime loan
– In July 2007, a German bank was the first one to fail
AIG was on the hook for hundreds of billions of credit default swaps
– they had no way of paying this money back
Cities around the United States saw a growing inventory of empty houses
– the house next door became vacant and it was impossible to know who the owner was
o ownership was shared amongst a group of investors and could be someone anywhere in the world
o multiple investors own pieces of the house and nothing can be done
RE: The 2008 Financial Crisis
I. Leadership and Decision-Making Issues
What are the issues of leadership? How effective where top-level leaders in making decisions? Why or why not? How did top-level decision-makers evaluate information before and during the crisis? What opportunities were missed? How did individuals at the management and tactical levels make decisions? What consequences were evident as a result of decision behavior of top-level officials and other actors involved?
II. Ethical Dilemmas Faced by Decision Makers
What ethical or moral dilemmas did decision maker’s at all level face as a result of the crisis? Give examples.
What were the implications of these decisions on the fate of individuals, communities and perhaps the global community?
III. Pre-Existing Issues that Exacerbated the Crisis
What pre-existing issues within the political-administrative environment existed that contributed or made situations during the crisis worse? Why weren’t these issues addressed? Were policy-makers able to overcome these pre-existing challenges to resolve or contain the crisis?
IV. Lessons Learned
Each and every crisis offers a vast reservoir of experiences and lessons for future crisis planning and training.
What are the political and organizational lessons that can be learned from this crisis? How are these lessons to be translated into revised organizational practices, policies, and laws?