UW-Madison ECON 102 - The Inside Job (4 pages)

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The Inside Job

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The Inside Job


The Inside Job Movie

Lecture number:
Lecture Note
University of Wisconsin, Madison
Econ 102 - Principles of Macroeconomics
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Econ 102 1st Edition Lecture 21 Outline of Last Lecture I General Info I The Great Recession II 14 4 Interest Rates and How they Change Investment Output GDP III 14 5 Monetary Policy Challenges for the Fed IV Film Glossary Outline of Current Lecture I The Inside Job Current Lecture I The Inside Job a Using derivatives i 50 trillion unregulated market ii Tried to regulate iii Larry Summers b Securitization Food Chain i the people who make the loan are no longer at risk of the person not paying ii Collateralized Debt Obligations CDO s 1 popular with retirement because of AAA rating best iii Rating Agencies paid to rate c Investment Banks These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute i banker makes more money when giving out supreme loans poor because of the high interest rates ii resulted in the biggest financial bubble in history 1 huge increase in housing prices a 1970 s and 1980 s small increases b effectively doubled in 2006 2007 2 led to hundreds of billions of dollars of profits a wasn t real income money created by the system b basically a global Ponzi Scheme iii Investment Bank Leverage 1 33 1 2 scary hight 3 Credit Default Swaps a unregulated i didn t have to keep specific amounts on reserve b worked like an insurance policy c paid quarterly premium d if goes bad would be paid to make up for loss i HOWEVER allowed many people to insure the same CDO ii House example 1 If 20 people are paying insurance on one house and it burns down the number of people with losses is huge big problem iv Has financial development made the work riskier Rajan 1 greater incentives to take risks that could destroy firms or the entire financial system 2 Make an extra 2 10 million a year by putting your institution at risk when you re not responsible for losses a Most took the bet b Lehman Brothers i CEO Richard Fuld ii 6 jets and a helicopter iii own elevator to bring him to his floor iv type A personalities v Psychological Study 1 when motivated by money the same part of the brain is stimulated as cocaine 2 all the largest financial firms had upper management in drug use prostitution etc v Goldman Sachs 1 Henry Paulson a highest paid CEO on Wall Street b Took job as Secretary of Treasury 2 bought 22 billion dollars of credit default swaps a insured themselves against loss of their customers b the more money their customers lost the more money they made c to court i duty to act in the best interest of the client ii doing the opposite of that selling securities to customers that the firm thinks is crap 1 then are determined to bet against it 2 not disclosing it to the person they are selling it to vi Moody s S P and Fitch 1 made millions billions on these ratings 2 the more AAA ratings they gave the more money they got 3 Justifying them as opinions

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