What caused the global financial crisis of 2008 In September of 2008 the bankruptcy of Lehman Brothers and the collapse of AIG the worlds largest insurance company It also doubled the national debt Part 1 How We Got Here 1981 President Ronald Reagan appointed Donald Regan CEO of Merrill Lynch as Treasury Secretary Reagan administration started a 30 year period of financial deregulation 1982 Regan Administration deregulated savings and loans companies allowing them to make risky investments with their depositor s money By the end of 1980 Hundreds of savings and loans companies had failed This crisis cost tax payers 124 billion cost many people their life savings Charles Keating Thousands of savings and loans executives went to jail for looting their companies Most notorious being Charles Keating 1985 When federal regulators began investigating him he paid Alan Greenspan 40 000 to come to his defense Keating went to prison Alan Greenspan Reagan appointed Greenspan Chairman of the Federal Reserve Greenspan was later reappointed by Presidents Clinton and G W Bush While under Clinton administration Greenspan continued deregulation with the help of Robert Ruben Former CEO of Goldman Sachs and Treasury Secretary and Larry Summers Economics professor at Harvard By late 1990 s Financial sector had consolidated into a few huge banks each so large that their failure could threaten the whole system The Clinton administration only helped the banks grow larger 1998 Citi Corp and Travelers merged Formed Citi Group the largest financial services company in the world Violated the Glass Steagall Act Glass Steagall Act Passed after the Great Depression Prevented banks with consumer deposits from engaging in risky investment banking activities 1999 Congress Passed Gramm Leach Bliley Act Gramm Leach Bliley Act also known as the Citi Group Relief Act Overturned Glass Steagall Act and cleared the way for future mergers End of 1990 s the investment banks fueled a massive bubble in internet stocks Followed by a crash in 2001 Caused 5 trillion in investment losses Elliot Spitzer New York Attorney General Launched investigation after 2001 collapse Found that investment banks had promoted internet companies that they knew would fail Ten investment banks settled the case launched by Elliot Spitzer for a December 2002 total of 1 4 billion Citigroup 400 million Goldman Sachs 110 million UBS 80 million Morgan Stanley 125 million Lehman Brothers 80 million Merrill Lynch 200 million Bear Stearns 80 million Credit Suisse 200 million Deutsche Bank 80 million JP Morgan 80 million Various crimes committed by large banks JP Morgan bribed government officials Riggs Bank laundered money for Chilean dictator Augusto Pinochet Credit Suisse laundered money for Iran in violation of US sanctions fined 536 million CitiBank helped funnel 100 million of drug money out of Mexico Freddie Mac accounting fraud fined 125 million Fannie Mae accounting fraud fined 400 million UBS helped wealthy Americans evade taxes fined 780 million Refused to corporate with the government CitiBank JP Morgan and Merrill Lynch helped Enron conceal fraud fined 385 million Did not have to admit wrongdoing 1990 s Deregulation and advancements in technology lead to an explosion of complex financial products called derivatives Made market unstable Using derivatives bankers could gamble on virtually anything By late 1990 s Derivatives were a 50 trillion unregulated market 1998 Brooksley Bourne tried to regulate derivatives Brooksley Bourne was appointed by Clinton to chair the Commodity Future Trading Commision Which oversaw derivatives market May 1998 CFTC issued proposal to regulate derivatives Greenspan Ruben and Arthur Levin issued a joint statement in response condemning Bourne and requesting that derivatives remain unregulated December 2000 Congress passed the Commodity Future Modernization Act Banned regulation of derivatives Use of derivatives exploded after act was passed Investments banks began to bundle things such as credit card debt student loans home mortgages etc into collateralized debt obligation CDO and sells them to investors Between 2000 2003 the number of mortgage loans made each year nearly quadrupled Early 2000 huge increase in subprime loans riskiest loans Investment banks preferred subprime loans because they carried higher interest rates Lead to massive increase in predatory lending Part 2 The Bubble 2001 2007 Increase in lending let to the biggest financial bubble in history Anyone could get a mortgage which led to an influx in real estate Housing bubble Countrywide Finance was the largest subprime lender Issued over 97 billion worth of loans Made over 11 billion in profit as a result Annual cash bonuses on Wall Street spiked Lehman Brothers was one of the top underwriters of subprime loans CEO Richard Fuld took home 485 million Greenspan refused to regulate subprime loans Securities and Excahnge Commission SEC conducted no major investigation of the investment banks during the bubble Leverage Ratio the ratio of the banks own money compared to borrowed 2004 Henry Paulson CEO of Goldman Sachs helped lobby the SEC to relax limits on leverage allowing banks to increase their borrowing April 28 2004 SEC met to consider lifting leverage limits on the investment money banks Banks ended up leveraging up to the level of 33 1 AIG was selling huge quantities of derivatives called credit default swaps Credit Default Swaps worked as an insurance policy for investors who owned CDOs Speculators could also buy Credit Default Swaps from AIG in order to bet against CDOs they didn t own Credit Default Swaps were unregulated so AIG didn t have to put any money down to cover losses so instead AIG paid employees huge cash bonuses AIG issued over 500 billion of Credit Default Swaps during bubble Street Joseph Cassano head of AIGFP made 315 million 2007 AIG s auditors raised warning Joseph St Denis him from investigating AIGFP s accounting resigned in protest after Cassano repeatedly blocked 2006 Henry Paulson CEO of Goldman Sachs was highest paid CEO on Wall 2006 G W Bush appointed Paulson as Secretary of the Treasury Paulson had to sell his 485 million stock in Goldman Sachs but thanks to a law passed by the first President Bush he didn t have to pay taxes on it 2006 Goldman Sachs began betting against CDO s through AIG 2007 Goldman began selling CDOs specifically designed so that the more money their costumers lost the more they made 2010 Goldman