The market crisis of 2008 is sometimes called "the worst financial crisis since the Great Depression of the 1930s" (Hilsenrath Jon, Serena Ng, and Damian Paletta). When this financial crisis was made public, it would also have meant the end of the United States banking system and a few financial institutions. It could have resulted in the collapse of many large well know financial institutions such as Morgan Stanley, Bear Stearns, and A.I.G. just to name a few. However, before that could have happened, the United States government decided to bailout these and many other financial institutions. However, the market that suffered the most was the housing market that left many people with eviction and foreclosure notices. In his book "The Big Short: Inside the Doomsday Machine", Michael Lewis talks about the behind scenes of scenes of what could have led to the market crisis of 2008. Also in his book he talked about how many obscure dealings with the housing market could have created the housing market bubble.
In "The Big Short: Inside the Doomsday Machine" by Michael Lewis, as I mention, he create a narrative to explain a bit of the behind the scenes of what might have led to the 2008 financial crises led by the subprime home loans coming from the housing market. In the book we read about different perspective on what was happening in Wall Street and in each part of the financial activity. Steve Eisman grew up in New York City, and "graduated from the University of Pennsylvania magna cum laude, and then with honors from Harvard Law School" (Lewis, Michael). When he was creating his career as a corporate lawyer, he noted that he did not enjoyed and often wondered why he decided to become a lawyer. Since the early 1960's Eisman's parents Lillian and Elliot Eisman worked as financial advisors to individual investors in behalf of Oppenheimer. When he was looking for a career change, his parents hired him as an equity analyst for Oppenheimer. Subsequently, his career started to take off and soon he "quickly established himself as one of the few analysts at Oppenheimer whose opinions might stir the market" (Lewis, Michael). In the book, Mr. Lewis mentions Meredith Whitney as the one that predicted the fall of Citigroup. After Meredith Whitney predicted that the Citigroup had mismanaged their affairs on October 31, 2007, "Meredith Whitney caused the market in financial stocks to crash. By the end of the trading day, a woman whom basically no one had ever heard of, and who could have been dismissed as a nobody, had shaved 8 percent off the shares of Citigroup and $390 billion off the value of the U.S. stock market. Four days later, Citigroup CEO Chuck Prince resigned. Two weeks later, Citigroup slashed its dividend" (Lewis, Michael). After Mrs. Whitney predicted the fall of Citigroup and from the event that happen a few days later many started to listen to her. Many started to look what was Wall Street firms really doing, taking a "hard look at these crappy assets they're holding with borrowed money, and imagine what they'd fetch in a fire sale. The vast assemblages of highly paid people inside them were worth, in her view, nothing" (Lewis, Michael).
Vincent Daniel graduated from SUNYBinghamton. He worked for Arthur Andersen, whom later was the accounting firm that destroyed and created the Enron Scandal. Soon after Vincent Daniel started to work for an audit company that was assign to audit Salomon Brothers. When he started to audit the Salomon Brothers, he could not understand how the financial rules where being suspended in thin air and many transactions on the books did not make sense. Not even his managers understood how Salomon Brothers managed their financial records. He could not decipher the muddiness of the investment bank's books that he left the audit company and went to work for Oppenheimer. Michael Burry was a stock market investor. Burry started to wonder why speculators did not shorted the subprime mortgage bonds, soon he noticed that it was not possible without taking huge risks. However, one day he discovered that maybe shorting subprime mortgage bonds was possible if it was combined with credit default swaps. Soon after making this starling discovery he noticed that "lot of smart people eventually were going to want to make side bets on subprime mortgage bonds. And the only way to do it would be to buy a credit default swap. The credit default swap would solve the single biggest problem with Mike Burry's big idea: timing" (Lewis, Michael).
When many firms in Wall Street started to sell and trade subprime mortgage bonds and also attempting to short them in order to make money, many knew few stocks and bonds were defective. Soon after many investors, financial institutions, and speculators, etc. started to lose control on the financial market. The subprime mortgage market started to "resembled a giant helium balloon, bound to earth by a dozen or so big Wall Street firms. Each firm held its rope; one by one, they realized that no matter how strongly they pulled, the balloon would eventually lift them off their feet" (Lewis, Michael).
One company that probably realized that eventually this "giant helium balloon: of the subprime mortgage market was about to exploded, it was only matter of knowing when. Goldman Sachs had let go of the rope", but "turned and made a big bet against the subprime market-further accelerating the balloon's fatal ascent"(Lewis, Michael). When many companies where oblivious to what was happening around them, "Goldman Sachs did not leave the house before it began to burn; it was merely the first to dash through the exit-and then it closed the door behind it" (Lewis, Michael). Since many credit rating agencies had failed to accurately rate the risk involved with each subprime mortgage-related asset, and the governments did not address the regulation of the 21st-century financial markets. Also the government had failed to notice what was actually happening when Bear Stearns had to get help from "JP Morgan Chase and the federal government" to "bail out Bear Stearns when the financial giant neared collapse" (History of U.S. Gov't Bailouts).
One woman who could have predicted the market crash was Brooksley Born, she "warned that unregulated financial markets were getting out of hand. Now many in Washington wish they'd listened" (Schmitt, Richard B). Brooksley Born was born and raised in San Francisco, California. She graduated from Stanford University and Stanford Law School. In the 1990's, Brooksley Born was the chair for Commodity Futures Trading Commission [CFTC] and she advocated regulating the financial market. When she worked for the CFTC she noticed that there was no regulation on the financial market, even more surprising "no federal or state public official had any idea what was going on in those markets, so enormous leverage was permitted, enormous borrowing. There was also little or no capital being put up as collateral for the transactions" (Interviews - Brooksley Born | The Warning | FRONTLINE | PBS). When Born announced that the government should regulate the over-the counter derivatives because it was becoming a dangerous marker. In her "attempts to regulate derivatives ran into fierce resistance from then-Fed Chairman Alan Greenspan, then-Treasury Secretary Robert Rubin and then-Deputy Treasury Secretary Larry Summers, who prevailed upon Congress to stop Born and limit future regulation"(Johnson, Whitney). Since many did not listen to her warning about the market growing at an uncontrolled rapid pace with the growth of credit-default swaps which later was a huge piece of the 2008 market crash. If many government officials "had they listened to her, I think this catastrophe could have been averted" (Leising, Matthew, and Roger Runningen). Now that the 2008 market has crashed and many were left wondering why no one listen to Brooksley Born. Walt Lukken the acting CFTC Chairman in October 2008 "called for more transparency and supervision of large over-the-counter markets such as the one for credit swaps" (Leising, Matthew, and Roger Runningen). Everyone that once contested the regulation of the financial market are calling for a more regulated financial market by the government.
One person that opposed Brooksley Born in the 1990's when she was head of the CFTC was Robert Rubin. Robert Rubin was an executive at Goldman Sachs before being the Secretary of Treasury under the Bill Clinton administration. Also he was the chairman of the executive committee of Citigroup's board before joining the Obama administration. For 26 years, Robert Rubin was an executive for Goldman Sachs and then became the Secretary of Treasury under the Bill Clinton administration. "His first major undertaking was during the Mexican bailout of 1995. ... Rubin drew criticism in Congress for using a Treasury Department account under his personal control to distribute $20 billion to bail out Mexican bonds, of which Goldman was a key holder"(Sauer, Fred N). Goldman Sachs "in April 2010, was accused of securities fraud in a civil suit filed by the Securities and Exchange Commission that claimed the bank created and sold a mortgage investment that was secretly devised to fail"(Goldman Sachs Group Inc.). Also while Robert Rubin was the Secretary of Treasury under the Bill Clinton administration, he helped to repeal the Glass-Steagall Act. The Glass-Steagall Act was put in place after the 1930's market crash; it created restrictions on bank and securities-firm affiliations. This act "allowed the risk-taking traders at Citicorp to jeopardize nearly $1 trillion worth of customer deposits" (Sauer, Fred N). Therefore making Citigroup vulnerable and jeopardizing approximately $1 trillion dollars, which year's later lead to "Citigroup [receiving] a $25 billion investment through the TARP in October and another $20 billion in November [2008]" (History of U.S. Gov't Bailouts). Two key aspects of his career that has gather great interest is that the worked for Goldman Sachs and Citigroup, those same financial institutions that would later be either at the center of scandals accusing one of securities fraud and the other of being bailed out by the government, respectively.
One person who also coincided with working with Goldman Sachs and is connected to the market crash is Henry Paulson. Henry Paulson graduated from Harvard Business School with a master's program. Soon after graduating, he "entered the Nixon administration, working first as staff assistant to the assistant Secretary of Defense" (Eley, Tom). Soon after the Nixon administration was involved in the Watergate Scandal where they were accused of espionage, blackmail, and revenge toward the opposing party. Subsequently, after that moment Paulson used his connections and went to work for Goldman Sachs. Through 1974 to 1982, Paulson worked hard and was able to ascend to become one of Goldman Sachs' chief executive. During the Bush administration in 2006 through 2009, he was the Secretary of Treasury. Since the moment he was appointment to Secretary of Treasury, "Paulson has overseen the destruction of three of Goldman Sachs' rivals" (Eley, Tom). Paulson had facilitated the "fire sale of Bear Stearns to JPMorgan Chase…. he allowed Lehman Brothers to collapse, while simultaneously organizing the absorption of Merrill Lynch by Bank of America"(Eley, Tom). These actions by Paulson had made it possible for Goldman Sachs and Morgan Stanley to become the only major investment banks, thus engendering great profits for both institutions.
If Congress had listen to Brooskley Born probably nothing would had happen. Maybe if the presidential administration, in this case Bill Clinton and George W. Bush, had done a bit of background check on the gentleman they were appointing to the position of Secretary of Treasury. Maybe they could have seen Goldman Sachs profits and market powers increase due to outside help by Henry Paulson and Robert Rubin. After reading Michael Lewis "The Big Short: Inside the Doomsday Machine" we could argue that "Goldman used two methods to hide the mess they were selling. First, they bundled hundreds of different mortgages into instruments called Collateralized Debt Obligations. Then they sold investors on the idea that, because a bunch of those mortgages would turn out to be OK, there was no reason to worry so much about the shitty ones"(Brooksley Born Named to Financial Crisis Inquiry Commission). Maybe if the government had regulated the financial market, the prevention of credit rating agencies turning junk rated assets such as mortgages into an AAA rates could have prevented many from trading or buying high risk assets. Also another way Goldman Sachs was able to stay away from the market meltdown was by "[hedging] its own bets, Goldman got companies like AIG to provide insurance -- known as credit default swaps -- on the CDOs. The swaps were essentially a racetrack bet between AIG and Goldman: Goldman is betting the ex-cons will default, AIG is betting they won't" (Brooksley Born Named to Financial Crisis Inquiry Commission).
Now that the subprime mortgage market helium balloon has exploded and the smoke cleared it started to become clear how Goldman Sachs was able to leave before the mortgage market unravels. The words Meredith Whitney utter, "You're still not facing up to how badly you have mismanaged your business. You're still not acknowledging billions of dollars in losses on subprime mortgage bonds. The value of your securities is as illusory as the value of your people" (Lewis, Michael). This statement can be clearly applied to the 2008 market crash, because the government decided to bail out a few institutions with the exception of Lehman Brothers. Looking from the public view to the inside of the financial market it can be seen that this financial market did not understood what had happen or how everything go to the point it did. Many still are playing the blaming game and no one has stepped up and taken responsibility. We could say that when the "mortgage bonds created subprime home loans extended the logic invented to address the problem of early repayment to cope with the problem of no repayment at all" would have been the domino effect that lead to the helium balloon in the mortgage market (Lewis, Michael).
After many days reading "The Big Short: inside the Doomsday Machine" by Michael Lewis and reading about Brooklsey Born, Robert Rubin, Henry Paulson and finding the connection to Goldman Sachs. I was left wondering how it was possible for a subprime mortgage market helium balloon to be even created. Also why had there not been big arrest or even full blown investigation into every institution involved with the mortgage market crash. If the regular blue or white collar were to steal any amount of money it's known that they would be trial and soon be jailed. Then why is it that just because this big muddy mess happen in Wall Street, the same judicial laws do not apply? Furthermore, after reading about Brooksley Born attempt to regulate the financial market and the great opposition of Robert Rubin, at first I wondered why Robert Rubin would be against regulation when he is the Secretary of Treasury. I wondered, would not he want to protect the tax-payer's money from questionable practices? Then I understood after I learned he once was an executive at Goldman Sachs, thus making a link to why he would use $20 billion of the Treasury Department to bailout Mexican bonds. The link was that Goldman Sachs was a key holder of those bonds and if the Mexican bonds were to default Goldman Sachs was vulnerable to great losses; however since the bailout they were able to gain great profits. Also Robert Rubin helped repealed the Glass-Steagall Act; thus, allowing "the risk-taking traders at Citicorp to jeopardize nearly $1 trillion worth of customer deposits." (Sauer, Fred N). Maybe this was a trigger for the near-collapse of Citigroup Inc.
We will probably never know in concrete what really caused the mortgage market crash in 2008. However, I noticed that everything was being brewed since the Bush Administration and finally exploded in the Obama administration. Many investors, financial institutions, speculators, and even the public were not aware or for that matter ready for what happen in the financial market in 2008. Countries around the world lost confidence and trust in our financial institutions. The public became wary to realize much of our debt was hold by foreigners, what would have happen in all the people holding our debt had asked to for compensation all at once? Could have our economy survived? Hopefully our government has learned from their mistakes and is taking measurable action toward regulating the financial market.
