Last year on PBS Frontline there was a 4 part documentary series called Money, Power and Wall Street which tells the inside story of the GFC.
As other media commentators have found out before a number of the contributing factors are well known
1/ Banking regulation was relaxed – notably the Glass Stegall Act which was repealed in the late 90’s – also expansion of newer types of trading outside the US regulators such as in London
2/ Banks then trade on their own account and have a conflict of interest with their customers
3/ Bank sector got out of control – the sector was many time larger than the productive industries due to new derivatives like CDO’s especially the lack of transparency for those markets.
4/ Banks got bailed out but nothing much has changed and while global losses are still being worked through most of the big banks have recovered and are continuing on with the same
Most importantly these bank traders were able to carry out all kinds of opaque deals without any significant financial regulation that mattered. In very simple terms Wall St bankers indulged their greed over several years and that caused the crisis.
The managers of those banks either didn’t understand what was happening or they were being paid massive bonuses and so turned a blind eye.
It is hugely ironic that that a profession whose job it was to manage risk got so distracted by the profits they were making that they completely missed the industry risk that they created.
When the tidal wave of toxic debt hit the lack of transparency meant that the government didn’t know what to do. First they bailed out Bear Stearns, then worrying about moral hazard they let Lehman Bros fail but then the flow on effect to AIG & Merrill Lynch would destabilise confidence in the US economy.
Henry Paulson misread the situation and that leads to the massive bail out of Wall St. The unprecedented $700b TARP act and the various political dramas had flow on effects around the world. Paulson had come from Goldman Sachs and had been closely involved in the business and should have had some insights from that experience but clearly did not.
Watch Money, Power and Wall Street: Part One on PBS. See more from FRONTLINE.
And here is episode 2.
Watch Money, Power and Wall Street: Part Two on PBS. See more from FRONTLINE.
In the middle of the crisis Obama gets elected but instead of going after the banks he appoints Tim Geithner and Larry Summers who can hit the ground running but have no solutions to the crisis. Instead they push through the massive TARP bailout. What wasn’t disclosed was besides the $700b of TARP funding how much other money was lent to the top banks and AIG to bail them out.
Incredibly AIG and the top 13 banks were not asked for any significant changes and this was a huge opportunity that was missed.
Watch Money, Power and Wall Street: Part Three on PBS. See more from FRONTLINE.
Part 4
Watch Money, Power and Wall Street: Part Four on PBS. See more from FRONTLINE.
Rolling forward to 2013. Obama is back in power and the same banks that were “too big to fail” have got bigger. There has been an attempt at regulation ( Dodd Franks) but Wall St invested more than $50m in lobby fees to disable that regulation and generally resist any form of change.
Meanwhile the trillions of downside are still working through housing markets in the US and the UK and Euro economies are still teetering on the edge of oblivion.
Did the US government learn anything for the GFC? On the facts you would have to say no. Obama had a chance to clean up when he hired Paul Volcker as Chair of the President’s Economic Recovery Advisory Board but that opportunity came to nothing and Volkner left.
On January 21, 2010, President Barack Obama proposed bank regulations which he dubbed “The Volcker Rule,” in reference to Volcker’s aggressive pursuit of these regulations. Volcker appeared with the president at the announcement. The proposed rules would prevent commercial banks from owning and investing in hedge funds and private equity, and limit the trading they do for their own accounts
Some of those rules made it in the Dodd Frank regulations but although the intent was good the overall view is that the new regulations are not as effective as they could have been.
