Speech Jack Humphries

In the late 2000’s Wallstreet stocks plummeted as some of America’s largest financial institutions went bankrupt. Pillars of the American and World economy like AIG, Lehman Brothers, and Goldman Sachs, revealed their financial debts. How did these  “To big to fail” banks go broke in what seemed like a matter of days though? How could such a detrimental meltdown be so unanticipated? The answers to these questions are simple and disturbing. It all started in the 1890’s when American Financial regulations, put in place post-depression, were lifted by the presidents of the Progressive era like Roosevelt, Taft, and Wilson. These regulations were put in place to keep businesses from growing too large and making financial decisions that carried excessive risks. In the Documentary Inside Job, the economy is compared to an oil tanker. In order to keep the oil tanker from capsizing from oil sloshing around, compartments keep the oil separated into fractions. These fractions minimize the sloshing and help the boat stay afloat. Financial regulations act as compartments by keeping everything separate enough so that no one company can capsize the economy. Then In the early 2000’s more regulations were lifted as Wall Street lobbied for more financial freedom. The final nail in our financial coffin was the emergence of modern day financial black magic such as the securitization food chain, and Credit default swaps. Under increased deregulation, and new modern banking techniques, titanic investment banks ran our economy into one hell of an iceberg, which is why more financial regulations are needed.

            The securitization food chain it is a term that describes how modern mortgages work. In the securitization food chain, your mortgage loan is pawned off to an investment bank such as Goldman Sachs. Once your loan is sold to the investment banks it gets bundled into a Collateralized debt obligation (or CDO) with other debts and loans. From there it gets rated by a rating agency and then sold to investors. In this food chain more interest means more money made for the investors, which makes high interest CDO’s more popular. But these profitable CDOs are also riskier since higher rates are assigned to the less financially sound. Then in the years leading up to the 2008 crisis, investment banks gave financial incentives to ratings agencies so that more than half of the risky CDOs received AAA ratings (Moody’s one of the largest rating agencies, tripled its profits from 2000 to 2008 primarily off of these incentives). When these toxic CDOs went under many vulnerable investors, such as retirement funds, went broke. On multiple occasions the rating agencies were forced to explain to congress why they had given junk bonds AAA status, and Every time they stated that their ratings were just opinions. If there had been tighter regulations on what is and isn’t a AAA CDO then the whole crisis could have been averted. Finally if tighter regulations had been put into place along the securitization food chain, less risky loans would have been made, those loans would have done less financial harm, and vulnerable investors would have lost less money.

            What can you insure? In the real world you can only insure things that you own, I can only insure my house so that when my house burns down only I get reimbursed. In the financial world everyone and anyone can take out an insurance policy on my house. This meant that toxic CDOs, doled out by Goldman Sachs and other investment banks, could be insured up to 10 or more times. When these doomed CDOs finally went under, insurance agencies like AIG found themselves having to pay back multitudes of what the original CDO was worth. These insurance policies are called Credit Default swaps, and In the December 2009 edition of the Wall street journal, Goldman Sachs was accused of fueling AIG loses by buying up over 22 billion dollars of these insurance policies. Every major investment bank is guilty offloading toxic assets with triple A ratings onto investors, and then taking out Credit default swaps on the CDOs they had just sold. Not once did the banks mention to their investors that they were betting against the products they were selling.  In April 2010 Goldman Sachs senior executives were forced to testify before congress. In their congressional hearing Senator Carl Levin repeatedly asked bank executives why they didn’t tell investors that they were betting against the CDOs they were selling. In particular, emails concerning Timber wolf securities were especially despicable. A Goldman Sachs sales team was quoted saying, “ Boy that Timber wolf was one shitty deal”, within weeks Timber wolf became Goldman Sachs “Top priority”. When asked about how he felt about his employees saying “god what a shitty deal” towards Goldman Sachs top priority, Executive Vice President of Goldman Sachs David Viniar said “ I think that’s very unfortunate to have on email”. No remorse was shown at the fact that the Goldman Sachs aggressively bet against its investors. If government regulation had been in place to force investment banks to disclose such conflicting interests to their investors, the toxic CDO’s might have never made it to market.

            In the end, Wall Street’s financial meltdown forced investors to pay the price. In the aftermath of the crisis, Wall Street CEOs walked away with trillions of dollars, even having the audacity to give themselves government bailout money as bonuses. Very little has been done to fix the corruption. Wall Street still believes that its risky actions were justified. But their justified actions have crippled countries across the globe. Take Iceland for example. After a period of economic deregulation in 2000 Icelandic banks racked up 140 billion dollars of debt, which they then persuaded the Icelandic government to assume. Iceland isn’t the worst off either. Ireland, Germany, and The US were just as financially injured by a crisis that was completely foreseeable. This crisis wasn’t caused by a year of Wall Street corruption; it took nearly a decade to make such a huge mess. In that decade though, countless people anticipated the inevitable meltdown. Some tried to question the stability of modern finance, but were widely ignored. In the eyes of investment bankers, there was simply too much money to be made. Their greed went unchecked as they lent more and more money to people who could not repay them. Then they bet against the people they off loaded their toxic assets onto. Finally when their companies failed, they claimed to be to big and to important to go bankrupt. They clearly have no accountability for their corrupt actions, which is why more financial regulations are necessary.