Considering The Us Situation More Deeply, It’S Also Needed

747 WordsApr 11, 20173 Pages
Considering the US situation more deeply, it’s also needed to go back to history. In 2000 government passed the Commodity Futures Modernization act, written with the help of financial industry lobbyists in which they banned the regulation of derivatives. In 2001 the financial sector was more powerful and had more money than ever before. There were dominants in the industry: 5 investment banks (Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, Bear Stearns), 2 financial conglomerates (JP Morgan, Citigroup), 3 security insurance companies (AIG, AMBAC, MBIA), 3 rating agencies (Moody’s, Standard & Poor’s, Fitch). Linking them all together was made in term of security and millions of dollars connected in mortgages and other loans…show more content…
This lead to a massive increase in predatory lending. Borrowers were needlessly placed in expensive subprime loans, and many loans were given to people who could not repay them. Consequently, hundreds of billions dollars a year were flowing through the securitization chain. Since anyone could get a mortgage, home purchases and housing prices had skyrocketed. The result was the biggest financial bubble in history. Countrywide the largest financial subprime lender issued 97 billion dollars worth of loans. It made over 11 billion dollars in profit as a result. At the Wall Street the bonuses increased tremendously and traders as well as CEO’s became enormously wealthy. Lehman brothers was a top underwriter of subprime lending. The Security and Exchange Commission conducted to major investigation of the investment banks during the bubble. During the bubble the investment banks were borrowing heavily to buy more loans and create more CDOs. The leveraging levels became frightening as they became 35:1. In addition, there was another ticking time bomb in the financial system with the world 's largest insurance company that was selling huge quantities of derivatives called Credit Default Swaps (CDS). For investors who owned CDOs Credit Default Swaps worked like an insurance policy. An investor who purchased an CDS paid AIG accordingly a premium. If the CDO failed, AIG promised the investors to pay them for their losses. However, unlike regular insurance, speculators could also
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