Firms involved were the Analysis Group, Charles River Associates, Compass Lexecon, and the Law and Economics Consulting Group ( LECG). policy still opposed reform after the 2008 crisis. Many academic economists who had advocated for deregulation for decades and helped shape U.S. The major banks grew in power and doubled anti-reform efforts. The executives had hand-picked their boards of directors, which handed out billions in bonuses after the government bailout. Top executives of the insolvent companies walked away with their personal fortunes intact and avoided prosecution. By December 2008, GM and Chrysler also faced bankruptcy. Layoffs and foreclosures continued with unemployment rising to 10% in the US and the European Union. Bush signed the Troubled Asset Relief Program, but global stock markets continued to fall. The global financial system became paralyzed. The next day, Paulson and Fed chairman Ben Bernanke asked Congress for $700 billion to bail out the banks. On September 17, the insolvent AIG was taken over by the government. Henry Paulson and Timothy Geithner decided that Lehman must go into bankruptcy, which resulted in a collapse of the commercial paper market. Merrill Lynch, on the edge of collapse, was acquired by Bank of America. These entities all had AA or AAA ratings within days of being bailed out. Two days later, Lehman Brothers collapsed. In September, the federal government took over Fannie Mae and Freddie Mac, which had been on the brink of collapse. The Great Recession began in November 2007, and in March 2008, Bear Stearns ran out of cash. The market for CDOs collapsed and investment banks were left with hundreds of billions of dollars in loans, CDOs, and real estate they could not unload. Treasury Secretary Lawrence Summers called his warnings "misguided" and Rajan himself a " luddite". There were some warnings about the growing risks in the financial system, including from Raghuram Rajan, then the chief economist of the IMF, who, at the Federal Reserve's 2005 Jackson Hole conference, identified some risks and proposed policies to address them, though former U.S. The three biggest ratings agencies contributed to the problem, with AAA-rated instruments rocketing from a mere handful in 2000 to over 4,000 in 2006. Goldman also bet against the low-value CDOs, telling investors they were high-quality. Goldman-Sachs sold more than $3 billion worth of CDOs in the first half of 2006. Numerous CDOs were backed by subprime mortgages. Speculators could buy credit default swaps (CDSs), which were akin to an insurance policy, to bet against CDOs they did not own. Many home owners were given loans they could never repay.ĭuring the housing boom, the ratio of money borrowed by investment banks versus the banks' own assets reached unprecedented levels. Rating agencies gave many CDOs AAA ratings. Investment banks bundled mortgages with other loans and debts into collateralized debt obligations (CDOs), which they sold to investors. In the 2000s, the industry was dominated by five investment banks ( Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, and Bear Stearns), two financial conglomerates ( Citigroup, JPMorgan Chase), three securitized insurance companies (AIG, MBIA, AMBAC) and the three rating agencies ( Moody's, Standard & Poor's, Fitch). Efforts to regulate derivatives were thwarted by the Commodity Futures Modernization Act of 2000, backed by several key officials. In the 1990s, derivatives became popular in the industry and added instability. In March 2000, the Internet Stock Bubble burst because investment banks promoted Internet companies they knew would fail, resulting in $5 trillion in investor losses. In the late 1990s, the financial sector had consolidated into a few giant firms. At the end of the 1980s, a savings and loan crisis cost taxpayers approximately $124 billion. The American financial industry was regulated from 1941 to 1981, followed by a long period of deregulation. When Lehman Brothers went bankrupt and AIG collapsed, Iceland and the rest of the world went into a global recession. The film begins by examining the effects of the government of Iceland's shift toward deregulation in 2000, which included the privatization of its banks. ( November 2021) ( Learn how and when to remove this template message) Please help improve it by removing unnecessary details and making it more concise. This article's plot summary may be too long or excessively detailed.
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