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Who Created The Financial Crisis And Why

Politics / Credit Crisis 2009 Mar 24, 2009 - 02:58 PM GMT

By: Steve_Selengut

Politics Best Financial Markets Analysis Article"The Big Takeover" by Matt Taibbi is probably the best article written to date explaining the financial crisis and how we got to where we are now. Taibbi's necessarily lengthy article explains the problems, names the "poipetrators", and exposes all of the conflicts of interest--- absolutely a must read.

AIG, Goldman Sachs, and J. P. Morgan turn out to be the major players causing perhaps the greatest financial crisis in modern history--- even if the pain is unlikely to get near Great Depression proportions, the dollar losses to individual investors have certainly gone as far.

JPM was the brewmeister of the CDO, a vat full of various kinds of income securities, determined to be less risky because the income on most would almost certainly keep flowing--- kind of like the once popular junk bond fund that Wall Street insisted was not risky at all because of the great diversification.

A few years later, the Captains of the Universe created a breed of high yield foreign government bonds where the interest was guaranteed but not the principal. (Read that again.) Certainly, the CDO product should have been looked over thoroughly by all the normal scam detectors and regulators.

But, what's that? Senator Phil Gramm, and his cronies on both sides of the aisle, had just OK'd the demise of the depression era regulations that prohibited the combination of Insurance Companies, Banks, and Investment Banks. Let the games begin.

Later on, the bewigged ones would loosen bank-lending rules, institute others that value mortgages as if they were common stocks, eliminate the only firewall protecting shareowners from predatory short-sellers, and deem that derivatives were not something that could be regulated by any existing entity.

Basically, Taibbi rightly accuses Wall Street firms of finding loopholes in rules and regulations, and squeezing creative products through the cracks in the law for their own benefit. Even in areas where they are under SEC supervision, over paid corporate lawyers and mathematicians are faster on their feet than your average government employee.

AIG, and more specifically, its AIG Financial Products Unit was responsiple for making the ridiculously risky CDO (Collateralized Debt Obligation) the subject of the quasi insurance gambling devices known as Credit Default Swaps, or CDS--- a CD with a capital S. (The AIGFP was headed by Joseph Cassano, allegedly a student of Michael Milken.)

Taibbi explains how AIG used these Certificates of Doom as gambling chips to create a multi-level risk betting industry, with no backing other than the idea that nothing would ever cause the housing bubble to pop. The CDS vehicle allowed the CDO industry to multiply because all of the risk was being assumed by AIG.

But, and this particular "but" should be in 72-point type, they insured the same loss multiple times without ever having the reserves on hand to cover any of the potential losses. The house-of-cards on the Hudson is built on a shared and intertwined foundation. Paulson's Goldman Sachs, for example, was AIG's biggest whale.

The final straw was how AIG got itself out from under the regulatory eye by fraudulently arranging for supervision by the OTS (Office of Thrift Supervision), a regulatory ebtity with only one insurance specialist on its entire staff. The OTS, it seems, never examined AIG, ever.

The article goes on to dig deeply into the bailouts; the Paulson, Geitner, and Liddy interrelationships, and more. But it reverberates the message voiced years ago in the first edition of "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want You to Read".

The arrogance of the financial institutions, the mad scientists they employ to manipulate the rules and rule makers, and the Emperor's New Clothes (trust me they're safe) marketing tactics they employ really do need to be regulated--- by the government, sure; by corporate boards of directors, absolutely.

In a Working Capital Model world, there would be no financial crisis.

By Steve Selengut
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

Disclaimer : Anything presented here is simply the opinion of Steve Selengut and should not be construed as anything else. One of the fascinating things about investing is that there are so many differing approaches, theories, and strategies. We encourage you to do your homework.

Steve Selengut Archive

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06 Aug 09, 06:44

Taibbi's article is pretty informative, but I do believe it is now outdated given new developments. Emerging Markets Economy ( an interesting article that puts the situation in perspective. Moreover, "who created the financial crisis?" is an overly pointed question. It implies intentional harm, which is clearly not the case, as laid out by the article.

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