Inside Job: Deregulation and Wall Street Culture Led to Financial Crisis

How Deregulation and the Evolution of Wall Street Culture Led to the Financial Crisis

A chronological re-ordering of the events and arguments of INSIDE JOB
1930s (post-Great Depression)-
1933-35: Motivated by financial abuses that contributed to the Great Depression, new laws such as the Glass-Steagall Act and the Securities and Exchange Act place limits on financial risk-taking and require extensive disclosure of financial information • Bankers/traders earned salaries in line with other professionals; tightly regulated financial sector
1979: Traditional American finance
1980s: The Reagan Era: laissez-faire and trickle-down economics
Substantial deregulation, especially the Garn-St. Germain Act which deregulates Savings and Loan companies, leading to the later S&L crisis • Oliver Stone’s Wall Street immortalized financial sector greed and immorality • S&L scandal: loose regulations, lax enforcement lead to massive fraud; hundreds of S&Ls fail lax enforcement lead to massive fraud; hundreds of S&Ls fail; $124 billion taxpayer-funded bailout • Neil Bush approves $100 million of bad loans to business partners through Silverado S&L, which subsequently fails
• 1989: Keating Five: Four senators and CEO Charles Keating accused of improper influence in advocating against investigating Lincoln S&L, which collapses and Keating is convicted of fraud
• 1987-1990: Michael Milken, Ivan Boesky and other Wall Street executives convicted of fraud and insider trading
1990s: Clinton era: increasing revolving door between Washington and Wall Street
• 1999: Clinton administration members with Wall Street backgrounds help pass the Gramm-Leach-Bliley Act, aka the “Citigroup Relief Act,” repealing Glass-Steagall and allowing mergers that create Citigroup
• 1994: A new law gives the Federal Reserve power to regulate the mortgage industry, but Alan Greenspan refuses to enact any regulations, on the grounds that regulation was unnecessary
• 2000: Clinton Administration, particularly Larry Summers, Alan Greenspan and key Congress members including Senator Phil Gramm help enact the Commodity Futures Modernization Act, which bans all regulation of financial derivatives and exempts them from anti-gambling laws
• 2000: Dot-com bubble bursts
• 2000-2002: Eliot Spitzer sues 8 investment banks for conflict of interest and recommending dot-com stocks they thought were junk; reaches settlements totaling $1.4 billion in fines
2000s: George Bush pushes for further deregulation and relaxed enforcement
• 2000-2005: Investigations of Fannie Mae and Freddie Mac reveal massive accounting fraud
• 2002: Arthur Andersen, auditor, convicted of obstruction of justice for shredding Enron documents
• 2003: Worldcom revealed to have inflated assets by $11 billion 17
• 2000s: new crops of highly complex financial innovations flourish: securitization of mortgages, credit default swaps, synthetic CDOs
• 2000-2007: Fed by the investment banking industry, a massive housing and mortgage credit bubble sweeps the United States; mortgage lending quadruples, housing prices double
• 2004: After intense lobbying by investment banks, the SEC lifts the leverage limits on the investment banking industry, allowing them to borrow more
• 2005: IMF chief economist Raghuram Rajan warns of dangerous incentives and risks in the financial system; Larry Summers dismisses him as a “Luddite”
• 2005-2008: Goldman Sachs, Morgan Stanley, Deutsche Bank and other investment banks begin using credit default swaps to bet against the same mortgage securities that they are selling as extremely safe
• 2006: Hank Paulson, CEO of Goldman Sachs, becomes Treasury Secretary
• 2007: The housing bubble bursts, as the financial sector runs out of people willing to borrow and purchase more housing; home ownership reaches an all-time high, while savings rates are at historic lows
2008: Great Recession begins
• Collapse of Bear Stearns (March) and then Lehman Brothers (September)
• AIG rescued with $85 billion one day after Lehman declares bankruptcy
• Housing prices drop by 32 percent over three-year period
• Record foreclosures
• Unemployment rises from 5% to 10% in one year
• Tens of billions in bailout money go to AIG and Goldman Sachs
• $700 billion emergency bailout for the financial industry
2010s: The Obama era: Business as usual?
• Timothy Geithner becomes Treasury Secretary
• Larry Summers becomes director of the National Economic Council
• President Obama re-appoints Ben Bernanke
• Obama appoints many Wall Street executives to senior regulatory and economic policy positions