Who is to Blame for the Financial Crisis
Research Questions:
- Who contributed to the creation of the financial crisis and
ensuing economic crisis?
- Who is to blame for the financial crisis?
- Can they be held responsible for their actions or inactions?
- Was there a conspiracy by some Wall Street executives and government
officials?
- Do investors have legal cause to seek compensation for damages
caused by Wall Street firms?
Research Findings:
Who contributed to the creation to the financial crisis and the
ensuing economic crisis?
The following is a general answer followed by a section naming the
key players:
- Regulators who relaxed risk management
regulations required by the banks and for not regulating
derivative investments (please, see more specific details below)
- The Federal Reserve Chairmen who dismissed the
build-up of the housing bubble from 2002 to 2007 until it was too late.
They did not
take actions to regulate mortgage companies or control
the housing bubble
- World Central Bankers who blindly copied the US
Federal Reserve Bank policies
- World Financial Regulators who blindly copied US
financial market models and regulations
- World Investment Banks who sold subprime (high risk) mortgage
backed securities to their customers without fully understanding
them and who hired credit rating agencies to rate them as high
quality investment when in fact they included high risk loans.
The same banks who sold the subprime investments later bet
against their own clients without disclosing the conflict of
interest to their clients
- Credit Rating Agencies who overrated junk securities
as investment-grade quality and misled investors about the risk
and the value of these investments
- Academic and Financial Economists who ignored the
warnings and misjudged macroeconomic and financial market
indicators
- Award-winning Economists who designed flawed risk
pricing models
- Investment Analysts who used flawed risk pricing
models and asset portfolio theories
- Wall Street Banking Executives who ignored internal risk
management policies out of greed to increase revenues and their
bonuses in the short term at the expense of long term stability
of their companies
- Wall Street Boards of Directors who did not protect
their shareholders against excessive executive compensation and
ignored prudent risk management strategies
- Wall Street Advisors who did not do their homework
before advising their clients on bad investments
- Investment Fund Managers who lost
billions of dollars investing without adequate due diligence
- Mortgage Brokers who sold loans to unqualified
borrowers in order to collect more commissions
- Homebuyers who took loans they could not afford to
pay back and blamed the banks for predatory lending
- US Presidents for hiring
former Wall Street lobbyists as government policy makers who
bailed out the banks without regard to the moral hazard. By
doing so, they shifted the burden on the taxpayers and risked
the future of the national economy
- US Supreme Court Justices who ruled that the
government may not ban political spending by corporations in
candidate elections thus tightening the grip of Wall Street on
government officials and skewing the balance of power in favor
of Wall Street and big companies.
- The Financial Media who took no responsibility for
promoting the illusions of a healthy housing sector and for not
asking the right questions. Media outlets that favored a
promotional business model at the expense of investigative
journalism. In our research, we found a prevalent bias in
allocating airwaves and print space to brand name experts. Most
journalists and editors seem to ignore voices that
are not well-known or those who have a story that do not fit
their narrative or preconception. All we had
to do is Google simple phrases like "US Economic Risks" to find
a wealth of information that would raise so
many critical questions. If equal media exposure was given to the voices
that warned us about the housing bubble,
the damage could have been mitigated.
We also recommend
reading three interesting articles about the subject on
FactCheck.Org ,
TIME magazine and
US News Report
Who are the key people and companies to blame for the
financial crisis?
The blame is shared between a Wall Street Cabal and some
government officials who unwittingly or knowingly executed the
Cabal's agenda and
continue to empower them and protect them.
The Wall Street Cabal dominates the US
government, treasury, congress, and federal reserve banks through
their lobbying arm the Financial Services Roundtable (www.fsround.org)
The cabal
consist of the largest investment banks and financial conglomerates,
including Goldman Sachs, Morgan Stanley, Merrill
Lynch, Lehman Brothers, Bear Stearns,
Citibank and JP Morgan. Securities insurance companies
like AIG, MBIA,
AMBAC and the top three credit rating agencies including Moody's, Standard &
Poor's and Fitch.
Their partners were prominent academics and ex-Wall Street
executives who worked for the government and protected
their agenda. These people were appointed by US Presidents including
Reagan, Bush Senior,
Clinton, Bush and Obama to top government positions, in part as a payback for campaign
contribution by some of these Wall Street firms. Some of these government
officials unwittingly empowered the cabal and some took deliberate
actions to bailout Wall Street and later protected them from
prosecution.
The complex Wall Street fraud scheme and the key players
behind the financial crisis
Home, car and other loans were
packaged by top Wall Street investment banks (like Goldman Sachs,
Morgan Stanley, Merrill Lynch and others) and called them CDOs
(Collateralized Debt Obligations) then was sold to investors. These
types of investments are called derivative securities.
These investment banks paid the supposedly
"independent" rating agencies (Moody's, S&P and Fitch) to rate
CDOs as high-grade investments when in fact many of them
included high risk mortgage loans (called subprime).
This is a clear
conflict of interest by the rating agencies and a suspected effort by banks
to defraud their clients to get more money for these CDOs. After the CDOs received A-ratings,
they created the
impression that they are secure investments. These CDOs, then became
popular with investors and many retirement funds that held the life
savings of millions of people who bought them.
To make things worse, large insurance
companies like AIG sold insurance for investors who bought CDOs to
protect against potential losses (in case some borrowers did not pay their
loans). AIG called these types of insurance policies Credit
Default Swaps (CDS) making them even more popular with global
investors and reinforcing the illusion that their investments
is highly secure and if they fail they will be covered by the
insurance policies.
What is unusual is that AIG allowed
other investors to buy insurance on CDOs that they do not even own. So an
investor can pay small insurance fee for a CDO that
someone else owns. If that CDO investment went bad, the investors who
paid the insurance (can be the actual owners and others)
would collect the full value of that CDO.
This allowed few investors who
knew that these investment were bad to buy insurance as a bet
against the failure of the CDOs. John Paulson is one of
the investors who knew that these CDOs were bad, so he bought the insurance betting that they will
fail. He made $12B betting against mortgage securities.
When he ran out of CDO investments, he worked with Goldman Sachs and
Deutsche Bank to create more of them so he can bet against them.
Goldman Sachs that sold CDOs to investors, later bet against CDO
type investments that they sold to their clients without disclosing
the conflict of interest. Other Hedge Funds like Tricadia and Magnetar, made billions betting against CDOs they
designed with Merrill Lynch, JP Morgan and Lehman Brothers.
(Source: Inside Job Documentary)
Thanks to Wall Street Cabal, their lobbyists, hired senators, and
people inside the government (see list of names below), who opposed
the regulations of Wall Street, AIG did not need to have money to
cover the losses by the CDOs if the borrowers did not pay their
loans. They also did not prosecute the credit rating agencies
who mis-rated the CDOs. The defense of Wall Street executives is
that the markets are not regulated and they were the ones who pushed
for deregulations in the first place.
It seems to us, even if the markets are not regulated, the
common law punishes fraud activities and misleading clients by knowingly
selling bad securities and loans to clients without disclosing the
risks. They misled clients by having them believe they are
high quality investments where in fact they were junk-rated investments.
Some key
regulators, policy makers, and influencers in the government are
former Wall Street executives and lobbyists who have strong ties to the investment
banks and who later got compensated generously by Wall Street firms,
thus raising serious question about a conflict of interest in their
decisions and policies.
The US government ended up paying taxpayers money
to bailout the Wall Street Cabal. Henry Paulson the former Treasury
Secretary was the CEO of Goldman Sachs and during his tenure sold
many of the subprime investments. He was one of the main architects
of Wall Street bailout. He bailed out the banks and later AIG on the
condition not to sue Goldman Sachs or other companies involved in CDOs.
Key government officials to blame (A partial list)
Martin Fieldstien, a Harvard Professor and former Chief
Economic Advisor who championed the deregulation initiatives of the financial markets during Regan's
Administration and later severed on the board of AIG and AIG
financial products that insured CDOs. - A key player causing the
global financial crisis.
Alan Greenspan who championed Savings and
Loans deregulations allowing these banks to speculate with consumer
deposit. Alan Greenspan refused to regulate the mortgage industry,
despite several warnings
and allowed the formation of housing bubble during his
tenure as Federal Reserve Chairman. Alan Greenspan was later hired
by John Paulson who made billions betting on subprime mortgages that
he refused to regulate. (Source:
New York Magazine)
Larry Summers and Robert Rubin, former
Treasury Secretaries (Rubin is also a former CEO of Goldman Sachs)
championed Gramm–Leach–Bliley (GLB) Act, effectively repealing
Glass–Steagall Act, thus allowing the mergers of consumer banks with
investment banks furthering the risk of speculation of with
people's money. Larry summers later made $20M as a consultant for
banks and funds that sold derivatives (Source: Panderer to Power: The Untold Story of How Alan Greenspan
Enriched Wall Street and Left a Legacy of Recession - By Frederick J.
Sheehan)
In 2000 Senator Phil Gramm, Alan Greenspan,
Robert Rubin and Arthur Levitt (former SEC Chairman) lobbied against an
effort to regulate the derivative markets that later turned to be at
the heart of the crisis. After leading the senate effort to prevent
the regulation of derivatives, Phil Gramm became the Vice Chairman
of UBS and Rubin Became the Vice Chairman of Citibank earning more
than $127 million (Source:
SourceWatch) Senator Phil's wife Wendy Gramm served on the board of
Enron - infamous for its fraud and collapse (Source:
Alternet)
Current and former Federal Reserve Board members including Ben Bernanke,
Donald Kophn, Kevin Warsh,
Randall Krozner, Frederic Mishkin, Janet L. Yellen, Elizabeth A.
Duke, Daniel K. Tarullo, and Sarah Bloom Raskin. In July
2005 in an Interview with Maria Bartiromo, Federal Reserve Chairman
denied there is a housing bubble and its impact on the economy,
saying "It is pretty unlikely possibility, we never had a decline in
housing prices on a nation wide basis" In Feb of 2006, he became the
Federal Reserve Chairman and despite several later warning he did
nothing to control the housing bubble (Source: CNBC Interview. Transcript at
Freedom Works).
In 2004 Henry Paulson who is during his tenure as the CEO of Goldman Sachs
was the highest paid CEO on Wall Street and sold most numbers of
subprime mortgages (part of the CDOs), later he was appointed by
President George W Bush as the Treasury Secretary and helped in bailing out
the banks, including Goldman Sachs - his former employer. He also helped lobby the Security
and Exchange Commission to relax limits on banking leverage,
allowing banks to loan more money in ratio to actual deposits. The
leverage ration became
40-1. That is for every 1 dollar they had in their banks, they could make loans
up to 40 dollars. This resulted in the creation of the banking debt crisis and housing bubble.
Goldman Sachs that sold CDOs to investors, later bet against CDO
type investments, that they sold to their investors. Henry Paulson bailed out AIG on the
condition not to sue Goldman Sachs or other companies involved in CDOs.
(Sources: Documentaries
Breaking The Bank,
Inside the Meltdown,
Bill
Moyers Journal,
60 Minutes
Wall Street Shadow Markets and
Inside Job )
Research Comments:
Can investors trust Wall Street investment
advice? Can they be trusted with their money and lifesavings? You be
the judge.
Can US politicians including senators,
regulators, and economic advisors be trusted with protecting the
citizens and the US economy?
The lack of protection against conflict of
interest in policy making, the incompetence of
most economists and regulators and the consorted efforts by few
Wall Street insiders allowed this fraudulent CDO investment scheme to crash the US and
global financial markets. If the Wall Street cabal is not held
accountable for their actions, they will lead to the collapse of the
US economy.
According to Med Jones,
the president of International Institute of Management, "Despite all
the events that led to the economic crisis of 2008 and 2009, last
year (2010), the US Supreme Court ruled that the government cannot
limit financial contributions of corporations to the election
campaigns of political candidates. This
decision will enforce special interest groups and Wall Street's grip on the government.
This imbalance of power will likely allow a few powerful groups to bring the US economy down in a
series of financial, economic and political crises. Throughout
history, every empire was disintegrated from inside first by similar
abuses of power structures. The US is not immune to socioeconomic laws"
Was there a conspiracy by some Wall Street executives and government
officials? Can they be held responsible for their actions or
inactions? Do investors have legal cause to seek compensation for
damages caused by Wall Street firms?
To answer these question, we have to list the legal definition of
the activities that appear to be illegal
Definition of Torts
Tort is the French word for “wrong.” The legal definition
of Tort is an act that injures someone in some way, and for which
the injured person may sue the wrongdoer for damages. Legally, torts
are called civil wrongs. A tort can be negligent or intentional civil
wrong.
Tort law imposes a duty on persons and business agents not to
intentionally or negligently injure others in society.
Under tort law, an injured party can bring a civil lawsuit to seek
monetary compensation for a wrong done to the party or the party’s
property from the offending party. Negligence is a 'legal cause' of
damage if it directly and in natural and continuous sequence
produces or contributes substantially to producing such damage, so
it can reasonably be said that if not for the negligence, the loss,
injury or damage would not have occurred.
For example, Negligent Mismanagement arises when the injury suffered by the
tort victim (such as investors who lost money) can be attributed to
carelessness in the oversight of some aspect of the corporation's
operations. It relates to situations where the board of directors
knew of, or ought to have foreseen, a systemic problem and failed to
address it.
Directors who breach any of their duties to the
corporation and their shareholders may be liable if the corporation
suffers a loss that can be directly attributed to their actions or
omissions. To protect themselves from such liability, directors
should always consider whether the decisions or actions being
taken are in the best interests of the corporation. They must
discharge their duties of skill and diligence, as well their duty of
loyalty, including acting honestly and in good faith, not improperly
delegating their responsibilities, and avoiding conflicts of
interest
Definition of Crimes
Crime is any act done by an individual in violation of those
duties that he or she owes to society and for the breach of the law,
the wrongdoer shall make amends to the public.
Inchoate (inko-wet)
crimes are incomplete crimes and crimes committed by non-participants
such as criminal conspiracy, attempt to commit a crime, and aiding
and abetting the commission of a crime.
Fraud is considered a crime.
The legal definition of Fraud:
Fraud is generally defined in the law as an intentional
misrepresentation of material existing fact made by one person to
another with knowledge of its falsity and for the purpose of
inducing the other person to act, and upon which the other person
relies with resulting injury or damage. Fraud may also be made by an
omission or purposeful failure to state material facts, which
nondisclosure makes other statements misleading.
For example, if a business or a person knowingly rate an
investment as high quality when in fact they knew it is not, that
person is committing
criminal fraud. Even if someone did not sell the investment but
knowingly aided in the commission of the crime. That person is also
criminally liable.
Research Conclusions:
Our research did not find evidence of conspiracy in designing the
financial crisis. This does not mean that there was no
conspiracy. Such determination requires substantial investigative
resources that we do not have.
However, our research found several actions and decisions by top
government officials and Wall Street executives that may fall under
the definition of torts or crimes. Whether in fact
there are crimes committed or not, we will leave that determination
to the justice system.
It is in our opinion that most of the people
who contributed to the financial crisis were simply incompetent or
driven by a blind belief in the ideology of free markets.
However, few people standout and appear to have acted intentionally
and with total disregard to risk management and their fiduciary
duties to protect their clients, investors and other stakeholders.
Whether there is a legal cause to sue them or not we will leave that
to the American public, attorneys and the investors who lost their
lifesavings.
As for the the impact of the subprime and housing bubble on the
economy, we can honestly say very few experts properly estimated the
impact of certain government policies on the economy. Also, we
believe very few
economists knew the inner workings of the financial investments that was
sold on Wall Street.
Can Wall Street activities can be
considered criminal. You be the judge. If you have some additional
information, please email us at research {at}
economicpredictions.org
Other research questions and findings:
-
Why did the world's top economists fail to predict the financial
crisis? (Others who missed the crisis, include government
leaders, award-winning scientists, market analysts and
investors). Was the crisis predictable or was it a Black Swan
(unpredictable) event? Are government policy makers competent
enough to manage the nation's financial freedom and security?
Are economists and their policies helping or hurting our
economic growth? Do we need to re-define the education of
economic science and the role that economists play in our
financial markets, government policies and business regulations?
-
Who is to
blame for the financial crisis? Who contributed to the
creation of the crisis? Can they be held responsible
for their actions or inactions? Was there a conspiracy by some
Wall Street executives and government officials? Do investors
have legal cause to seek compensation for damages caused by Wall
Street firms?
- Who predicted
the financial crisis and the ensuing economic crisis?
Is there a documented evidence supporting their claims? Were those who warned about the crisis lucky or did they have a clear logic behind their
predictions? Can we use their knowledge to predict future crises?
What are their future predictions? How do their predictions
compare with each other? Where do the experts agree and where do they
disagree? How accurate are their economic predictions? Can they
be relied on for investment decisions?
- Who are the
top winners and losers of the financial crisis? Top
investors, economists, intellectuals, government officials,
think tanks, and universities that lost or won because of the
crisis.
- What are the lessons we can learn to
avoid future
crises? What the the economic policy lessons? What are the
investor's lessons? Do we need more or less financial regulations?
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