Financial Institutions and Market

Quiz
Submitted to:
Sir Ali Raza

Submitted By:
Qais Chughtai
Sp23-Baf-119

Class:
Baf 4b
Introduction:
“Inside Job” is a documentary film directed by Charles Ferguson, released in 2010, which
specifically investigates the causes of the financial crisis of 2008. It delves deeply into the role of
Wall Street, financial institutions, and government policies in precipitating the crisis. The film
features interviews with key figures in finance, economics, and government, providing a
comprehensive examination of the systemic failures that led to the crisis.

Deregulation in Iceland and privatization of banks:

Iceland's downfall stands as a clear warning about the dangers of too much deregulation and
privatization. Once known for its stable democracy and high standard of living, Iceland's path
took a troubling turn around the early 2000s. Government policies opened doors for big
multinational companies to exploit Iceland's natural resources for their own gain. At the same
time, the decision to privatize the banking sector led to a frenzy of risky financial activities, like
reckless lending and overvalued assets.
The outcome was disastrous. While the banking elite made huge profits, oversight from
regulators faltered due to conflicts of interest and influence from the industry. External auditors
and credit rating agencies failed to do their job properly, giving their stamp of approval to risky
financial practices. When the crash came in 2008, it hit Iceland's economy hard, causing a surge
in job losses and widespread financial suffering. The aftermath exposed serious flaws in the
system, showing just how important it is to have strong rules and oversight to prevent financial
disasters.
This story isn't just about Iceland—it's a lesson for the world. The global financial crisis of 2008
revealed similar problems with regulation and unchecked greed in the financial industry. It's a
reminder that we need solid rules in place to keep markets in check and protect against the risks
that come with letting things run wild. The story of Iceland's downfall serves as a stark warning
against the perils of excessive deregulation and privatization. Initially celebrated for its stable
democracy and high living standards, Iceland's trajectory took a troubling turn around the turn of
the millennium. Government policies opened the door to multinational corporations, granting
them access to exploit Iceland's natural resources for industrial gain. Simultaneously, the decision
to privatize the banking sector unleashed a frenzy of financial activity, characterized by reckless
lending and inflated asset valuations.
The consequences were dire. The banking elite profited immensely while regulatory oversight
faltered, plagued by conflicts of interest and regulatory capture. External auditing firms and
credit rating agencies failed to exercise due diligence, endorsing risky financial practices. The
inevitable collapse in 2008 sent shockwaves through Iceland's economy, precipitating a surge in
unemployment and widespread financial hardship. The aftermath laid bare systemic failures,
underscoring the importance of effective regulation and oversight in safeguarding against
financial excesses.
As the global financial crisis of 2008 underscored similar patterns of regulatory failure and
unchecked greed within the financial sector. It serves as a sobering reminder of the imperative to
maintain robust regulatory frameworks to mitigate the risks inherent in unfettered market
dynamics.

Part I - How We Got Here

After the Great Depression, the United States enjoyed about 40 years of economic growth
without facing any major financial crises. During this time, strict regulations governed the
financial industry. Regular banks operated locally and were barred from risky investments with
people's savings. Investment banks, which managed stock and bond trading, were small,
privately owned partnerships. In this traditional model, the partners invested their own money
and kept a close eye on it, prioritizing stability over risky ventures.
However, things changed dramatically in the 1980s. The financial industry exploded, with
investment banks going public and becoming much larger. This led to people on Wall Street
making massive amounts of money. Previously, a friend who worked as a bond trader at Merrill
Lynch struggled to make ends meet in the 1970s, but by 1986, he was earning millions and
thought he was just really smart.
In 1981, President Ronald Reagan appointed the CEO of Merrill Lynch, Donald Regan, as
Treasury secretary, signaling a close relationship between Wall Street and the government.
Supported by economists and financial lobbyists, the Reagan administration initiated a period of
financial deregulation that lasted for about 30 years. This included deregulating savings-and-loan
companies in 1982, which led to hundreds of failures by the end of the decade, costing taxpayers
billions and many their life savings.
One notable case involved Charles Keating, who hired Alan Greenspan to vouch for him in a
scheme that landed Keating in prison. Despite this, Greenspan was later appointed as chairman of
the Federal Reserve, the nation's central bank, and continued under subsequent administrations.
Under President Bill Clinton, deregulation persisted, with the financial sector consolidating into a
few massive firms, each capable of posing a systemic risk to the entire economy. In 1998,
Citicorp and Travelers merged to form Citigroup, the largest financial services company in the
world, in violation of the Glass-Steagall Act, which had been enacted after the Great Depression
to prevent such risky mergers. Despite the violation, regulators turned a blind eye, and Congress
passed the Gramm-Leach-Bliley Act in 1999, effectively overturning Glass-Steagall.
The financial sector's power and influence continued to grow, with lobbyists shaping legislation
in their favor. Derivatives, complex financial products that allowed banks to gamble on anything,
became increasingly popular despite their potential to destabilize markets. Attempts to regulate
derivatives, led by Brooksley Born, were thwarted by powerful figures like Larry Summers and
Alan Greenspan.
By the early 2000s, the financial sector was more profitable and concentrated than ever before,
with a new system called securitization linking trillions of dollars in mortgages and loans to
investors worldwide. This system, however, was inherently unstable, as lenders and investment
banks prioritized profits over the quality of loans, leading to risky lending practices and the
proliferation of subprime mortgages.
Incentives within the industry encouraged brokers to sell predatory loans that maximized profits,
leading to widespread exploitation of borrowers. Despite warnings about the dangers of these
practices, financial institutions continued down this path, setting the stage for the catastrophic
financial crisis of 2008.

Part II - The Bubble (2001-2007)

The housing market experienced a massive surge in the flow of money through securitization,
leading to a sharp increase in home purchases and prices. This created a massive financial
bubble, with real estate prices soaring to unsustainable levels. The financial sector's hunger for
profits drove the frenzy, reminiscent of previous housing bubbles but on a much larger scale.
Financial institutions like Goldman Sachs, Bear Stearns, Lehman Brothers, and Merrill Lynch
played a significant role in fueling the bubble. Subprime lending, risky loans given to borrowers
with poor credit, saw a staggering increase from $30 billion to over $600 billion annually in just
ten years. Companies like Countrywide Financial made enormous profits from these risky loans,
with their CEO raking in millions.
Wall Street saw a surge in profits, with traders and CEOs becoming immensely wealthy during
the bubble. However, much of these profits were not sustainable and were generated by a flawed
system. The Federal Reserve had the authority to regulate the mortgage industry but failed to act,
contributing to the crisis.
Investment banks heavily borrowed money to buy more loans and create complex financial
products like Collateralized Debt Obligations (CDOs). These banks became highly leveraged,
meaning they borrowed a lot relative to their own money, making them vulnerable to even small
decreases in asset values.
AIG, the world's largest insurance company, sold vast amounts of credit default swaps, insurance
policies for CDOs. However, unlike traditional insurance, speculators could also buy these
swaps, leading to massive risks for AIG and the financial system as a whole.
The financial industry's incentive structures encouraged excessive risk-taking, with huge cash
bonuses tied to short-term profits. Critics, like economist Raghuram Rajan, warned about the
dangers of these practices but were dismissed by industry insiders and policymakers.
Goldman Sachs, in particular, engaged in questionable practices, selling toxic CDOs while
betting against them and misleading customers about their quality. Other firms like Morgan
Stanley were also implicated in similar activities, leading to lawsuits from investors who suffered
significant losses.
Rating agencies like Moody's and Standard & Poor's played a crucial role in the crisis by giving
high ratings to risky securities in exchange for profits. Despite their influence, they claimed their
ratings were just opinions and not reliable indicators of a security's true value or suitability as an
investment.
The housing bubble eventually burst, leading to widespread financial turmoil, foreclosures, and
economic recession. The financial crisis of 2008 exposed the flaws and excesses of the financial
system, leading to calls for reform and tighter regulation to prevent similar crises in the future.
Part III- The Crisis:
In this part, there's a discussion about the fiscal extremity that hit the world in 2008. It started
with problems in the casing request in the United States, particularly with subprime mortgages.
These were loans given to people who had difficulty paying them back. Despite warnings from
economists, controllers, and indeed some interposers, not much was done to address the
underpinning issues. As the casing request started to collapse, it set off a chain response. Banks
that had invested heavily in these parlous mortgages faced huge losses. Lehman Sisters, one of
the biggest investment banks, went void in September 2008. This shocked the fiscal system,
causing fear and indurating credit requests. Governments, including the United States, had to step
in to help a total collapse. They bailed out banks and fiscal institutions with taxpayer plutocrat.
Despite these sweats, the extremity spread encyclopedically, leading to a severe recession.
Severance soared, businesses closed, and people lost their homes. The goods were felt not just in
the United States but around the world. Countries like China, which reckoned heavily on exports,
suffered as demand declined. Millions of people lost their jobs, and life came harder for
numerous. The extremity stressed the interconnectedness of the global frugal. What started as a
problem in the U.S. casing request snappily came a global issue. It also exposed excrescencies in
the fiscal system and nonsupervisory oversight. Despite warnings, controllers and policymakers
failed to take decisive action until it was too late. The fate of the extremity was devastating for
millions of people. numerous lost their homes, their jobs, and their savings. It took times for
husbandry to recover, and the scars of the extremity are still felt moment. It serves as a stark
memorial of the troubles of unbounded rapacity and reckless lending practices in the fiscal
sector.

Part IV - Accountability:
The fourth part of "Inside Job" examines the issue of accountability in the aftermath of the 2008
financial crisis. Despite the widespread devastation caused by the crisis, very few individuals and
institutions were held accountable for their role in precipitating the meltdown.
The documentary highlights the lack of criminal prosecutions and meaningful regulatory
sanctions against Wall Street executives and financial institutions responsible for fueling the
crisis. Many of the key players involved in the risky and fraudulent activities that led to the
collapse were able to escape accountability, either through legal loopholes or cozy relationships
with regulators and politicians.
Moreover, the revolving door between Wall Street and Washington allowed for a culture of
impunity, as many former Wall Street executives went on to hold influential positions in
government and regulatory agencies, creating conflicts of interest and undermining efforts to
hold bad actors accountable. The absence of accountability further eroded public trust in the
financial system and fueled widespread anger and disillusionment among ordinary citizens who
endured most of the crisis. While millions of people lost their jobs, homes, and savings, the
architects of the crisis walked away with hefty bonuses and golden parachutes, further
exacerbating inequality and injustice.
The documentary calls for greater accountability and transparency in the financial industry, as
well as meaningful regulatory reforms to prevent a recurrence of similar crises in the future.
Without accountability, the cycle of reckless behavior and financial speculation is likely to
continue, perpetuating a system that prioritizes short-term profits over long-term stability and
prosperity.
Part V- Where Are We Now
The rise of the US fiscal industry is part of a larger trend in America. Since the 1980s, the
country’s profitable supremacy has waned, and inequality has increased. Companies similar as
General Motors, Chrysler, and U.S. Steel, which were formerly critical to the U.S. frugality, were
misruled and fell behind transnational rivals. Jobs were shifted offshore to save plutocrat when
nations similar as China opened up their husbandry. American manufacturing workers lost a
substantial number of jobs. Over the last many times, our manufacturing base has significantly
deteriorated. still, other diligence, similar as information technology, prospered and handed well-
paying jobs. still, these positions constantly demand a council education, which has come
decreasingly precious for the typical American. While leading institutions like Harvard have
enormous bents, public universities suffer fiscal cuts, performing in soaring education costs.
When the fiscal extremity struck before the 2008 election, Barack Obama cited Wall Street
rapacity and nonsupervisory shortcomings as causes for reform. still, after gaining power, his
administration’s fiscal reforms proved ineffective. crucial officers in the administration had
connections to Wall Street, and nothing was done to circumscribe bank lagniappes or hold fiscal
directors responsible for their conditioning. Ultimately, "Inside Job" serves as a sobering
reminder of the need for comprehensive structural changes to create a more resilient and
equitable financial system that serves the interests of society as a whole.