Whatever

Emilio Moroney

Professor Magruder

Business Writing

November 10, 2016

         Henry Ford once said “A Business that makes nothing but money is a poor business”. Over the past 8 years our financial system has been in the process of recuperating from one of the worst financial crisis the world has ever seen. Starting 2004 lenders began making loans to groups of individuals who could not afford them or hand little to no credit history; these type of loans are known as subprime loans. The loans were then sold to Investment Banks, which bundled them with other credit instruments to create CDOs (Collateralized Debt Obligations) and sold these to investors at a triple A rating (the best credit rating possible. They were only rated in this way because the banks were the ones paying the credit rating agencies to rate them. To cut a long history short the big guys (banks) made money by short sighting the little guys (investors and mortgage owners); but how was this allowed within our political system, who regulated the industry, who was held accountable, and could this happen again in our society today?

Political System Failure and Financial Deregulation

Our political system controls the regulations and legislation that establish dominance over our Financial sector. As early as in the year 2000 a bill was passed which essentially allowed for derivatives (a complex financial product which allows for the betting against or for essentially anything) to be exempt from regulation (Inside Job). This bill was heavily pushed by senator Phil Gramm and with this bill the start of deregulation within the financial sector begun. In December of 2000 congress passed the commodities futures modernization act, which was written with the help of financial industry lobbyist, the bill banned the regulation of derivatives (Inside Job).

With the help of these two initial bills; five investment banks, two financial conglomerates, three securities insurance, and three rating agencies were able to control what was known as securitization food chain. Securitization meant that the lenders of loans, especially subprime loans did not have to worry about being repaid. This is where deregulation came to play into the financial crisis; since derivatives were not regulated, investment banks could bet against their own CDOs to fail generating profit with no risk for the banks. When the CDOs began to fail the investment bank didn’t have to worry, but all the investors which usually involved pension funds or retirement funds were in huge losses. Individuals life savings were gone and the individuals who were at the bottom of the food chain home owners lost their homes being unable to afford their monthly payments. Essentially the politicians who decided on the deregulation of the derivatives created the cycle of failure that came with the derivatives  

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