Wednesday, July 8, 2020 8:48

Why are we in this Financial Crisis?

Tagged with: , , ,
Posted by ep on Friday, September 26, 2008, 15:14
This news item was posted in Economy, Politics category and has 53 Comments so far.

Update 3/15: I just added this video to the top of the post which I feel does a good job giving an overview of the Credit Crisis.

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

First I want to thank my friend Chris who works in finance for the all the sources and explanation of how everything works, I couldn’t have put this together without you. The punch line of all this research is there are several parties and institutions who share the blame for this crisis. Below I have grouped my bullet points into three main categories of the offenders: Government, Regulators, The Market.

If you don’t want to read through all of this, here is a quick animated explanation of the crisis (Thank you Madame for the link)

As always, please comment.  Even if it is just to say good job or you suck and missed something.  If you like the post please add it to your social networks or forward it along.




  • Congress overhauls bankruptcy laws in early 2005 making it much harder to be freed from debt when filing bankruptcy, instead forcing people into payment plans (8). This led to more aggressive lending practices as the risk of a debtor filing bankruptcy was reduced. Senator McCain voted yes for this legislation, Senator Obama voted no. (9)
  • In 2002 legislation was passed deregulating of the finance and banking sector, allowing companies like AIG and Lehman Brothers to begin participating in markets they were previously not allowed to and with less oversight. The bill was sponsored by McCain’s current economic advisor Phil Gramm and supported by McCain (Obama was not in the Senate at the time). (10)
  • President Bush and Congress (both parties) began pushing Fannie and Fredie to fulfill their chart to help low income homeowners. This lead to Fannie and Fredie making a strong entry in the subprime market in 2006-2007 (3).
  • Fair Market Value accounting law passed at the end of 2007. This requires companies to list the current fair market value of an asset. In a falling market this can create a snowball effect for driving the value of an asset down, and it has for CMO’s. (1)


  • Greenspan and the Fed increased money supply before the y2k in fear of computer glitches causing economic panic. Nothing happened and the extra money was not taken back out of the economy.
  • After the Internet Bubble collapsed, Greenspan infused the economy with additional money and lowered the Fed funds rate. This led to lower lending rates overall.
  • The lower cost of money meant that people could afford more expensive houses for the same monthly payments.
  • Greenspan steadfastly refused to enforce existing regulations or enact new ones when earlier warning signs of the crisis started appear (3)(6)
  • Underwriting guidelines put in place after the Depression were ignored and companies were not punished for violating the regulations (5)
  • Greenspan admits he has some culpability for the mortgage crisis(4)
  • SEC created in 1934 to ensure that companies accurately disclose their financials and risk. An unwillingness to exercise their power helped to allow banks to not fully disclose their risk (7)
  • Weakened rules for allowing mortgages to be combined into backed securities. Such as not having stringent income verification, max loan value over 400,000 etc. added more risk.
  • Reduced the ratio of capital required for investment banks so now $40 could be borrowed for every $1 of capital to back it up (7)

The Market/ Wall Street & Main Street

  • Investors moving money out of the stock market after the Internet crash moved to the ‘safe’ investment of real estate. Thereby increasing demand.
  • The way mortgage were sold fundamentally changed. Traditionally a bank would loan individuals money and hold the note. So it was in their interest to be sure the person would be able to repay the loan. This has transitioned into a market where mortgage brokers would write the loan and then sell it for a commission. Therefore the person writing the loan had no interest in if the loan could ever be repaid.
  • Country Wide begins to aggressively offer subprime loans, swelling their profits and created new products such as interest only ARMS, reverse amortization loans, etc.
  • Other banks begin to follow Country Wide’s lead in an attempt to bring their performance in line with Country Wide
  • Mortgages were combined into mortgage backed securities of different risk levels. The problem was that when high risk mortgages fail (foreclosures, etc), they affect the value of the ones with low risk too. This was not factored in heavily enough.
  • Mortgage backed securities risk is rated by rating agencies, like Moodys. The issuer of the debt (the bank) pays the agency who’s rating it likes the most for that rating. Therefore there is a clear incentive to give high ratings. In their defense, the rating agencies didn’t have visibility into all of the risk.
  • Insurance companies, like AIG, begin to sell CDS (Credit Derivative Swaps). A CDS acts as insurance against a mortgage backed security in this case. As an example, Bear Sterns might have paid $100,000/ year in premiums for 5 years to ensure that $10,000,000 in securities don’t default. If they do, then AIG has to pay the $10,000,000 in principle. This obviously creates a cash obligation for the holder of the debit to pay the insurance. However if you realize that your $10 million security is only worth $2million, paying $500,000 to insure it becomes very steep premium.
  • CDS are considered ‘Level 3 Assets’, as such their disclosure requirements are VERY weak. Basically a footnote saying we have some CDS exposure but it never makes it to the balance sheet. This makes accurately evaluating the risk of the CDS impossible.
  • CDS are traded in a liquid market much like options or futures traded on an exchange, minus much regulation.  The value of these securities therefore fluctuate daily based on market sentiment and appetite for such insurance on bonds (supply and demand).  Companies like AIG and Bear Stearns sold CDS to bondholders, hedge funds and market speculators.
  • As the credit market began to weaken the premiums required / aka price for protection of the underlying bond (cds) rose dramatically.  As each of these securities is a contract between two parties, AIG or Lehman may have sold the insurance for 1% a year for 5 years on a $10 million face (resulting in a $100,000 a year premium).  In order to close the position however, it may now cost $200,000 a year because of the demand going up for the insurance due to worry of default.  Thus, the insurer side of the CDS contract has two options: Hold a liability on the books that is a level 3 asset and hope the bond does not default OR buy the insurance back at a significant premium.  Most institutions choose to hold on to these assets as Level 3 assets.
  • Eventually several companies who were holders of the mortage backed securities ran into cash flow problems.  This was partially caused by the fact they had an abundance of illiquid assets on their books (mortage backed securities) and nobody willing to extend them a line of credit.


Credit Crisis Timeline
Credit Crisis Timeline

Image from:

(1) Wall Street Points to Disclosure as an Issue

(2) A Lesson the Market Ignored

(3) The elephant in the control room

(4) Greenspan Confesses (Sort Of)

(5) Wall Streets Blame Game

(6) Greenspan’s Folly

(7) How Much is the SEC’s Cox to blame,8599,1843519,00.html

(8) Congress Overhauls Bankruptcy Laws

(9) Project Vote Smart

(10 )McCain Embraces Regulation after Many Years Opposed to it

Bookmark and Share
You can leave a response, or trackback from your own site.

53 Responses to “Why are we in this Financial Crisis?”

  1. Hyperboles
    26 September, 2008, 17:59

    I think it’s also important to note that the bankruptcy laws were overhauled after the credit company lobbies started crying about how hard it was for them when a mean borrower deliberately spent a ton on credit and then filed bankruptcy to avoid paying and took all of their profits away. This legislation stripped consumers of the previous protection that they had via bankruptcy because that particular Congress sold us all out. In truth, a LARGE majority of bankruptcies are a result of a medical tragedy and the ensuing bills. (Apparently health issues are not enough punishment on their own for being human, as far as the creditors are concerned.) I’m sure we all realize how perilously close most of us are to that happening, and I know that Obama has said he wants to reform those specific laws.

  2. [...] Slideshow (some adult language here): Subprime Explained MP3: Giant Pool of Money-Great insight into liar’s loans. What they are, who bought and sold them, and their lifecycle. Blogpost: Why We Are In This Financial Crisis [...]

  3. Greg Silveira
    30 September, 2008, 8:46

    No one forces us to borrow money. When we borrow, we sign a contract agreeing to pay back. I personally know people that have declared personal bankruptcy because they bought a house they couldn’t afford, a car, truck, motorhome,etc. The lender was guilty of unethical lending practices, but this does not negate the moral obligation of the borrower. Reforming laws to make bankruptcy easier is not a viable solution. The ONLY solution is to be a responsible borrower.

  4. 30 September, 2008, 9:10

    I agree responsible borrowing is needed. In the case of the current financial crisis irresponsible borrowing only accounts for a portion of what got us to where we are.

    People should also read to their kids every night, not drink, get 10 hours of sleep, etc. Point is greed and envy are awfully powerful. Personally I’m not willing to bet on other’s human nature not to be greedy and put us in the same situation again when I am getting ready to retire.

    So yes, responsible borrowing is the answer. I just don’t think it something you can expect to really happen.

  5. 11 October, 2008, 21:53

    Bullshit, Greg. When you go to a mortgage broker it should be no different from going to a doctor or a lawyer. There should be some kind of an expectation of professional conduct. Let’s face it, people were LIED to about these mortgages and the future values of their homes. I personally know mortgage brokers who were trained to LIE to people.

    And don’t forget that it was none other than George W. Bush who told us to “go shopping” after 9/11. Consumer spending is 70% of our GDP. We have become the largest debtor nation, whereas we used to be the largest creditor nation, as recently as the early 80’s.

    Who are you people kidding, with your “blame the people in debt” nonsense? If it weren’t for the people in debt, our economy would have crashed years ago!


  6. LaterSkater
    26 October, 2008, 10:21

    “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.”
    Thomas Jefferson 1802

  7. Ciara
    5 February, 2009, 8:16


  8. James A
    6 February, 2009, 11:18

    I Agree with you donna! MONEY = DEBT and DEBT=MONEY !

  9. Stranger
    18 February, 2009, 15:01

    When we pay bills it goes to debt collectors wich goes to small and large businesses wich lowers prices saving money so i think its also the fear of paying bills.

  10. Tita
    23 November, 2009, 23:33

    FEAR!!! FEAR of what, remember we get into, what we get into because we really are not erudite in that area and at the time it is what we really want to do. It is like buying something you may want, you are only buying because you really want it and it may look cute on you and you’re going to impress this or that person. Keep in mind we buy only what we want and not what we really need (just like we felt into a mortgage crisis), because we want too, not because we really need it. I am a single mother of three and renting one apartment for us and if I really wanted a house I know I can get one, but in reality I know I do not need it. Plus I am a 10 hour worker, College student, and a mother just trying to live day by day and my days are like living like rich>>> :!: :roll:

  11. 8 September, 2010, 20:32

    Then When they are Allowed to Insure Fuzzy Math Investments IT WAS SO EVIL.How can they Lose?They just keep on Stacking it and The Responsibility has been Passed so Many Times that the Blame is on The Politicians for Not ACTUALLY REGULATING by Law and Making This Insanity Against the Law.The ealthy have so mUch money that It seems like the Politicians are CHEAP.Those Bastards that Made Billions On the Hedge Fund Circuit by Talking the VALUE WAY UP and Out of Proportion.The Damn Derivatives are Like Making Twenty pounds of Shit from a 15 pound Kit using Fuzzy math and Talking The Value Way Up Knowing Damn well it is worhtless.Then The Mortgages they Sliced Up default Too on Top of Being Worth less To begin with.The Twenty Pound Lie becomes Five Pounds of Real Shit.They have No Ethics and sit on their Money Knowing the Time Bomb didn’t go Off in their Face.Sharks are all the same.There is only one way to hold them Responsible and The Politicians will never do it.They have NO BALLS and Not enough money to defeat the Lies and deceit that can be Produced by the Absurdly Wealthy who have most of the Resources.The Absurdly Wealthy HIre People to take care of those worries.The Bottom Feeders.They Call them Lawyers.The Wealthy make me sick.Kindness Kills Apathy .Why do the Wealthy let People die in the streets.

    :?: :?: :?: :?:

  12. 3 January, 2011, 21:35

    Let’s face it they are crooks.I lived it and I am now homeless.I depended on that low cost ROOM I was renting in Vallejo.I had Bailed Kris Out and he bailed me out.He was lied to by the bank.The bank sent an appraiser that valued the house at 531 Wallace in Vallejo at just under 400,000 dollars.Kris owed about 80,000 dollars.He had a second already.They gave him another loan.The loan was given in 2002 after the BS appraised value.Then Kris owed over 100,000 dollars on a home valued at a much higher amount.

    Kris had lived there for over twenty years.He raised kids watched a wife succomb to cancer,The Mortgage company was the devil in disguise.Kris had a full house he has heart.My sister came along.They had a rocky relationship but it worked out.The house being taken wasn’t good.The KIDs didn’t need the upset.The adults will live.
    The House just sold in 2010 for 108,000 dollars.The bank had it listed for 80,000 dollars.The Buyers who thought they were getting a deal in 2004 when they bought the house from the bank on the courthouse steps.They paid 330,000.They lost their ASS.The CRIMES that happened in these kind of HOODS was unforgiveable.The CRIMES against the POVERTY stricken citizens is what England was dealing with when we broke off and started THE USA.

    WTF happened? KINDNESS KILLS APATHY yes indeeed.

    :x :x :?: :?: :?:

  13. 3 January, 2011, 21:49

    That was in 2004 and I have been struggling ever since.
    I am not alone.There is an SRO Hotel Shortage and that is the ROOT of homelesness in San Francisco.Before 50,000 SROs were RAZED for progress.The Cost of a FLOP house was miniscule.That Drug Thug Ridden closet is NOW 650 a month.WTF happened a world class case of Hate Apathy and Ignorance.The Newspapers went on a HATE campaign and words like Flop House and Skid Row were used to RAZE the Habitat for 50,000 old men at the time.Those old men are now homeless and dying in doorways The Answer is The Community Housing Partnership and The White House Council for Community Solutions and Civic Participation.Maurice Lim Miller and the Other Council Members can bring Obama solutions he can ACT ON.REALLY.Time to PARTICAPATE!

  14. 18 September, 2011, 7:22

    efficient post about financial crisis.

  15. 6 October, 2011, 6:06

    Wow! Thank you! I continuously wanted to write on my site something like that. Can I include a fragment of your post to my website?

  16. 18 September, 2014, 4:19

    Thhis is mmy first time ppay a quick isit at here and i am in fact pleassant to read everthing
    at single place.

  17. 20 September, 2014, 19:22

    Helko great blog!Does running a blog similar to this take a great deal
    of work? I’ve virtually no understanding of prograqmming
    hhowever I was hoping to start my owwn blog in the near future.

    Anyway, should you have any recommendations or techniques for new
    blog owners please share. I know this is off topic nevertheless I just needed to ask.

  18. 2 March, 2015, 13:34

    Remarkable! Its actually amazing piece of writing,
    I have got much clear idea about from this piece
    of writing.

  19. 22 April, 2015, 4:15

    for the best content about home and garden, interior design,

  20. Insights is a tool for tracking the growth of your page as well
    as the number of interactions on your page. The business page should definitely display general information for
    its future customers like the current business
    address, their contact numbers, the company. Consider how much easier and
    less stressful it would be to separate your personal life from your
    professional life.

  21. 11 November, 2015, 19:56

    It has been my privilege to work with hundreds of people over the
    many years I have been involved in the real estate and mortgage business.
    We offer you a great range of services regarding the credit card which make sure that the entire process becomes easy
    for you. The credit card debt settlement letter is
    commonly referred to as the “settlement offer.

  22. 7 May, 2016, 14:07

    Almost three years ago, my old computer had many bad infections and poor pop-ups. I have some files left upon that computer and Used to do not discover them for almost three years back. I question I will like to see my old documents again which i can connect with my brand-new computer to old computer. That is certainly problem which i is afraid which poor viruses will come to my new one particular from aged one. Make sure you let me know how I can get my old files move from my outdated computer to my new computer with no bring poor viruses to my brand-new one?.

  23. 12 May, 2016, 13:01

    I love Facebook, but I hate that their notes section isn’t mainly because appealing because MySpace’s websites. I’ve lately transferred a blog from MySpace to Facebook using the “share” icon located beneath every blog… Nevertheless , I do nothing like the way it seems on my Facebook page. Are there any better ways to import my sites?.

  24. 15 May, 2016, 10:33

    How do I use my wordpress theme upon my regular subpages?

  25. 15 May, 2016, 11:24

    Where can I find running a blog websites that deal with legalities?

  26. 15 May, 2016, 12:25

    How to add article to Joomla utilizing a blackberry or other mobile device?

  27. 16 May, 2016, 6:28

    I am not experienced with joomla but I want to use to make a site. My only trouble at the moment is getting this installed on Askjeeve hosting We don’t know how to proceed… Can anyone guide me to a site or forum with this or tell me how do it? Greatly appreciated, thank you..

  28. 5 June, 2016, 15:42

    Develop a habit in toddlers to use the bathroom right before
    going to bed. As mentioned in the Leak Barrier section, valleys have leak barriers iinstalled underneath them.

    Special construction and shaft sealing devices are available for blower service requiring zero or minimal gas
    leakage into and out of casing.

  29. 2 August, 2016, 17:35

    Good read.

  30. 21 December, 2016, 20:11

    Que pasada!! Unos muy bien dichos puntos de vista! De verdad apreciaria
    que tu colgases mas comentarios ademas ell resto de contenido de la pagina web es bastante util.

  31. 2 April, 2017, 10:52

    It is really a nice and helpful piece of information. I am satisfied that you shared this
    helpful information with us. Please stay
    us up to date like this. Thank you for sharing.

  32. 7 June, 2017, 21:56

    A lot of people also like tile their own kitychens simply becazuse is in order to undestand clean up spills.
    Thee more backlinks you have, the actual greater visible you’ll bee to google.

  33. 13 June, 2017, 20:33

    Marketing Increased Home Business On A Budget

  34. 18 June, 2017, 22:02

    This way, you have a more costly chance to
    get response from your advertisements. And that iis whnat you do going to btain in the
    Perpetual Trafcfic Formula training course. Why ddo necessary too earn money witth our blogs?

  35. 24 June, 2017, 19:19

    Quickly And Simply Apply For Grants On Your Own Big

  36. 14 July, 2017, 0:44

    There’s that whole ‘back to school’ feeling, getting everything
    organised and set-up perfect. Solutions: Take at least 98% responsibility for your results.
    Others want you at their next conference!

  37. 17 July, 2017, 21:22

    I foubd myself transported back at some point and wondering what it be like had I not been born so late.
    In 1910 a second information keynote speaker of Working
    Women was saved in Copenhagen. I paid $100 per night after i went to Los Angeles.

  38. 18 July, 2017, 14:04

    Be Green Wiith These Green Energy Tips

  39. 20 July, 2017, 3:20

    Cosmetic companies count on the fact that people do not know something
    more than that little piece. Email carries innformation from
    marketers this sent for the audiences. It will connecting the marketers and audiences.

  40. 20 July, 2017, 8:24

    As the movie opens, we find him in Miami, executing a favor the oldd friend or family member.
    Many suggest ingredients your day with yoga. There are lots of benefits to prdesenting
    a speakers bureau.

  41. 21 July, 2017, 17:30

    Exuding freeshness and vitality is element ingredient in male well-being.
    However, with dog life vests, trunks, boxer shorts,
    and swimsuits, will make have too go away from your
    pooch ashore.

  42. 17 August, 2017, 18:25

    A part-time coach who focuses mainly on raising great
    kids? Any alternative corporate events has the firm plznned lately?

    Place a small photo of yourself on your lower corner of
    back cover.

  43. 13 September, 2017, 4:57

    When you are looking for a mortgage for your existing or future property you would want to make the best deal possible to work for you. Our mortgage guide will help you get the best deal.

  44. 7 November, 2017, 10:08

    Hi there mates, its great aryicle on the topic
    of educationand fully explained, keep iit up
    all tthe time.

  45. 11 November, 2017, 17:24

    Everything is very open with a clear clarification of the challenges.
    It was tryly informative. Your site is very useful. Thank you for sharing!

  46. 13 January, 2018, 18:05

    F*ckin’ awesome things here. I am very happy to peer your post. Thank you a lot and i’m having a look forward to touch you. Will you kindly drop me a mail?

  47. 26 February, 2018, 11:00

    Chewing gum not just provides you with fresh breath, but in addition assists you to
    curb your appetite. But unless they are producing the merchandise themselves, which can be
    unlikely, they’re dependent upon several steps before receiving
    delivery. If you’re willing to alter your diet perhaps it’s about time to clean up
    the whole diet.

  48. 4 May, 2019, 6:18
  49. 1 October, 2019, 14:59

    That is a very good tip especially to those
    fresh to the blogosphere. Brief but very accurate info… Thanks for sharing this one.

    A must read post!

  50. 13 February, 2020, 22:03

    Divorce Coach…

    Another Damn Blog » Why are we in this Financial Crisis?…

  51. 28 April, 2020, 3:01

    The Monaco star threw himself to the ground to earn a penalty, which was converted by Antoine Griezmann on the way to a 3-1 French win in Luxembourg.

  52. 28 April, 2020, 3:01

    He wants to return to Switzerland, and I want to bring him to Sion.

  53. 27 June, 2020, 5:12

Leave a Reply