Some attack benefits & immigration but I think it’s worth remembering IT WAS THE BANKS. THEY TOOK ALL THE MONEY. IT WAS ON THE F****** NEWS - Frankie Boyle on austerity post 08 crisis.
The scale of the 2008 Financial Crisis
The 2008 financial crisis was the worst economic disaster since the Great Depression of 1929 and cost trillions. It originated in US but led to worldwide economic turmoil because the modern globalist economic system is very US-centric after the dollar was made the world's reserve currency and more to the point, debt originating in the US and rest of the world, and global financial entities are all totally entangled among tax havens.
The event was considered a black-swan event i.e. an unpredictable and unforeseeable event. However, in reality it was a foreseeable event (as the film the Big Short shows) and actually the response of governments and central banks have been too seemingly ignore the causes and rely on public naivety to restore faith and confidence in the economic system, when they should be doing the exact opposite.
It is believed that the crisis cost the country by 2016 15% of GDP or 4.6 trillion, with the losses mainly suffered by the middle and working class, not the banking and elite class who arguably were the ones who most failed managing the economy before the crisis. This was shown by how US unemployment rose to 10%, and even two years after the recession it stayed above 9%, not counting the discouraged workers who gave up searching for a job. The effects of the crisis were just as bad, if not worse - across the world, just look at the economies post 2008 of the PIGS (Portugal, Italy, Greece and Spain) for instance or even Iceland, a country one would imagine to be incredibly economically sheltered. Europe was less prepared in many ways to care for itself post crisis, because the ECB and all other central banks were much weaker or more limited than the Fed in the US.
The causes
1. An abstract but very real cause of the crisis was the substantial rise in inequality in the US, which was generally provoked by asset inflation alongside financial deregulation. This means more and more households took on more and more debt, particularly those from the middle class in an attempt to keep up with the upper classes, whilst banks were liberated from proper regulation and encouraged to take risks and so offered credit in increasingly generous terms; all combined created issues such as the sub-prime mortgage bubble. Bear in mind, this was provoked by the Fed who actually implement negative Real Fed fund rates in the 2002-2005 period, a time when 'the new issuance of subprime loans increased more than three-fold, from less than $200 billion in 2002 to over $600 billion in 2006'. Look at how non-governmental debt rose so drastically in every aspect, though particularly financially, in the twenty years before the crisis (when they were already as high as levels at the time of the 1929 US Great Depression:
As the graph shows, in the US excessive leverage in private and public sectors alike led to the creation of major debt - In the US, the debt-to-GDP ratio remained stable at 150% from mid-1950s to early 1980s, but the ratio rose sharply and steadily to around 300% in 2007. However, this wasn't limited to the US - others followed their lead - 'In 1980, the average debt level of the 18 major industrial economies was at 165% of GDP. In 2010, the ratio rose drastically to 320% of GDP. '
2. A more concrete cause of the crisis was a reliance on computer models to analyse credit risk and go further, to create a market for trading mortgage credit risk.. Consider hypothetically that house prices rise for sixty years state in one state, even when the economy suffers dips during those years - well, a skeptical person would be find it all odd, especially knowing that house prices have fallen in the past before and that they have risen overall far faster than other goods despite population rates increasing less and less - in fact they may be even expecting a fall (equally that person would know that it would be likely house-prices will fall together across states). A computer engineer however could take the statistics for that state, and all other states (that equally rose consistently), and form a model to predict the chances house prices would fall, limited to that computer engineers input and skill, and devoid of instinct and imagination.
Moreover, a computer model could say that not only is a fall in one state to be say 98% unlikely if configured basically, but if you mix mortgages from every state, then the probability of them falling would be 99.999% should a computer not take into account that falls in house prices spread from state to state and aren't independent. This actually happened as risky mortgages from different states were bundled together and termed safer than the sum of their parts as result of diversification. Contrast how institutional mortgage lending started in the U.S. thanks to societies like the Terminating Building Society who gathered and distributed credit purely out of trust and perception, to how now borrower credits are assessed electronically by distant lenders using purely model and data-driven measures. When a computer model gets it wrong people realise far too late as it's all statistical and non-intuitive based. The computer has no doubts.
This is all worth knowing as it was collapse in housing markets to borrowers with better-than-average housing scores that caused the crisis as much as the subprime loan system that allowed low-income borrowers with poor credit history to take out mortgages. The regulatory and most complex sophisticate economic models of the time couldn't even predict such a simple occurrence, and the consequences were devastating - only amplified by the greediness of the likes of the companies that guarenteed mortgages such as Fannie Mae and Freddie Mac.
3. Laws passed less than ten years before the crisis that encourage the leveraging of risky mortgage backed securities (MBS/ABSs), in particularly of riskier re-securitised collateralised debt obligations (CDOs) filled with dodgy subprime mortgage loans now at completely unknown rates, were likely the decisive toxins to the world's economy in 2008. Equally toxic were the methodologies of how CDOs were comprised through tranches, which supposedly was a mathematically sound and secure way to reduce borrower and lender risk, but in reality hid risk and convoluted the whole financial product to the extent buyers had no real clue what they were getting, only were confident that they were very safe e.g. marked AAA (as shown in detail below):
CDOs made the sevirity of the housing crash possible, because mortgage brokers were rewarded for creating risky subprime mortage loans which would be packaged and sold to investors, so that mortage brokers had more money to extend yet more new loans only needing more risk, massively distorting supply and demand in the market.
This was all instigated by two specific US deregulation-based laws passed less than a decade before the crisis. The first, the Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act) that 'allowed banks to use deposits to invest in derivatives'. Secondly, there was the 2000 Commodity Futures Modernization Act that 'exempted derivatives from regulatory oversight. It also overruled any state regulations. Big banks had the resources to manage these complicated derivatives.' Bearing in mind MBS are derivatives, and the fact financial experts new the dangers of such laws such as Warren Buffet who in 2002 said -'In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.. (they're like) time bombs, both for the parties that deal in them and the economic system', is it any surprise the 2008 financial crash happened. As a result, banks could chop up original mortgages and resell them in tranches, making the derivatives impossible to price realistically.
Leverage is the amount a bank is willing to go into debt and invest based on it's equity (what the bank has). It was believed by hedgefund manager David Einhorn Lehman Brothers 'had a leverage of 44:1' which would mean if the firm lost just 1% in the value of its investment, it would wipe out 45% (as it would have 44 times more debt than equity) of its equity. That was how risky and arrogant the financial entities were before the crisis - a minor blip would lead to a catastrophe. Lehman Brothers' eventual fall was so hard, even the Fed decided the company's time was gone, but was just one of many financial entities taking such risk - Merrill Lynch's leverage was conservatively estimated to be '26.9 to 1' at the time of the crisis for example.
In 2007, banks began to panic and didn't want other banks to give them worthless mortgages as collateral, and as a result, inter-bank borrowing costs, called Libor rose and the leverage rates meant there was possible path back - the whole financial system crumbled down.
4. The trigger cause of the global financial crisis was the popping of a housing bubble in the US but it led a global financial crisis precisely because the financial markets no longer really knew what the buying or selling, nor the big four auditors what they were rating. More to the point, US sub-prime mortgages were mixed with all sorts of other debts, sliced and diced into securities, re-packaged and re-marketed throughout the whole world from banks operating in offshore facilities.
In 2009, the Bank for International Settlements detailed how the ‘most common jurisdictions for US securitisations are the Cayman Islands and the state of Delaware… The most common SPE jurisdictions for European securitisations are Ireland, Luxembourg, Jersey, and the UK.’ London and tax havens such as the Netherlands, Cayman Island and Ireland were therefore at the heart of the US-sub-prime mortgage crisis. On one IMF published document titled ‘The (sizable) Role of Rehypothecation in the Shadow Banking System’ it is estimated that by 2007 ‘the seven biggest banks (Lehman Brothers, Bear Stearns, Morgan Stanley, Goldman Sachs, Merrill/BoA, Citigroup, and JPMorgan) had shifted $4.5 trillion off their balance sheets.’ Thus, the 'subprime fever originated in the United States, but soon spread to European behemoths like Deutsche Bank, HSBC, and Credit Suisse: by 2008, close to thirty per cent of all high-risk U.S. mortgage securities were held by foreign investors'.
To emphasise how risky this was, the Lehamn Brothers even 'had to go to a English law firm to be able move to do a repo 105 manoveour (which allowed it to move)… $50 billion of assets off its books (and) conceal its heavy borrowing, or leverage’. No U.S. law firm would sign off on the transactions but in the UK there are no statutory limits governing the reuse of a client's collateral and a major firm did.
It was the shadow bank Lehman Brothers’ eventual bankruptcy filing, the largest recorded in history, which quite literally sparked for the financial crisis and the scale of its collapse was provoked by such little offshore regulation and such poor auditing standards.
Research has backed this up and concluded that by ‘facilitating the endogenous evolutionary instability of these markets (Asset Backed Comercial Paper programmes)…(offshore markets) had profoundly negative effects’.
Tax havens actually played a deeper role in the crisis than even that. In 1995 a magic offshore firm ‘Mourant du Feu & Jeune’ informed Jersey that they had a written a new law for the island, regarding a corporate form called Limited Liability Partnership (LLP). The law firm had been working with the Big Four Accounting firms who wanted the best perks of Partnerships –‘less disclosure, lower taxes, and weaker regulation—and the limited liability protection too... If a partner commits wrongdoing or is negligent, other partners who are not involved aren’t accountable for the consequences.´
This law was passed the next year, and was the product of what Professor Prem Sikka, of Essex University, calls the auditors’ ultimate aim - “to use the state to shield it from the consequences of its own failures.' ‘The draft Jersey LLP Act was worse still. LLPs would not need to have their own accounts audited or even to say on their invoices or letterheads that they were registered in Jersey. It had no provisions for regulating audit firms or investigating misdemeanors, and it offered other audit stakeholders—that is, the public—almost no rights. To get these astonishingly generous concessions from the public at large, these multi billion-dollar global corporations would have to pay a one-time fee of just ten thousand pounds at first, then five thousand pounds a year afterward.
The proposed LLP Act was a high-risk idea. When Auditors make mistakes, it tends to lead to economic crashes such as Enron and World.Com. Due to the importance of their job they should always have a pressure to be accountable for whatever decision they make when auditing firms, otherwise the accountancy firms might be start setting lower standards for themselves. The downsides and risks of enacting a law granting LLPs are all foreseeable for experts and lawyers but they would not be apparent for everyday people from Jersey.
Unfortunately, in 2008 the four big Accounting Firms failure to Audit properly junk derivatives led to the financial crisis. These limited liability provisions ‘took away the most powerful incentive for self-policing by the corporate professions of law and accounting and help explain the wave of corporate cheating that swept the country.’
6. Auditors were just as responsible for the 2008 crisis and corrupted as the bankers were. The big 4 audit firms are Deloitte, Ernst & Young (EY), PricewaterhouseCoopers (PwC) and KPMG and were separately tied to the banks, e.g. PwC handled Northern Rock, EY handled Lehman Brothers and Deloitt - RBS, KPMG - HBOS and Bear Stearns. Combined they mastered the art of 'creative accounting' signing off trillion-dollar balance sheets and sanctioning increased dividends in bank shares that would crash within a matter of months. As accountant professor Prem Sikka wrote - 'The auditors collected £2142m in audit fees from FTSE-100 clients in 2002 to 2008 and a further £2159m for consultancy services to their audit clients in 2008. They advised banks on the formation of special purpose vehicles, tax avoidance schemes, securitisation and structuring of transactions, all of which are central to the crisis... Auditors of banks could not tell the difference between a tent on Brighton beach or AAA security. They too easily accepted management valuations and permitted banks to show toxic assets as good and report profits that did not exist.' Of course, individuals did see that they weren't doing a good job. Paul Moore was head of risk at HBOS and warned that the bank was taking far too many risks - he was nicknamed the 'mad monk' and punished - fired by the bank’s chief executive, James Crosby, 'who would later be knighted and then made deputy chairman of the Financial Services Authority (FSA).' Yet within four years of his prediction HBOS collapsed and had to be bailed out with 20bn of taxpayers money and brought by Lloyd's Bank. Fortunately, Moore's side was supported post-crisis when he testified in court and Crosby resigned and gave up his knighthood.
Of course auditors were never properly investigated following the crisis, and of course never were forced to explain how trillions of assets and liabilities that they audited simply vanished from the bank balance sheets that they had supposedly properly audited post-crisis. The confidence they had in AAA securities was entirely mathematically modeled garbage to boot, just to encourage greater leveraging on original mortgage debts and therefore greater profits for banks and auditors alike.
What equally amplified the world crisis was that the way investment was encouraged and permitted by auditors meant not only hedge funds and other financial institutions around the world owned the MBSs, but that MBSs were also in mutual funds, corporate assets, and pension funds. Everything was assumed to be safe since when the likes of traditionally safe pension funds brought risky assets, they were advised they would be protected by credit default swaps (CDC) traded by the likes of Insurance company AIG, that in the end all defaulted when the likes of AIG hadn't enough equity to cover losses in derivative values and ended up needing one of the largest ever bail-outs in history themselves just to keep the system alive.
The relevance - Were the causes ever fixed and lessons learnt?
If CDOs were at the heart of the problem in 2008 because of extreme leveraging, then something crazy happened subsequently. Central banks, banks and financial entities realised that corporations were more protected by the system as corporate loan obligations (CLOs), backed by corporate credit in the form of leveraged loans were less hit than CDOs in 2008, and so once again made financial leveraging the heart of the economy - the quickest way for financial entities to make excessive profits through leveraging and these financial entitities were to be the only ones who would make profits. Of course this meant once more more corporate debt - 'Corporate borrowing rose to record levels in the United States. At the end of 2010, the total debt of non-financial companies was $6 trillion. That became $7 trillion by the end of 2013, almost $9 trillion by the end of 2017, and $10 trillion by 2019.'
Around the time of the global financial crisis in 2008 there were only about $300 billion worth of CLOs in the US. By 2018 this had more than doubled to $617 billion, largely as a result of QE and extremely low FED rates. Of course this made a lot of money for many of the wealthiest capitalists - 'Global investment banking fees rose steadily as QE money was pouring into the financial system hitting a monthly peak of $11.1 billion in June 2014, surpassing the previous record of $10.7 billion, set in the summer of 2007, right before the crash.'
If loose accountability was at the heart of the CDO crisis, you would expect at least there would be strict regulation of the CLO market which most grew in CDOs place. The exact opposite occurred - previously corporate loans had lots of covenants that protected investors, but in the last decade cov-lite loans (loans with covenants stripped out) became popular to give borrowers more flexibility, less accountability and encourage them to take more risk. 'The Cov-lite loan, once an exotic debt instrument, became the industry standard. In 2010, they accounted for less than 10 percent of the leveraged loan market. By 2013, they were over 50 percent, and by 2019 they accounted for 85 percent of all leveraged loan.'
If inequality, excessive risk-taking and asset bubbles were the cause of the 2008 crisis, then central banks decided to not care the slightest and provoke exactly those economic conditions once more, post 2008 through Quantitative Easing (QE) and low interest rates. If QE comes at great cost and was only ever meant to be for times of emergencies, then why did central banks have to pump so much around Covid - the answer was to not save the man on the street who never really benefits from QE, but to save the CLO market and the largest corporations and then banks. In fact, central banks created new rules this time to save zombie ready-to-die corporations in a way they never tried to save indebted mortgage-owners. Banks of course had been compiling leveraged loans into CLO packages to sell to the likes of pension funds, but they also brought CLOs themselves and put themselves in severe risk should there be a CLO crisis like there was a CDO one - 'In 2019 alone, the value of CLOs held by big banks jumped by 12 percent to $99.5 billion. JPMorgan had boosted its own holdings by 57 percent that year.'
Hence the need for a Fed 2020 bailout that was larger than 2008 bailout - the largest expenditure of American public resources since World War II. It goes without saying tax havens are still alive, and markets are still so intermingled and overly US-centric that should there be a crisis in the US again it will spread to the rest of the world. However, it does seem that international activity post-crisis has been significantly reduced overall as money flowing across borders was more than halved from 2007 to 2017. The answer is we have a major debt problem today, worse than ever before, and therefore a major debt market - the world's mainstream economists have learnt very little. As the majority of CLOs contain contract clauses that permit them to hold only a certain amount of junk debt, then when a crisis like Covid hit corporations, a lot of the leveraged loans inside the CLOs were going to degraded - thereby breaching the standards of the contract. Therefore, CLOs would 'have to sell off their junk debt and replace it, or write down the value of the whole CLO' and this would put in danger like the mortgage crisis did, the banks. Hence why 'the stock value of the big banks fell by 48 percent between the stock market’s peak in February and March 23. Shares of JPMorgan Chase, the biggest of the big banks, were down by 43 percent during that time.' So how did central banks like the Fed save the corrupted system when it was about to die - the Fed 'for the first time, directly purchase corporate bonds, CLOs, and even corporate junk debt. (if the debt had been rated as investment-grade before the pandemic).
All the big 4 auditors have continued making chilling mistakes - as shown by how a PWC's CEO was forced to resign over reports of conflicts of interests, and more by how KPMG were viewed as responsible for the three large US bank failures (Silicon Valley Bank, Signature and First Republic); Ey for failed financial firm Wirecard and Deloite for bad auditing of transport company Go Ahead. The world is more technocratic, algorithmic and de-personalised as ever and so audit firms and regulatory bodies will continue to rely on false-statistical comfort, not realness, to make predictions.
Lastly consider the following graphs from a pre Covid August 2018 article by the McKinsey Global Institute titled 'A decade after the global financial crisis: What has (and hasn’t) changed?' -
To conclude it doesn't take a rocket scientists to deduce that the economy is looking worse than ever post 2008/pandemic in 2024, that the financial system was not reformed in a less risk/less debt and financially strict way. I for one do not want to be a false-prophet but believe the 08 crisis is still incredibly relevant today and the world could and probably will easily face a similar or larger disaster if the lessons from it are never learnt by both people and institutions. The bankers are absolutely guilty, but they were incentivised by the government and central banks like the Fed, and people in the end were the ones who took the mortgages and jumped on the housing boom band-wagon; a crucial point is to re-frame asset booms as asset inflation, and then it becomes visible what a mess we are all in.
References
(1) Norman T L Chan: Excessive leverage – root cause of financial crisis, https://www.bis.org/review/r111215g.pdf
(2) Warren Buffet on Derivatives, https://www.fintools.com/docs/Warren%20Buffet%20on%20Derivatives.pdf
(3) Explained: What happened during the 2008 Lehman crisis, Vivek Kaul, https://www.livemint.com/Industry/Gi4CgVYJ4QLOiVGRKqx8JO/Learning-from-Lehman-what-goes-around.html
(4) A decade after the global financial crisis: What has (and hasn’t) changed?, McKinsey Global Institute, 2018 https://www.mckinsey.com/industries/financial-services/our-insights/a-decade-after-the-global-financial-crisis-what-has-and-hasnt-changed
(5) Big Four audit firms had pivotal role in global financial crisis, Ian Fraser, 2009 https://www.ianfraser.org/auditors-blasted-for-pivotal-role-in-crisis/
(6) The lord's of Easy Money: How the Federal Reserve Broke the American Economy, 2022, Christopher Leonard
(7) The finance curse,
(8) Obituary: Paul Moore, ‘mad monk’ who blew the whistle on bank failure, 2020 https://catholicherald.co.uk/obituary-paul-moore-mad-monk-who-blew-the-whistle-on-bank/
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