Overview: How could the authorities and regulators not see the great financial meltdown of 2007+ coming and not do something to stop it happening? They had numerous smaller runs before the big event, perhaps the best of which was the collapse of Long Term Capital Management which bet the wrong way on derivatives and had to be bailed out by other financial institutions in 1998 - because not doing so would possibly create a systematic risk of financial Armageddon.
Or was the conspiracy here that the financial sector was completely out of control, nobody was regulating them perhaps because nobody truly understood what they were doing, or what they were doing wasn't being regulated by anybody? And tax payers were the ultimate savior of the highly paid financial guys...
Maybe Not? :
1) Was it all Beyonce's fault? According to a report in the Guardian [link] published in January 2009, Phil Maymin, professor of finance and risk engineering at New York University, is reported to have said that he has spotted a correlation between stock market volatility and songs with low "beat variance" of songs in the Billboard top 100. So stock markets go wild at the same time regular beats are in the charts. Beyonce's Single Ladies Put A Ring On It could spell doom for the world economy says the Guardian piece humorously. Womanizer by Britney Spears topped the charts in October 2008 in the usa. "The correlation is pretty strong," Maymin argues. Another example was Aha's Take On me which topped the charts in 1987.
Main conspiracy points:
1) Alan Greenspan, chairman of the Federal Reserve, August 1987 - 2006, was a believer in free markets. Fraud was not possible, he allegedly once said, because the market would work it all out. With such blind faith in the markets to regulate themselves, the financial crisis of 2007+ was surely inevitable. That it happened almost exactly 30 years to the day he took the job is entirely coincidental. See below: Frontline - The Warning - Alan Greenspan vs Brooksley E. Born - the link to youtube below is to the audio version of the program.
2) The collapse of Long Term Capital Management (LTCM), in 1998, was a significant warning of the dangers of derivatives, but nothing seems to have been done to tighten up regulation of derivatives afterwards (possibly because of 1) above). LTCM: The highest IQ of any 16 people working together in the world, doing what they knew about, with their own money invested in the company and it still failed - as Warren Buffet says in the video below.
Warren Buffett on Long Term Capital Management
3) Derivatives - Called by Warren Buffet 'weapons of financial mass destruction'. There was evidence years before that they were being mis-sold. It was as far back as 1993 that Proctor and Gamble sued Bankers Trust for selling derivatives to them that caused substantial unexpected losses [New York Times].
4) The ratings agencies. Ratings agencies had a conflict of interest in that they were paid by those they rated - there was free market competition between the agencies to give favourable ratings for bonds.
The September 2008 crisis was caused by ratings downgrades. On 16 August 2008 Moody's downgraded 691 mortgage backed bonds at a stroke (p136 The Age Of Instability, David Smith). in November 2007, 2000+ mortgage backed securities were downgraded, in about quarter of cases downgrades were 10 notches+. (p136 The Age Of Instability, David Smith)
5) Goldman Sachs sold sub prime mortgage contracts to their clients -
"How much of that shitty deal did you sell to your clients?" Goldman Sachs Hearing
6) Spain's Financial Crisis 2012: Corruption of the political classes - Spain's cajas (small banks) had political controls. These are now bust, Spain wants Europe to give money to these, but if they do it means corrupt politicians can walk away with millions. [Paul Mason, BBC Newsnight]
7) Lehman Bros went bankrupt citing leverage ration of 44 ie $18bn core capital, $800bn debts (p162 The Age Of Instability, David Smith).
8) AIG went bust due to it's use of Credit Default Swaps - CDS - which were reportedly outside AIG's regulated business. About $180bn was needed for the bailout... A credit default swap is essentially an insurance policy on a bond. Take as an example a bond from blue chip General Electric. General Electric have never failed on a bond in living memory. What AIG were doing was selling insurance on, say, those GE bonds and just taking the premium money for essentially doing nothing. Trouble is, along comes a catastrophic financial meltdown and suddenly they may have to pay up...
9) The USA: TARP The Troubled Asset Relief Program, $700 billion plan to get banking system through the crisis. "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." (p177 The Age Of Instability, David Smith)
10) Iceland - 304,000 population. Bailing out banks would cost $10bn 50% of Iceland's GDP. IMF says the failure of Iceland's 3 banks was the biggest in relation to size of economy anywhere at any time (p182 The Age Of Instability, David Smith).
Those that sounded the warning alarms: Senator Dugan in 1999: