Snip! On the Origins of the Global Financial Crisis
(draft) Severing ties to long-term outcomes ends badly.
Early in our Pandemic, compelled by a series of ideas that clicked together in my brain (the wet, onboard, organic one),and inspired the the book and film versions of The Big Short, I created three videos to explain how we got into the Global Financial Crisis of 2008-2009, which started as the Subprime Crisis, then snowballed.
Here's the tl;dr:
- Many different parties at many different times "snipped" the long-term relations that held the financial system together. For example:
- Bankers who knew and helped their clients through the life of a loan (think Jimmy Stewart in It's a Wonderful Life) got replaced by transactional layers (loan originators immediately sell mortgages to securities houses, which dice and package them up into hybrid securities) and nearly incomprehensible financial instruments.
- The ratings houses — Moody's, Fitch, and Standard & Poor's — started rating most anything as AAA (least risk), fearing the next house would say yes if they said no to any incoming security they had to rate.
- The major investment banks — Salomon, Lehman and Goldman — went public. Instead of being partnerships where partners' reputations and assets were on the line, long term, they were now playing with OPM.
- "Foreclosure Phil" Gramm and others got rid of Glass-Steagall, allowing (forcing) all banks to speculate.
- Lawrence Summers, Robert Rubin, and Alan Greenspan kept Brooksley Born from regulating derivatives.
- Bob Lewis, AIG's Chief Risk Officer, inexplicably approved Credit Default Swaps, which allow you to insure assets (derivatives) you don't own.
- The exotic new derivatives offered juicy returns because they were based on flawed assumptions (housing prices will never go down!).
- Everyone wanted their money invested in these highly profitable instruments. Failing to join the crowd on this merry-go-round brought you unbearable heat and hate (read or watch The Big Short).
- When the system collapsed, the big fish who jumped off the merry-go-round profited nicely; everyone else got hosed.
- When Obama came to power, he knew the economy had to recover and grow, so he turned the system over to the banksters to fix what they had broken, aware they would likely profit even more.
- We have fixed almost none of the problems that caused the GFC. Nobody served time. The broken regs and institutions remain broken. Bob Lewis and others who helped precipitate the crisis didn't suffer for those actions.
Okay, not the shortest tl;dr ever 😅
When people protest that The System Is Rigged, its
For the longer story, you can watch my three videos here on YouTube, or click on the player below to watch them in this page:
And of course, all of this in context, in my Brain:
This is part of a series on [[The Dark Side of Rethinking Constraints]].This article is cross-posted on Substack here, Medium here and LinkedIn here. It's also here in my Brain.