The film Too Big to Fail is about the beginning of the economic crisis in 2008shows the dilemmas and decisions that were made and how they affected each ofthe actors participating in the US economy. From the analysis of this film, agreat ethical dilemma arises that arises throughout the development of the plot:Is it possible to do something outside the law for the common good of society?. In the world of finance is not only necessary to have a code of ethics thatdoes not indicate the way forward, but also a moral code that makes us make thebest decision by assessing the damage in each scenario and trying to choose theone that represents the least harm to society. Apparently every day for a whole month, alegendary different financial company wavered before the collapse. The stockvalue documented some of its biggest and most dramatic losses in history,including the epic devaluation to 778 points of the Dow Jones on September 29 -the biggest slip ever experienced by the Dow in a single day. In the face ofsuch a devastating situation, legislators and government institutions workovertime in an effort to nip in the bud a failure of catastrophic scope for thefinancial system. (2009, CNN Money). This news is a visible reflection of theserious economic situation and subsequent rupture that the United States wouldexperience in its financial and economic system.
However, behind such adisheartening situation there is a story characterized by the highest figures,both financial and political, who with their decisions and actions forged thedestiny of what would be one of the most important crises not only in theUnited States, but in the world. In order to understand the outbreak of thecrisis and its subsequent affectations, it is necessary to answer the followingquestion: What was the process that led to the crisis of 2008 to become anunprecedented world crisis? The crisis of 2008 was forged from time ago, moreprecisely during the last two decades of 1900. They were years in which thefinancial and banking sector took a 180-degree turn, as banks began to become publicas a measure of capital increase.
With President Reagan’s entry into thepresidential mandate – supported by the most influential economists andlobbyists in the country, as was Greenspan – a period of deregulation beganthat would prevail during the subsequent presidential terms of Clinton andBush.By the end of 1990 there was already anaccumulation of entities so large that if for some reason they broke, theyconstituted a threat that could destroy the entire financial system.The sum of deregulation and newtechnologies gave rise to the derivatives market. The economists claimed thatthey made the market safer, but the reality was that they created greaterinstability, since the derivatives bet on practically everything includingclimate.By the end of 2000, banks depended almostentirely on derivative activities to be more viable, with the added bonus thatthere was no authority to regulate them.
By the time Bush came to power therewas already a highly powerful, profitable, and concentrated financial sector.At the top of the sector were 5 banks: Merryl Lynch, JP Morgan, LehmanBrothers, Goldman Sachs and Bear Sterns; 2 Financial Conglomerates: Citigroupand Morgan Stanley; 3 Securities Insurers: AIG, MBIA, AMBAC; and 2 RatingAgencies: Moody’s and Standard & Poor’s. All the mentioned entitiesconformed a very complex system known as “Securization Food Chain”,in which trillions of dollars of loans and mortgages were connected granted bythe lending banks, who in turn sold the debt to investment banks, thesecombined hundreds of mortgages and loans (credit, student, car, etc.) to createcomplex derivatives known as CDOs and in turn sell them to national investorsand foreign.
The problem lay in the following: 1.The lenders banks did not worry if those who asked for the loan could pay forit, all they wanted was more profit through the sale of more CDOs.2.A dependency is created among the members of the chain, because amongthemselves they ate the product (CDO’s). Which would eventually create a dominoeffect.
3.Nobody, not even the creators of the CDO’s were able to put a price on theirpackages, the question was, were they really quality assets? Did they have realvalue?4.Distorted compensation system, that is, there were greater gains in the shortterm than in the long term, which were reflected through the payment ofmillionaire bonds and a reduction of penalties in case of losses.5.
High risk, and even greater with the appearance of so-called”subprime” – combination of thousands of loans and mortgages.6.No regulation of the situation known as the Mortgage Law and encouraged byGreenspan.7.The level of leverage of the banks was really worrying. There was a ratio of33: 1. Which meant that a minimum decrease in assets such as 3% would leavebanks completely insolvent.
The situation worsens when thementioned Insurance Companies – AIG, MBIA, and AMBAC – enter to furthercomplicate the securitization chain with the sale of the well-known CDS, whichrepresented an insurance derivative in case of a decrease in the value of theCDO. The problem was that they were backed by dubious subprime mortgages andunlike insurance; they did not ensure anything tangible or real, sincespeculators could buy CDs to bet against unpopulated CDO’s.This mechanism governed by a structure oflower losses and greater short-term gains, would irremediably explode the speculativebubble that had been brewing, causing not only the bankruptcy of the country’sleading banks, but the collapse of the entire financial system.
Agood way to better understand the scope and magnitude of the 2008 Crisis isthrough its comparison with “The Great Depression”. The followingtables intend to list both the similarities and fundamental differences thatcontributed to convert both collapses into crises with global and catastrophiceffects for the US and world economy. There is no doubt that the fate;consequences and primary effects of the 2008 Crisis were shaped by a series ofdecisions, actions and inactions on the part of the main leaders of thecountry, as well as the captains of the US finances. The next step tounderstand the roots of this financial crisis is to answer the followingquestion: In what ways did the main leaders affect this crisis?Afterthe bursting of the mortgage bubble, the entire mortgage market fell; almostimmediately after the banking and the stock market, the interbanking andcommercial credit followed, causing the freezing of the economy. After this,the crisis expands to an international level going into the banking system andstock exchanges around the world; this expansion of contagion is observedthrough the first manifestations of the fall in consumption, production andemployment. There were by then large productive companies – such as GeneralElectrics – suffering significant losses as well as tens of millions ofmortgage debtors and dismissed workers.
Withthe bursting of the housing bubble, the prices of raw materials plummeted,particularly that of oil. Added to this is an instability that would cause asignificant increase in inflation and subsequent deflation in the UnitedStates. Since they mention the ways in whichthe decisions of the high banking officials and leaders of EEUA affected boththe country and the world, it is necessary to understand which decisions werethe most important and those that caused the aforementioned effects?Thebeginning of the crisis goes back to the deregulatory decisions made by thegovernment incited by the high officials of the Federal Reserve – with AlanGreenspan as president – a clear example is the acceptance of the Mortgage Lawwhich allowed total freedom and no regulation of the situation; as well as thedecision of the SEC – Securities and Exchange Commission – that allowed thebanks to risk without limit and reach very high levels of “leverage”,prompted by Paulson – Secretary of Treasury -.Another important decision was thedecision of the Secretariat of Treasury – led by Paulson – to protect themortgage company Fannie Mae and Freddie Mac with more than 200 billion dollars;as well as structuring the purchase of Bear Stearns Bank through JP Morgan; Butperhaps his most important decision was to omit the rescue, avoid the purchaseand therefore allow the bankruptcy of one of the most important banks in thecountry: Lehman Brothers.
Undoubtedly, one of the actions thatcaused great tumult was the Bank of America’s purchase of Bank Merryl Lynch.After this purchase, the FED convinces 5 of the most important banks to investa total of 180 billion dollars as a measure to restore financial banksglobally.Finally, there are two actions ofpredominant importance for the final location of the crisis, both led by theFED in conjunction with Henry Paulson, Bernanke and Tim Geithner. The first wasto pass a law through the United States Congress that would allow thegovernment’s loan of 700 million dollars to create a fund that would buy thetoxic assets of the banks; and the second was to carry out a strategy of”nationalization of banks” in which Morgan Stanley, Goldman Sachs,AIG, among other banks renounced their status to become common banks governedby the US government.According to the Investigation Commissionof the Financial Crisis of EEUA created in May 2009 to establish the causes ofthe crisis, this “could have been avoided”. So, if this were reallytrue: What things could have been avoided after realizing that the country(USA) was at risk of crisis? This crisis is characterized by excessive risktaking and negligence on the part of financial regulators. From my perspective,both factors could have been avoided because their occurrence depended on thedecisions made by both senior officials and leaders and bankers leaders.
Aclear example is the reduction in financial regulation during the management offormer Federal Reserve Chairman Alan Greenspan, the FED and the SEC may haveimposed limits on the excessive risk incurred by banks but never did. On theother hand, the fact that the main regulatory bodies – such as the SEC -allowed the world’s balance sheets to be flooded with uncollectible assets orof completely uncertain quality worsened the situation. The level of risk of the packages wasgiven as much by its complexity as by its lack of tangible value, this couldalso have been avoided since it was the packaging of the debt that propagatedthe contagion in the financial system. If these complex financial instrumentshad been commercialized in a smaller volume and had been based on reliablemortgage debtors, the scope of the crisis would not have reached to destroy thefinancial system and would have prevented the bankruptcy and / or sale of someof the banks already mentioned. On the other hand, the abysmal failuresof credit rating agencies to recognize the risks involved in these or otherproducts stand out.In conclusion, it can be said that thecrisis was caused by a series of factors, including failures in financialregulation and business management, as well as the lack of understanding of thefinancial system by policy makers, which resulted in a collapse of thefinancial system both nationally and globally.
A crisis of the magnitude of the2008 Crisis generates implications that until five years later continue toaffect the US and world economy. Even when the behavior of the US economy seemsto confirm that it is finally entering a new stage in the growth cycle, thereare a number of negative factors from the 2008 crisis that have not beencompletely eradicated.More specifically, there are 5 factorsthat have hindered the US economy: 1) The late recovery of the real estatesector that today continues to suffer falls of up to 8.7%; II) The highindebtedness of the private sector, the problems in the credit markets spreadwidely to the whole economy and are still present today; III) The unemploymentrate, which is likely to remain above its historical average and pre-crisislevels; IV) The almost absent inflation rate and GDP decrease, V) And finallythe three traditional pillars of the economic growth continue at levels belowthe immediate subsequent average of the crisis that was 2.2%. -Retailconsumption (which in normal times means more than two thirds of US growth),investment by companies (which still currently postpone their investments asmuch as possible given the national economic outlook) and foreign trade, whichcan not be expected because the main trading partners of the United States arealso immersed in a deep post-crisis cycle.What is mentioned in the previousparagraphs is a representation of the post-crisis consequences with which theUnited States continues to live.The origin of the crisis was the centerof the United States and it expanded to the rest of the world, in clearcontrast to previous crises that originated in emerging countries and expandedtowards the center; due to this, the crisis of 2008 has been pointed out bymany international specialists as the “crisis of the developed countries”,since its consequences are observed mainly in the richest countries of theworld.
So, what is the reason that this crisis could only have been caused in acountry like the United States and not in an emerging country like ours?The United States since the end of theSecond World War and up to the present time holds the title of the first worldpower, that is, the first in terms of economic, military and technologicaldevelopment. In 2008 it had a GDP of 14.22 trillion dollars – a quarter of thenominal world GDP-; With a currency that represents 60% of the world reserves,it becomes the holder of the largest financial market, with an influence thatstands out in any international economic and political decision. It is rankedseventh in the world in terms of production and GDP per capita, as well asbeing the largest industrial producer in the world and the largest commercialcountry in the world with commercial clients ranging from the EU to Mexico,Canada and China. In addition to what was mentioned in theprevious paragraph, we must take into account that the USA is the only countrythat consumes, spends and invests more than it produces and still has thecapacity to finance its excess and obtain profits.
The reality is that the restof the world saves to finance American spending.The crisis of 2008 could not have arisenfrom an emerging country like Mexico, given that its economic, political andinternational circumstances would not have had the capacity to generate theglobal repercussions and repercussions caused by this crisis. The reason issimple: simply because they lack of wealth, power, international influence, aswell as the aforementioned characteristics, which make the United States theonly country capable of causing but also withstand a recession like the onethat occurred in 2008.