Swimming with Sharks, Part Three: The 2008 Financial Crash

June 01, 2017

Last week we left off with a high level overview of the structure of the “World of Finance.”  If you recall, the “World of Finance” was broken up into three parts:  Asset Management, Insurance, and Banking.  This week we quote from the book,Swimming With Sharks, for a very good summary of the 2008 financial crash by author Joris Luyendijk: 

"The short version is that in the years before the crash, commercial banks and mortgage providers lent far too much money to people who could not afford such debts – primarily in the United States and the UK, mostly for mortgages.  This continued over a long period of time because the easy money drove up house prices, making many people feel richer than they were.  Also, commercial banks and mortgage providers had less reason to worry about the risk of default on these loans because they could sell them on to investment banks, which then chopped them up and repackaged them into ever more complex financial products.  Asset managers at pension funds and other investors were keen to buy them because central banks were keeping interest rates low and these new instruments offered better returns.  For protection, pension funds and others relied on the American insurance giant AIG, which insured many of the products.  In turn, AIG trusted the credit rating agencies’ triple-A[i] ratings. 

 “As time went on, the products became more and more intricate and ‘exotic’ but the triple-A ratings kept coming.  Meanwhile, the banks kept some of these complex products on their own balance sheets – often hidden in deliberately complicated ‘vehicles’ in offshore tax havens.  The accountants either failed to see any of this, or thought it was fine, or looked the other way, as did regulators and politicians. 

“In 2007, the Labour prime minister, Gordon Brown, praised a gathering of bankers and asset managers in a speech at Mansion House:  ‘The financial services sector in Britain, and the City of London at the centre of it, is a great example of a highly skilled, high value-added, talent-driven industry that shows how we can excel in a world of global competition.  Britain needs more of the vigour, ingenuity and aspiration that you already demonstrate that is the hallmark of your success.’

“At the time of that statement there were already signs that millions of house buyers would not be able to meet their financial obligations, particularly in the US.  The financial products that contained their mortgages began to lose value, or ‘exploded’ and became worthless.  Investors had to take big losses but banks, too, had kept some of these products.  They had to write off huge sums of money as well – but how much?  Not only had many of the products themselves become mind-bogglingly difficult to value or understand but the same was also true of the ‘vehicles’ in offshore tax havens where the banks had placed many of them.Would the banks’ buffers be big enough?  At Lehman Brothers[ii] they were not, and when this bank had to announce bankruptcy other banks and financial institutions stopped lending each other money.  Suddenly the financial world was gripped by a paralyzing fear:  what would happen tomorrow? Who would be the next to go belly up?  The domino effect could cause the global financial system to collapse in a matter of days.  In response, governments reached deep into the state coffers[iii] and central banks now only lowered interest rates to levels not seen in centuries but also pumped unprecedented amounts of newly created money into the economy, both directly and indirectly.  This calmed the potentially debilitating distrust that had engulfed the financial system.  Politicians and central bankers had posed as fearless financial firemen – they had ‘saved’ the system.

“Obviously there is more to a debacle as epic as the 2008 financial crisis and bail-out but even this crash course is enough to bring out the number of parties involved:  the consumers who borrowed far beyond their means, often by misrepresenting or lying about their finances; the mortgage provides who encouraged people to borrow and cheat, or misled borrowers about the true extent of their indebtedness; the credit-rating agencies and accountancy firms that went along with the mushrooming complexity of products; the financial giant AIG which had insured them without keeping sufficient capital reserves.  And how about the pension funds and other investors that had been clamouring for more complex financial instruments to buy, since these promised a good return and they were only allowed to invest in AAA products?

 "The list of parties to blame is in fact considerably longer yet two things already stand out.  First, ‘the bankers’ were clearly not the only ones responsible.  Second, most people working in the banks, as well as entire areas of ‘finance,’ had absolutely nothing to do with all of this. 

 “Most commercial bankers were filling their days operating the payment system, or financing the construction of an oil rig, or dreaming up a new type of savings account for children under the age of twelve.  The vast majority of accountants were at work auditing the books of energy companies, technology firms or government institutions, far removed from financial products.  Anyone involved in the stock market was miles removed from the 2008 debacle. The same goes for those who were busy taking companies public in, say, the Middle East or South America.  And so on…

 "I remember a sense of relief, almost, when I began to understand just how few people were directly involved in the crash.  At least this had not been a comprehensive conspiracy on the part of the entire sector…

 “It was plain to see that investment banks and investment divisions of megabanks had played a key role in the crash.  And it was also clear that this was not the first time that investment bankers had had to say ‘sorry’ and promise to do better…So, I decided to start digging into those investment banks.”[iv] 

End of excerpt from Swimming With Sharks:  Inside the World of The Bankers.

As you read above, in gaining his understanding of the 2008 crash and in the course of his interviews with those in the financial world, author Luyendijk began to see that investment banks played a defining role in the financial collapse of 2008.  We will dive into what he uncovered about investment banks in the coming parts of the “Swimming with Sharks Series.”  

You may ask at this point in the series, where are we going with all of this?  With a basic understanding of the structure of the financial world as well as the most recent financial crash in 2008, it becomes easier to drill down and understand a little more detail about investment banking.  We want to help reveal to you the truth about the world’s financial systems.  This is not a short-term scare tactic to move you to purchase silver, but the truth about the financial systems is actually very scary.  These truths should move every thoughtful person to making a firm decision about exiting system as quickly as possible.  

We look forward to next week.  We are here to serve you. 

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