tv Boom Bust RT September 15, 2018 8:30am-8:53am EDT
bush forty one has popularized this phrase. push and i'll say no and they'll push again and i say to them read my lips ah and candidates for congress were asked to take no new tax pledges and while the bill passed it cost many democrats their election in one nine hundred ninety four republicans won control of the house and clinton nomics faced tougher hurdles in congress clinton omics was first kept the us economy moving along in addition to policies put in place like welfare reform and free trade deals such as the north american free trade agreement and significantly financial deregulation was taking place within the clinton administration and then through the nine hundred ninety nine gramm leach bliley law which repealed the glass steagall act a law enacted the in one nine hundred twenty nine after the stock market crash as banks were being destroyed during the great depression the last stigall importantly
separated investment banking from commercial banking the concern was the improper speculating role commercial banks were playing in the stock market using in part their own customers money they were seriously self-serving some said greedy and place not only the financial sector but the entire economy in precarious peril and when those bank speculative bets went bad the markets melted down crashing with contagion not only amongst the banks but other companies and other sectors of the economy for the last years of the clinton administration the economy was booming with excellent growth the last year in one thousand nine hundred nine g.d.p. was four point eight percent but the us federal government actually had a budget surplus it had been two decades since that occurred but one not so notice thing was this thing taking place at a little agency that was pretty memorable rather it's called the c f t c the us commodity futures trade. commission the c f t c chairwoman brooksley born who had
come into the clinton administration late one thousand nine hundred ninety six saw a problem with financial deregulation and critically had huge concerns about unregulated markets called o.t.c. markets or dark markets that sounds scary as it should because these were bets on what a stock might be worth in the future be it a day or year or a month or more regulators or had no view was taking place they had no view as to what was taking place and nobody knew what or how much was being wagered nor the exposure the risk that is of the entities engaged in the trading so chair borne work with the p.w.g. the president's working group which included secretary of treasury and chairs of the federal reserve securities and exchange commission and herself to see f.t.c. but none of the others were concerned about dark o.t.c. markets after all clinton nomics was about deregulating not regulating but chair borne didn't let up to see if he issued a proposal just
a proposal on how the dark o.t.c. markets might be regulated in a thoroughly unusual unprecedented fashion the other members of the p.w.g. trashed it within hours of its release for her troubles president clinton replaced or the new chair had no issues with these dark o.t.c. markets and fast forwarded past two thousand and the us has a new president george w. bush bush forty two and he takes over great really a great economy with budget surplus a body else is doing refight take the money out and live without having to work for a year you know crazy stuff thanks for sharing kathy appreciate you being with us. thank you. and then the financial players and prominently the big bank which no longer had speculative trading restrictions upon them since that glass steagall act we talked about had been repealed back in ninety nine they began speculating in earnest in those dark markets about which chair brooksley born had
warned they traded the mortgage bundles through these new products called credit the swap default swaps or c.d.s. is and they were betting if the c.d.s. would fail or not and when the value of these products was whatever the traders deemed appropriate so if a trader traded one thing in value did it x. and the other trader might value with it why the problem was these things were traded among thousands of traders and financial firms and they were broken apart sliced indicts to the point where nobody knew what the risk was for anyone and regulators had of course not a clue it was the exact type of risk crazy risk in the spring of two thousand and eight the seventy five year old firm bear stearns one under bankruptcy it was a shock to many that this well established firm would take such a deep and devastating dive and it had many of us me included at the time to see if to see wondering what it might mean was there more to come and there was and it was
lehmann brothers which became the financial straw which broke the economy's back for more here's artie's ashley banks. what over six hundred billion dollars in assets and a little over six hundred billion dollars in debt lehman brothers had to file bankruptcy making it the largest bankruptcy filing and u.s. history in the first week of september lehman brothers management made unsuccessful overtures to many potential partners as a result their stock plunged by seventy seven percent the company would continue to see this trend to as its hedge fund clients started pulling out and it short term creditors began cutting credit lines by the end of the second week in september and brothers was left with only one billion dollars in cash leaving the company desperate for any help it could get and during the weekend of september thirtieth two thousand and eight lehman was in talks with barclays p l c and bank of america corp hoping one of the banks would take over unfortunately lehman brothers was out
of luck and declared bankruptcy on monday september fifteenth two thousand and eight women brothers was the fourth largest u.s. investment bank at the time of the collapse having twenty five thousand employees worldwide that day twenty five thousand employees lost their jobs and poise had been following the news over the weekend when they arrived to headquarters on monday they cleared out their offices aware of what was to come seven days after the collapse and a move holdings incorporated announced at a would acquire lehman brothers franchise in the asia pacific region and clued in japan hong kong and also. it later also announced it would acquire the company's investment banking and atwood he's businesses and europe and the middle east this deal became effective on monday october thirteenth two thousand and eight barclay also acquired a portion of lehman brothers following the clumps surely after the collapse took
place many question why the federal reserve didn't bail out lehman brothers. during the time of the collapse timothy geithner was the president of the new york federal reserve and two thousand and fourteen he said the bank wanted to assess lehman brothers adding quote we explored all available alternatives to avoid a collapse of lehman but the size of its losses were so great that they were unable to attract a buyer and we were unable to land on a scale that would save them despite the federal reserve's inability to save lehman brothers the collapse led to many employees and customers uncertain of what the future what holds and washington actually banks art. and what the future did hold it also ahead treasury secretary hank paulson and federal reserve chair ben bernanke really critically concerned with lehmann did what was next with
contagion from lehmann and perhaps others who could fall destroy the economy and still nobody knew the financial risks of those dark o.t.c. markets with those bundles of bad mortgages in the credit default swaps fearing the worst total economic destruction paulson and bernanke headed to capitol hill with a three page document seeking more than seven hundred billion dollars to buy what they called troubled assets held by large and small banks and insurance giant aig which had insured the o.t.c. dark market products for many of the banks and it did become law for more we're joined by legal journalist molly barrows at the ring of fire network molly some of our viewers may now have only a really a veg. welcome back well the impact of the great recession upon the crash that was huge in the u.s. the g.d.p. began retracting during the third quarter of two thousand and eight and ended up
negative point one percent for the year followed in two thousand and nine by a negative two point five percent. rate unemployment for two thousand and eight was seven point three percent but went up to nine point nine percent the next year home foreclosures jumped by eighty one percent in two thousand and eight up two hundred twenty five percent from two thousand and six as over eight hundred sixty thousand families lost their homes just in two thousand and eight and another two point eight million families received at least one foreclosure notice in two thousand and nine and for more on the impact we are joined by john grace president of investors advantage corp and henry ford which our friend the c.e.o. of straw mark it john thanks for being here both of you thanks for being here john what happened in the u.s. stock markets were generally overall not good but explain. well i started out good year two thousand and eight part and by the end of the year the s. and p. and the dow according to yahoo finance wrote about thirty seven percent drawdown
did not stop there i believe it stopped around late march early april to a total decline for stocks of about fifty seven percent for two thousand and eight indeed in march march thirty first two thousand and nine and johnno better which were sort of the worst sector stocks hit. well it was a broad brush bart so it probably led with the financials given all the drama that you're just reporting on that we all remember so vividly i mean i happen to be at goldman sachs it was around november just before thanksgiving two thousand and eight and i will tell you coming out of a conference meeting a meeting in the conference room it didn't feel like a library it felt like the morgue i mean that's just what it was on the fiftieth floor so nobody knew what was happening as the market in that day was off i think nine hundred points in one day so it just got worse and worse and worse day by day by day so i mean i love the question that you're posing here because the answer the best answer i see is brian sozzi who was
a lehman analyst in two thousand and eight and his answer is are we better prepared today than we were then in the end his answer is we've learned squat to use his words. that may be true in some cases for sure and hillary talk about contagion talk about the u.k. and the e.u. first yes ok with regard to contagion you know that was the greatest fear was the spread of course across all of europe and one of the differences is people talk about like the integration of monetary policy but not the disintegration it's right tough to break up so what you saw across europe of course was this entire dependability now you look at what was happening as well as like an unintended consequence there was a flight to safe havens one of the reasons that london rose even more so as a global financial state sector was this rise of the the flight to free havens you also. so having europe on the biggest difference you mentioned top of the it was this lot of a stronger a strong central bank so you have to have
a lender that is the like willing to be the lender of last resort a strong central bank and that did not exist in europe the e.c.b. was not strong enough to kind of stop this in europe so that's why you saw the ramifications through spain and cyprus of course the devastation in cyprus afterwards the other issue in europe of course is the debt that the banks hold of government debt the percentage in germany and greece it was about twenty percent and in spain thirty percent you don't have that in the u.s. and that was what was part of that contagion in europe and reminded me by the way you know when barclays was trying to buy lehmann a seat for weekend it was actually the regulators in the u.k. who said no they didn't want this contagion but they seem to get it right well actually barclays only then they actually caused by lehmann in the end but off the bankruptcy polson in his memoirs you probably saw that also you know he actually said that the the u.k. really and he used different language i'll just say did us over but i think a lot of it was due to the shareholders concerns because they also couldn't vote on
it but yes that was a situation. they wanted a guarantee from the you know we can't do it it's questionable whether or not they had the authority i saw warren buffett say i don't care if i if i were fed sure even if i didn't have the authority i would have done it and dealt with it in court because there's killer talk about what was the impact of the research in asia i know it was less but what do we know now actually when i was it was less i think the difference was because you know asia is always somewhat more conservative particularly china china and japan i think they're one step removed and they don't have the same structure they don't have the same structural weaknesses when i just mentioned strong central bank i mean you can't get any more stronger than china and also of course don't forget that a lot of it was caused by panic and the reaction and lack of confidence so you had a run on the banks not of course like the great depression that was what didn't occur in china as much and john thought finally i mean you always talk about active investment this was certainly a time where investors need to be active in these markets right. absolutely and
bart let me just say today it would be absolutely one hundred percent appropriate for the same investors to go back to see how bad it was in two thousand and eight if you were making contributions who cares but let's suppose you started the year with a million dollars in your traditional retirement account and you only took out three percent thirty thousand dollars and then the market washed away fifty seven percent so that's the maximum drawdown of sixty percent which means one million dollars suddenly becomes four hundred thousand right before your very eyes and guess what you can't buy and hold in this equation is the retirement accounts and you must take increasing withdrawals for the rest of your lives so that means that the odds of getting what is now four hundred thousand back to a million when there's a nother withdrawal because you have to make those withdrawals is probably pretty slim and so what we're saying is go back to see what you can learn from two thousand and eight look to see where you could apply active management strategies to all things liquid wherein they work so that maybe you were fully invested in
risk assets where the one of the percentage the stocks and bonds might be at the beginning of the year but if it was there a system that would have kicked in no matter how busy you are that might have pulled your assets out of risky assets into cash or alternatives by year in limiting your loss for two thousand and seven being off thirty seven you're only off twenty if we're off twenty we need twenty five to get back to even as that loss gets greater certainly become more challenging to try to get the account back to the starting balance thank you so much john gray said help your time guys. are playing with fire. and the financial crisis led to a regulatory revolution with the passage of the two thousand and ten wall street reform and consumer protection act otherwise known as dodd frank it sought to address things like those dark o.t.c. markets and under-capitalized financial institutions for more on this we're please be joined by bartlett naylor a public citizen thank you so much for being here again three hundred ninety eight
rules county i know nobody will how many of these were actually. completed well bit about eighty have been completed the two areas most dramatic discrepancy with executive compensation and credit rating we think that. executive compensation was very much central to the crash these people bankers didn't do this because they were playing some sort of video game or toy kids throwing their toys out of the pram they were doing because they were being paid up mortgage backed securities they were getting bonuses and so for those those rules have not been completed credit rating agencies those collateralized mortgage obligations were very complicated to understand and so they relied on credit rating agencies well they were they were in on the scam they were in on the scam used to be that investors paid for the credit ratings because a photocopy machines they couldn't make any more money because people were basically giving them to their fellow investment friends for free and so the issuer
began to pay for them and the credit rating agencies began to look to the issuers and giving them basically inflated grades so those are two of the basic areas where the regulations remain unfinished and we talked about we did cover o.t.c. the dark markets that's regulated now and talk about glass steagall that was sort of redone partly as a thing called the bowker rules part of dodd frank that changing the difference between commercial and investment banking explain where that is well where that is is that the regulators did approve a rule that became final in two thousand and sixteen you worked on that i voted on it you voted on it it's a very complicated rule public citizen and the progressive organizations did not like that rule in particular it was overly complex again this rule says that banks should not gamble especially with taxpayer backed f.d.i.c deposits they should be engaged in the difficult boring business of making loans. the the the liquidity.
that was threatened hasn't really appeared and yet the banks want this relaxed and as we speak the five agencies including your former agency are busy at work relaxing that rule i hope it doesn't happen i want to ask you about the future what do you think might be the next big crisis difficult to say. if i knew i would make a beeline to the regulators and make sure there is they are aware you're different such a different fellow people would say i'm headed to my investor you say go to the regulators well we got into the last mess because some of your other guests point out we were giving away mortgages like can't like free free candy we are also we have too much student debt we're also using all this corporate tax tax cuts to do buybacks and we are have corporate leveraging so i'm not sure if it's going to be junk bonds corporate debt student loans auto loans it will be something we have a crisis every decade decade and
a half and we're we're going to have another one i think it's going to be something that we do not see now where the folks in the financial sector as they are trying to make profits will figure out some way and the regulators will again like they did when brooksley born brought this up look the other way and not figure it out. thank you so much appreciate your help. at boom bust we try to be nimble and quick and those aren't traits which come easily to financial regulators but we'll keep doing our part right here and try to help us look at look out for the next financial crisis and of course for all the booms and the busts that's it for now see you next time. the swarm bluto them so moving. and good news was before.
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