Economic Report

4 interlocking factors 4 financial crisis:
1.) Too much leverage
2.) Large Asset Class - Subprime Mortgages failed
3.) Systemically important firms owning #2
4.) International derivatives tying balance sheets

1.) Too much leverage
	-1997 to 2007, leverage in global large banks TRIPLED.
	-Also, not included 1.) Shadow banking system and 2.)Off balance sheets on Balance Sheets made it go 4 to 5 times up higher.
	-Psychological Ingredient - Paradigm of old rich bankers mistake leverage for genius. It was their firms, not themselves making all the money. Hard to convince the other way around.

2.) Subprime Mortgages.
	- What were they? no one knew....they were mortgages that had a 2 or 3 year teaser rate and then was repriced upward from 3% to 9%
	-Underwriters knew that consumer could only pay 3% for starter years only, not 9%
		-Why? Incentives trump ethics.
		-Consumer would buy loan and pay upfront for the privilege of getting the loan, but had to refinance and would pay extra for doing so. They couldn't afford it!
		- Disaster for society but Awesome for mortgage companies and departments who could re-copy and re-paste these deals all over the world, hitting higher bonuses over and over again year after year.
		-As the underlining loans and credits got worse, which became obivious in 2006, Wall Street woke up and began regulating. Less money! (no one wants negative returns!)

3.) Important Firms Owning asset class.
	- Model of Wall Street: Buy it and Sell it.
	- Reality of Wall Street: Buy it and Sell it and Keep some of it.
		-Why? It got harder for bankers to find investors to buy product because of so much supply.
	-Should have tightened supply chain and focus on getting more end-users. Instead they sold product to firms instead and held onto paper currency because they thought it was the best product (AAA bonds! Best in class!) when it was actually more like BBB bonds, worst in class...

4.) Derivatives
	-If I own debt in GE and I want to lower my risk by purchasing a Credit Default Swap from bank, I have to pay a fee, but if GE goes bankrupt, bank pays me. CDS's are insurance for individual transactions. Only works if bank is not bankrupt. Trillions of individual transactions.
	- Who is to blame?
		- Regulators? Not really. Trust issues - Regulators let banks manage their own risks because they trust them.
		- Banks? Fannie Mae and Freddie Mac? Partially, but no.
		- You? Maybe, but you might couldn't be old enough to buy a mortgage at that time.
		-Truth is: The banks didn't cause it, it was going to happen because there were people lined up all over the place to buy anyway.

Crisis = Wall Street creates leverage, insures and sells bad (but looks good) mortgages internationally, and creates instruments (derivatives, or bets) that tie transacitons together.

Result = Unregulated banking systems fail all the time, the only difference here was: rather than a boom, we had an international-sized bust that almost created an international depression.

but you never hear about it, really, it was all just a whisper in the wind....