Meltdown Review
Understanding the crisis involves understanding the past. At the beginning chapter of the book, Mason tells stories of the bankruptcy of Lehmans, and the collapse of AIG. AIG was making about 15 per cent of its profits from insuring financial speculation, and its shares were trading at a spectacular 37 times of its earnings by September 2000. To achieve this, AIG began to insure a large chunk of the high-risk speculation. They also had been faked to fool the auditors and had taken its customer’s insurance premiums and invested them in the speculative bubble. These are the reasons of the collapse of AIG. However, AIG had business with virtually every financial institution in the world; for example, it had underwritten $447 billion of debts of global companies. It was too big to fail. Therefore, government had made an agreement to rescue AIG with an $85 billion loan for an 80% stake of the company. With 80% ownership of government, AIG went nationalized.
For the next chapter, the author starts with details of the rescue argument between Paulson and Fed chief Bernanke on the TARP bail out package. And another major influence, which led to the financial crisis, would be the deregulation. The author mentions the passing of the Gramm-Leach-Bliley Act, which he then says “made official what the banking industry had been doing for a decade: merging, modernizing, becoming complex, bending and twisting to get around outmoded rules.” Together with deregulation, information technology was the second equally important factor.
Another aspect of this crisis was the shadow banking system, “a huge, unannounced and unregulated banking network operating with almost no press coverage and little visibility”. They exploited a “loophole” in the Basel II to create two off-balance sheet companies known as ‘conduits’ and ‘structured investment vehicles’ (SIVs). Since there’s no bank behind it, the risk of structured investment bank is bigger. The profit that SIVs brought was real.
For the next chapter, the author starts with details of the rescue argument between Paulson and Fed chief Bernanke on the TARP bail out package. And another major influence, which led to the financial crisis, would be the deregulation. The author mentions the passing of the Gramm-Leach-Bliley Act, which he then says “made official what the banking industry had been doing for a decade: merging, modernizing, becoming complex, bending and twisting to get around outmoded rules.” Together with deregulation, information technology was the second equally important factor.
Another aspect of this crisis was the shadow banking system, “a huge, unannounced and unregulated banking network operating with almost no press coverage and little visibility”. They exploited a “loophole” in the Basel II to create two off-balance sheet companies known as ‘conduits’ and ‘structured investment vehicles’ (SIVs). Since there’s no bank behind it, the risk of structured investment bank is bigger. The profit that SIVs brought was real.