The GFC Explained Part 3 – What Really Happened

Welcome readers to our final instalment of our GFC series. After thoroughly researching about what really happened during the 2008 financial crisis, we must say there’s a whole lot more to the story than what people know. At the end of Part 2 we mentioned there was a second Wall Street Titan that was about to enter to their own death trap – allow us to introduce Lehman Brothers. In 2008, the CEO of Lehman Brothers was Richard Fuld and it wasn’t long before he became the prime target for millions of Americans during the financial crisis. In early September, the stock price of the firm was plummeting and it was advised a fire sale would need to be held to sell off current assets. What is a fire sale we hear you ask? Basically, it means the firm is selling off their assets at a very low price (this usually happens when a firm is facing bankruptcy). In a panic, an emergency meeting was held between the CEO’s of every major Wall Street bank – JP.Morgan, Meryl Lynch and Goldman Sachs. Fuld feared that if a solution were not reached, the bank would not be opening for business on the Monday. Lehman Brothers as a firm had been through a lot since opening in 1850. They survived the Great Depression and the 9/11 attack (given their offices were located in the World Trade Centre), so people believed they could survive this as well. The billion dollar bailout idea decided during that meeting was this – Lehman Brothers would be divided in two; a British bank called Barkley’s would purchase the solid assets and then the American banks would take over the other questionable parts of the firm. Unfortunately, they were screwed over by the British, relenting to take part in the deal… Lehman Brothers filed for bankruptcy on that Sunday morning at 2am.

Can you imagine the kind of effects this would have had on the American economy?! Millions of jobs were destroyed and the effects of this also had a reach overseas as far as Beijing. This bankruptcy was the catalyst for everything that occurred at the end of 2008. The stock market plummeted, Russia ceased trading altogether and banks stopped lending money. Hank Paulson (former CEO of Goldman Sachs and US Treasury Secretary at the time) stated this was the financial equivalent of war. It was his decision in the end to allow Lehman Brothers to fall into bankruptcy – refusing to go ahead with a government bailout and using taxpayer money.

The next commotion was caused by American International Bank (AIG). CEO Joseph Casino moved to the UK in order to practice the kind of trading that was banned in the USA and with his risky insurance scheme the company was forced into bankruptcy as well. What people may not have known was that Pulson actually bailed out AIG with $85 billion worth of cash injection… and yep, you guessed it, using taxpayer money! You’ll be glad to hear Joseph Casino was fired (but walked away with a hefty sum of money). It seemed that taxpayer money was the only solution to help bail out these failing banks – you can see the controversy here now right?

Now, allow us to introduce something called the Troubled Asset Relief Program (TARP) in light of JP. Morgan and Goldman Sachs approaching the cliff. The government strategized to buy back toxic assets (e.g. MBS) and equity from banks in order to bring them out of turmoil of an amount up to $700 billion. This program went through a few reforms so if you want to know the criteria the banks had to meet, give it a google!

Things were then starting to get very real for the American resident with foreclosures starting to occur at a rapid rate. Usually there might be 1-2 foreclosures a month…. now they were 20-30 PER WEEK! Surprisingly, the parliament actually told residents to fight back against foreclosure. Needless to say, things were out of control and the CEO’s of the top banks in the US were brought to an emergency meeting at the White House. The deal went down like this… the government would make direct investments in the banks and if the banks accepted, they would experience increased governmental intervention (yes, this also included their bonuses so you could probably assume they were reluctant). These banks accepted cash bailouts of between $10 to $25 billion. So, can you imagine the public reaction to this? Pretty bad. Over in Europe they had their own kind of bail out proposed as a rescue fund. Yes, the Europeans blamed the Americans for the collapse of Lehman Brothers (and we guess the whole GFC).

Now, let us quickly come back to Iceland for a second. In October of 2008, the Icelandic banks in the UK and Iceland collapsed and were taken over by government. Britain actually demanded that Iceland guarantee British deposits to their residents in Icelandic bank accounts but Iceland refused. The outcome? Assets were frozen in Iceland banks within the UK and Iceland was pretty much classed as a terrorist country in their eyes. With the years leading up to the GFC as residents were encouraged to buy up big on assets such as cars and houses, majority of residents were about $350,000 if not more in debt.

Alright readers, there you have it! The intricate details behind the GFC you may not have known. Overall, this crisis was the result of the repackaging of stocks, taking B and BBB rated bonds and selling them off as quality AAA bonds. So you see, this crash was not the result of a system breakdown but that of people lying, greed, cheating and being un-ethical. We’ll just let that sink in…

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