This is a good intro, which should give the viewer an Economics 101 understanding of the crisis. It doesn't get into important issues like how government regulations like loosened mortgage rules and SEC lever ratio exemptions allowed risky lending. It also doesn't address why a bailout is necessary, how a single institution failing can bankrupt entire industries through credit default swaps, or what will happen to credit if these firms go under.
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Originally Posted by tisonlyi
Now that monetary policy is dead (0% fed funds rate) welcome to the hyperinflation gambit.
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Hyperinflation? More like liquidity trap.
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Originally Posted by flstf
Yeah, this is confusing, I guess it is like dominoes. Also it seems clear now that the government could have (should have) prevented this by either forbidding such high leveraged positions by the banks and/or forcing the security insurers like AIG to actually have enough money on hand to pay the claims. I understand they got around being regulated like real insurance companies by calling the insurance they sold credit swaps or some such thing.
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The SEC passed a lever ratio exemption for five firms about five years ago. Before that, banks couldn't lever at more than 12:1. In addition to borrowing, levering includes backing assets like mortgages with cash -- for every $12 owed to you, you have to have $1 in the bank. By the time it all came crashing down, these firms were levering between 30:1 and 40:1. At 40:1, a 2.5% net capital loss would result in illiquidity.
Those five firms? Bear Sterns, Goldman Sachs, Lehman Brothers, Merril Lynch, and Morgan Stanley.
Here's a writeup.
The Big Picture | How SEC Regulatory Exemptions Helped Lead to Collapse