Blog 5.
An inside job explained, what really went on in the worlds most influential organisations?
From watching the financial film Inside Job released in 2010 my eyes were opened to many issues that i was unaware of. It left me feeling that can we ever trust any information is given to us from influential members of organisations. The film outlined the many issues that occurred in the 2008 global recession in a wave of events resulting from the incompetence of the worlds largest investment banks and insurance companies.
During the time of the great recession there was a global economic downturn that devastated the worlds financial markets along with the real-estate industry (HISTORY.COM EDITORS, 2017). The effects from the great recession meant that there was a huge increase in house foreclosures worldwide, resulting in million of people losing their homes and life savings. In fact, according to real estate data company "RealtyTrac", there were 6,324,545 completed foreclosures from January 2006 to April 2016 (BROOKE NIEMEYER, 2016)
Figure 1.
As Figure 1 shows, the default rate on household debt and foreclosures skyrocketed from 2006 to 2009, before falling sharply from 2010 to 2013 (ATIF MIAN, 2015). The amount of foreclosures that occurred was because of the large number of mortgages that were been given out for individuals to buy homes. This process was given the name secularisation food chain. Prior to the changes that occurred in the great recession people went to their local banks to apply for loans for a mortgage, this resulted in monthly payments being taken out of their income. During the great recession the banks that people previously went to for mortgages were taken over by larger banking organisations therefore now being controlled by corporations. Therefore instead of the loan payments being between the home buyer and the lender, there was now many more parts in the process. By 2008 home foreclosures were sky rocketing as people were borrowing and then not being able to keep on top of the mortgage because of the CDO process they didn’t need to pay the loan back, just leave the house thus resulting in the high level of foreclosures.
One thing i found very interesting from the film was the level of influence that high level employees of these large banking corporations had within the US government over the years. For example many of the directors from companies such as Goldman Sachs advised different presidents over the time span on the great recessions. This information that was provided in the financial film opened my eyes to how closely politics and business go hand in hand.
Picture from (Ferguson, 2010).
One of the main corporations that was involved in the scandal that arose from the great recession was Goldman Sachs. Goldman Sachs proclaims "a responsibility to our clients, our shareholders, our employees and our communities to support and fund ideas and facilitate growth." yet the evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients and their communities. Its misuse of exotic and complex financial structures helped spread toxic mortgages throughout the financial system. And when the system finally collapsed under the weight of those toxic mortgages, Goldman profited from the collapse (Carl, 2010).
Large corporations such as Goldman Sachs profited from the great recession as they were involved in swaying their customers to purchase subprime loans from them. Subprime loans appear to provide credit in locations where credit might be more difficult to obtain. Subprime loans are heavily concentrated in zip codes with more mid‐level credit scores. They are also more prevalent in counties with higher unemployment rates. The latter result suggests that subprime loans have the potential to be an additional source of credit when economic conditions deteriorate (Christopher J. Mayer, 2008). This means that organisations such as Goldman Sachs took advantage of people in need by giving them financial advice and services that were not necessarily in the customers best interests. Goldman Sachs is the fifth bank to reach a multi-billion-dollar settlement with the department of justice in relation to subprime mortgages during the Great Recession. Other bank settlements include $13 billion with J.P. Morgan Chase; $16.6 billion with the Bank of America; $7 billion from Citigroup; and $3.2 billion from Morgan Stanley (Shen, 2016).
One of the main ways that the large corporate organisations were making money was from the CDO's. CDOs are risky by design, and the decline in value of their underlying commodities, mainly mortgages, resulted in significant losses for many during the financial crisis. As borrowers make payments on their mortgages, the box fills with cash. Once a threshold has been reached, such as 60% of the month's commitment, bottom-ranch investors are permitted to withdraw their shares (Investopia, 2019).
There were many academic conflicts where journal and statements had been published and the authors had been paid for what they wrote therefore making it biased. Thus meaning that many of the formal documents and articles that were available to the public providing financial advice was leading the customers down the wrong path when it came to decisions such as investing and loan purchasing.
What i learnt most from the financial film Inside Job was that the great recession caused so many extreme issues economically not only in the US but worldwide, also that if you are high up and influential in large corporations such as Goldman Sachs you can make as many risky decisions you like without being prosecuted. Even though the investment banks had to pay the government billions of dollars to help try and fix what they had caused through the great recession this did not mean that directors did not get to keep their extremely large bonuses.
As Figure 1 shows, the default rate on household debt and foreclosures skyrocketed from 2006 to 2009, before falling sharply from 2010 to 2013 (ATIF MIAN, 2015). The amount of foreclosures that occurred was because of the large number of mortgages that were been given out for individuals to buy homes. This process was given the name secularisation food chain. Prior to the changes that occurred in the great recession people went to their local banks to apply for loans for a mortgage, this resulted in monthly payments being taken out of their income. During the great recession the banks that people previously went to for mortgages were taken over by larger banking organisations therefore now being controlled by corporations. Therefore instead of the loan payments being between the home buyer and the lender, there was now many more parts in the process. By 2008 home foreclosures were sky rocketing as people were borrowing and then not being able to keep on top of the mortgage because of the CDO process they didn’t need to pay the loan back, just leave the house thus resulting in the high level of foreclosures.
One thing i found very interesting from the film was the level of influence that high level employees of these large banking corporations had within the US government over the years. For example many of the directors from companies such as Goldman Sachs advised different presidents over the time span on the great recessions. This information that was provided in the financial film opened my eyes to how closely politics and business go hand in hand.
One of the main corporations that was involved in the scandal that arose from the great recession was Goldman Sachs. Goldman Sachs proclaims "a responsibility to our clients, our shareholders, our employees and our communities to support and fund ideas and facilitate growth." yet the evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients and their communities. Its misuse of exotic and complex financial structures helped spread toxic mortgages throughout the financial system. And when the system finally collapsed under the weight of those toxic mortgages, Goldman profited from the collapse (Carl, 2010).
Large corporations such as Goldman Sachs profited from the great recession as they were involved in swaying their customers to purchase subprime loans from them. Subprime loans appear to provide credit in locations where credit might be more difficult to obtain. Subprime loans are heavily concentrated in zip codes with more mid‐level credit scores. They are also more prevalent in counties with higher unemployment rates. The latter result suggests that subprime loans have the potential to be an additional source of credit when economic conditions deteriorate (Christopher J. Mayer, 2008). This means that organisations such as Goldman Sachs took advantage of people in need by giving them financial advice and services that were not necessarily in the customers best interests. Goldman Sachs is the fifth bank to reach a multi-billion-dollar settlement with the department of justice in relation to subprime mortgages during the Great Recession. Other bank settlements include $13 billion with J.P. Morgan Chase; $16.6 billion with the Bank of America; $7 billion from Citigroup; and $3.2 billion from Morgan Stanley (Shen, 2016).
One of the main ways that the large corporate organisations were making money was from the CDO's. CDOs are risky by design, and the decline in value of their underlying commodities, mainly mortgages, resulted in significant losses for many during the financial crisis. As borrowers make payments on their mortgages, the box fills with cash. Once a threshold has been reached, such as 60% of the month's commitment, bottom-ranch investors are permitted to withdraw their shares (Investopia, 2019).
There were many academic conflicts where journal and statements had been published and the authors had been paid for what they wrote therefore making it biased. Thus meaning that many of the formal documents and articles that were available to the public providing financial advice was leading the customers down the wrong path when it came to decisions such as investing and loan purchasing.
What i learnt most from the financial film Inside Job was that the great recession caused so many extreme issues economically not only in the US but worldwide, also that if you are high up and influential in large corporations such as Goldman Sachs you can make as many risky decisions you like without being prosecuted. Even though the investment banks had to pay the government billions of dollars to help try and fix what they had caused through the great recession this did not mean that directors did not get to keep their extremely large bonuses.
Bibliography
Carl, S. (2010,
April 27). Wall Street and the financial crisis: The role of investment banks
. THE VIEWS EXPRESSED BY CONTRIBUTORS ARE THEIR OWN AND NOT THE VIEW OF
THE HILL.
Christopher J.
Mayer, K. P. (2008). Subprime Mortgages: What, Where, and to Whom? National
Bureau of Economic Research., 7.
Ferguson, C.
(Director). (2010). Inside Job [Motion Picture].
Investopia.
(2019, Septemebr 18). Were Collateralized Debt Obligations Responsible for
the Financial Crisis?
Shen, L. (2016,
April 11). Goldman Sachs Finally Admits it Defrauded Investors During the
Financial Crisis.
Carl, S. (2010,
April 27). Wall Street and the financial crisis: The role of investment banks
. THE VIEWS EXPRESSED BY CONTRIBUTORS ARE THEIR OWN AND NOT THE VIEW OF
THE HILL.
Christopher J.
Mayer, K. P. (2008). Subprime Mortgages: What, Where, and to Whom? National
Bureau of Economic Research., 7.
Ferguson, C.
(Director). (2010). Inside Job [Motion Picture].
Investopia.
(2019, Septemebr 18). Were Collateralized Debt Obligations Responsible for
the Financial Crisis?
Shen, L. (2016,
April 11). Goldman Sachs Finally Admits it Defrauded Investors During the
Financial Crisis.
A fantastic read Eleanor, it really is shocking to see the events that took place. Do you think that from this situation corporate governance has become a lot stricter since the events that led up to the financial crisis?
ReplyDeleteHi Emily,
DeleteI do believe that governance finance has become a significant amount stricter since the events that occurred in the US leading to the great recession of 2007. However if is never fully known what is going on behind closed door of organisations wherever in the world, shown by the sudden collapse of the Thomas Cook Group earlier this year. I would like to think that nothing extreme as the Great Recession would occur again but from the uncertainty of Brexit within the UK this can not be certain that economic distress will occur again.