The Global Financial Crisis of 2008

• Iceland was a stable democracy with a high standard of living, low unemployment, and low government debt before 2000.
• In 2000, the Icelandic government began a policy of deregulation, allowing multinational corporations to exploit the country's natural resources and privatizing its three largest banks.
• The result was a massive financial bubble, with the three banks borrowing $120 billion, 10 times the size of Iceland's economy, and bankers showering money on themselves and their friends.
• The stock market and house prices skyrocketed, with stock prices increasing by a factor of nine and house prices more than doubling.
• The bankers set up money market funds and advised deposit-holders to withdraw money and put it in the funds, creating a Ponzi scheme.
• American accounting firms like KPMG audited the Icelandic banks and found nothing wrong, and American credit-rating agencies gave them high ratings.
• In February 2007, the rating agency upgraded the banks to the highest possible rate, triple-A.
• When the Icelandic banks collapsed in 2008, unemployment tripled in six months, and many people lost their savings.
• Government regulators who should have been protecting the citizens did nothing, and one-third of Iceland's financial regulators went to work for the banks.
• The crisis was not unique to Iceland, with similar problems in the US, where Wall Street incomes are excessive and regulators failed to do their job.
• The global financial crisis of 2008, triggered by the bankruptcy of Lehman Brothers and the collapse of AIG, led to a global recession, costing tens of trillions of dollars and rendering 30 million people unemployed.
• The crisis was caused by an out-of-control financial industry, which has led to a series of increasingly severe financial crises since the 1980s.
• Before the 1980s, the financial industry was tightly regulated, and most regular banks were local businesses prohibited from speculating with depositors' savings.
• Paul Volcker, former chairman of the Federal Reserve, noted that the financial industry exploded in the 1980s, with investment banks going public and giving them huge amounts of stockholder money.
• In 1981, President Ronald Reagan chose as Treasury secretary the CEO of Merril Lynch, Donald Regan, and started a 30-year period of financial deregulation.
• The Reagan administration deregulated savings-and-loan companies, allowing them to make risky investments with depositors' money, leading to a crisis that cost taxpayers $124 billion.
• Thousands of executives went to jail for looting their companies, including Charles Keating, who hired Alan Greenspan to defend him.
• Greenspan was later appointed chairman of the Federal Reserve and was reappointed by presidents Clinton and George W. Bush.
• During the Clinton administration, deregulation continued under Greenspan and Treasury secretaries Robert Rubin and Larry Summers, allowing the financial sector to grow even larger.
• The Gramm-Leach-Bliley Act of 1999, also known as the Citigroup Relief Act, was passed at the urging of Summers and Rubin, allowing Citigroup to merge with Travelers and violating the Glass-Steagall Act.

• The repeal of the Glass-Steagall Act in 1999 led to the creation of massive financial institutions that were deemed "too big to fail" and were bailed out by the government.

• The deregulation of the financial industry in the 1990s and 2000s led to the creation of complex financial products called derivatives, which made markets unstable.

• The use of derivatives and financial innovation exploded after 2000, leading to a massive financial bubble.

• The securitization food chain connected trillions of dollars in mortgages and other loans with investors all over the world, creating a system that was a ticking time bomb.

• Lenders no longer cared about whether borrowers could repay their loans, as they could sell them to investment banks, which would then package them into collateralized debt obligations (CDOs) and sell them to investors.

• Rating agencies, paid by the investment banks, gave many CDOs triple-A ratings, making them popular with retirement funds and other investors.

• The system was a "green light" for lenders and investment banks to pump out more and more loans, without caring about the quality of the mortgages.

• Between 2000 and 2003, the number of mortgage loans made each year nearly quadrupled, with a huge increase in subprime lending.

• Many subprime loans were combined into CDOs, which were then sold to investors, who were unaware of the risks involved.

• Investment banks, such as Goldman Sachs, Bear Stearns, and Lehman Brothers, made huge profits from selling CDOs, and their CEOs became enormously wealthy.

• In 2004, Henry Paulson, CEO of Goldman Sachs, helped lobby the SEC to relax limits on leverage, allowing investment banks to sharply increase their borrowing.

• The SEC somehow decided to let investment banks gamble a lot more, with the ratio of borrowed money to the banks' own money becoming increasingly high.

• AIG, the world's largest insurance company, was selling huge quantities of derivatives called credit default swaps, which worked like an insurance policy for investors who owned CDOs.

• AIG didn't have to put aside any money to cover potential losses, and instead paid its employees huge cash bonuses as soon as contracts were signed.

• The 400 employees at AIG's Financial Products division in London made $3.5 billion between 2000 and 2007, with Joseph Cassano, the head of AIGFP, personally making $315 million.

• In 2007, AIG's auditors raised warnings about the company's accounting practices, but Cassano repeatedly blocked them from investigating.

• Raghuram Rajan, then the chief economist of the International Monetary Fund, delivered a paper in 2005 warning that the financial system was making the world riskier due to incentive structures that encouraged bankers to take risks.

• Rajan's paper focused on the problem of bankers being rewarded for taking risks that might eventually destroy their own firms or the entire financial system.

• Larry Summers, then a prominent economist, was vocal in his criticism of Rajan's paper, accusing him of being a Luddite and wanting to reverse the changes in the financial world.

• The financial industry's excessive compensation levels and focus on short-term profits led to a culture of greed and risk-taking, which ultimately contributed to the financial crisis.

Here is a summary of the text in detailed bullet points:

• Wall Street culture is described as a "boys' club" where men engage in risky behavior, often involving strip bars, drugs, and prostitution, and where the goal is to make as much money as possible.

• A Bloomberg article reports that business entertainment, including strip clubs and prostitution, accounts for 5% of revenue for derivatives brokers.

• A New York broker filed a lawsuit in 2007 against his firm, alleging he was required to retain prostitutes to entertain traders.

• At least 40-50% of higher-end clients at a particular firm were from Wall Street, including Goldman Sachs, Lehman Brothers, and Morgan Stanley.

• Clients would use corporate money to pay for lavish requests, such as Lamborghinis for girls.

• The behavior extends to senior management, with a friend of the narrator describing the trading desk at his company as a "complete disaster" due to the sale of subprime mortgages.

• Borrowers had taken out loans for 99.3% of the price of the house, with no money down, and would walk away from the mortgage if anything went wrong.

• Goldman Sachs sold at least $3.1 billion worth of these toxic CDOs in the first half of 2006, while CEO Henry Paulson was at the helm.

• Paulson later became Secretary of the Treasury, avoiding a $50 million tax bill on his $485 million in Goldman stock.

• By late 2006, Goldman had started betting against the CDOs they were selling to customers, without disclosing this to the clients.

• The firm made hundreds of millions of dollars while the investors lost almost all their money.

• Rating agencies Moody's, S&P, and Fitch made billions of dollars giving high ratings to risky securities, and were compensated based on the number of ratings reports they produced.

• The agencies argued that their ratings were merely opinions and not investment advice, despite the fact that pension funds and others relied on them to make investment decisions.

• The Federal Reserve, led by Chairman Ben Bernanke, did nothing to stop the crisis despite numerous warnings from economists and experts.

• In 2008, the crisis came to a head, with the collapse of the subprime mortgage market and the failure of several major banks, including Lehman Brothers and Bear Stearns.

• The government was forced to take over Fannie Mae and Freddie Mac, and later bailed out AIG with an $85 billion loan.

• The ratings agencies continued to give high ratings to banks and financial institutions until just days before they failed, including Lehman Brothers, Merrill Lynch, and AIG.

• The administration was caught off guard by the crisis, with one official stating that "nobody knew" about the extent of the problem until it was too late.

• The Federal Reserve and Treasury Department were criticized for their slow response to the crisis, and for not taking more action to prevent the collapse of the financial system.