Brave World: Investment Banking 2008 (B):KEL380) Why Essay

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brave world: Investment banking 2008 (B):KEL380)

Why were proponents of deregulation so successful in the late 1990s? How much can we blame deregulation for the meltdown in the investment banking industry? And how could the government have foreseen and/or stopped the domino effect before the crisis of 2008?

Proponents of deregulation were successful due in part to increase wealth of American citizens. Housing prices were rising at an incredible pace. Many Americans were becoming wealthy by simply "flipping" houses on the market. With this wealth, came an increase in prosperity and a standard of living for many Americans. However, this practice soon came to an end when the housing market bubble burst in late 2006. Much of the blame can be attributed to the greed of the investment banking and financial institutions. Investment banks were essentially giving loans to individuals who could not afford the payment. In turn, the investment banks such as Morgan Stanley and Goldman Sachs assumed large of amounts of debt. When large amounts of delinquencies and foreclosures occurred, investment banks didn't have sufficient capital to cover the losses ("Subprime Crisis: A timeline" 2008). The government fostered this behavior by providing insurance for these securities. With government backing, subprime loans were given to individuals in staggering numbers. Eventually, these individuals could not afford to make the payment and defaulted. The government could have foreseen and slowed these practices by created higher standards for home ownership.

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However, legislation before the crisis would be unpopular for politicians looking to get reelected. Politics plays a significant role within these circumstances. Property owners, the financial services industry, and investment bankers were all reaping the benefits of a housing market appreciating at nearly 58% a year from 2000 (AOL Real Estate Staff, 2010). A decision to halt such a rapid increase in wealth would have adverse consequences for the politicians and bankers involved. Politicians on one hand, wanting to get reelected would be seen as unpopular if they slowed the rapid increase in property values. Bankers, on the other, could essentially lose their jobs for attempting to halt unethical policies of investment banks.

2. How much of the industry-wide crisis stemmed from investment banks' financials and current economic climate as opposed to investor panic and speculation?

The crisis stemmed from both investor panic and investment bank financials equally. For example, near the height of the crisis, Bear Sterns, who ultimately was allowed to go bankrupt, had nearly $17.4 Billion in cash and cash equivalents ("Edgar online," 2008). However, it was too heavy burdened by the subprime mortgage market. Many trading counterparts did not want to deal with the risk associated with lending to Bear Sterns who was severely exposed to the mortgage industry. Also, hedge fund managers, who held significant positions within the bank did not want to deal….....

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