 So let's start. There are a whole series of sub-thoughts. Every node here is called a thought and you'll see how they're all linked to each other and underneath this a couple layers down are articles, videos, editorials, whatever else. But for example, one of the thoughts here is that we snipped the laws that kept banks from speculating, then suddenly everybody's money was in play. So for example, foreclosure fill, and this is some editorial in my part, Phil Graham was known as foreclosure fill for reasons that will become evident through this whole story. He is in my rogues gallery of people who individually contributed to the sub-prime crisis. But foreclosure fill basically helped break Glass-Steagall, the anti-trust act, so that travelers sandy while could buy city corp, thus turning all banks into risk takers. Let me unpack that. Under Glass-Steagall, banks could not speculate with our deposits, which means Glass-Steagall separated commercial banks from investment banks and one couldn't do the other. This came out of the 1933 Banking Act. Basically, the PCORA Commission investigated why the crash of 29 happened and they said, hey, we need to separate these things out. And this was actually a good idea. And if you've been listening to Elizabeth Warren recently, she's been saying the same sort of thing like we should bring this back. So I say that sandy while needed this to pass so that travelers could eat city corp. And that's kind of what happened. Travelers, which was a large insurance company, the Travelers Company founded in 1853 as St. Paul Fire and Marine had become this giant enterprise that wanted to merge with City Group, but actually it wasn't so much a merger as a reverse merger. And in order for this to happen, they needed to be able to get rid of Glass-Steagall because Glass-Steagall would have prevented the merger of City Group. and Travelers. So there was this contingency. The transaction went ahead, except there was still this annoying bill in the way, Glass-Steagall. So they managed to pass, and I'm not saying sandy while did this personally, but through a whole series of legislation and a bunch of help from Phil Graham, they passed the Financial Services Modernization Act of 1999 or GLB, the Graham Leach-Bliley Act. And this in fact took apart the provisions that were in there from Glass-Steagall. And here's a Wall Street Journal article from much later titled, Sandy Regrets Breaking Glass. Ah, too bad. And one of the causes of the global financial crisis was this. So if I go back to my nexus of reasons, we snipped the laws that kept banks from speculating that everybody's money, um, forcing everybody to invest in a particular security makes that pool of money really, really huge. This is kind of one of the later insights. But what happened was it used to be that your bank deposits were pretty safe. They had to be invested conservatively. They couldn't be invested in all these high risk instruments. Getting rid of Glass-Steagall snipped that particular kind of responsibility over time. And I have to say that a lot of people talk about volatility and finance, the beta factor. Can investors need volatility? Can investors hate a predictable stock that just goes up slowly, slowly, slowly, and always, you know, does exactly what it's promising to do on investment? No, they want a high beta. They want a lot of volatility in the markets because if they have some control over that volatility, they can in fact make a lot of money. So making everybody invest in a particular security created a gigantic pool of money around this. Another way that that happened is that the investment ratings houses, Moody's, Fitch, and Standard & Poor's were basically giving all these, all these derivatives, AAA ratings. AAA is the highest rating you can possibly give something. And I kind of got this when I read the article, it's The Economy Doomcock by Michael Lewis, the same fellow who wrote The Big Short. And here's The Big Short, the book inside the Doomsday Machine. He published this in 2010. And here's the film, The Big Short, which has Init, Brad Pitt, Christian Bale, Ryan Gosling, and Steve Carell, who I normally can't stand, who was just brilliant in this particular thing. And so Michael Lewis writes this article, it's The Economy Doomcock in Vanity Fair. And he goes to this little, this little German retirement fund investment bank called IKB, and it turns out that they were buying these things up, they were gobbling everything up. And I was stunned to discover that they went under because they had been buying CDOs, CDSs, and all of the derivatives that people had been conjuring up during this entire incident. And it suddenly dawned on me. At the end of this article, there's a quote from one of the bankers at IKB, and he says, we were doing all the math and all that, and we thought we were okay, but these instruments were all rated AAA, which means no risk, right? So we severed the logic of risk, and so the connection between risk because all these ratings houses were transaction mills. Basically, they never said no because then the next guy would get the business and they'd make the fees, and they were being paid by the banks per transaction for certifying that these derivatives were in fact AAA. And at the beginning, they were probably mostly AAA because at the beginning, these derivatives were pretty reasonable. But over time, one of the things that happened is that John Paulson, J.P. Paulson, who is another person who is very individually involved in all of this, he convinced Goldman and Deutsche Bank to go fill CDOs with junk mortgages. Then he went out and bought CDSs, which I haven't explained yet, and bought those as insurance against these CDOs that he now knew were going to fail because most of the mortgages at that time had balloon payments that would come do kind of around the same time, sometime later. So these weren't obviously mortgages that were going to fail up front, but everybody in the system thought they were going to flip their houses and make a lot of money going forward. So all of a sudden, we start getting all these horrible loans in the system all over the place. And these instruments, these derivatives, these mortgage-backed securities, which goes back to Lou Ranieri, he kind of invents the mortgage-backed security at Solomon. He's another person who individually contributed this. He's a couple of layers out. And Michael Lewis wrote the book Lyres Poker about his time there in that same environment. So Lou Ranieri basically helps invent the mortgage-backed security, which for a while is probably an okay thing because it allows risk to be spread across pools of mortgages and it allows people to buy, actually it allows very large institutions with a whole lot of money in hand, to buy clusters of mortgages all at once rather than having to go create transactions to buy them all. So nice that you can do that. But partly the series of videos is trying to explain the complexities that come out of that. So these securities just got ever harder to understand and they kept coming out with them. So the ratings agencies just couldn't rate them quickly enough. They couldn't do the analysis. Everybody was just kind of jamming because returns were high and doubters were getting slammed. In fact, if you go back and read the big short, you'll see that the six or seven people who figured out that the system was broken and was about to implode hated the whole experience. There was probably a thrill of discovery and the thrill of pursuit and trying to figure out how it happened. But not a one of them wanted to repeat this episode ever again in their lives. They were hated by everybody in their circle, all of their peers, all of their clients were calling to demand their money back because they were betting against a market that was rising and rising and rising like crazy. And in the meantime, we snipped away our ability to see what was going on. Derivatives are not standardized or recorded. In fact, there was an attempt in 1998 for the Commodity Futures Trading Commission to get oversight of derivatives. And here, Brooks Lee Bourne actually went and tried to get control, but Larry Summers, Robert Rubin, and Ellen Greenspan all blocked Bourne from regulating derivatives. That's another part of our, you know, snipping away our ability to see what was going on. We also snipped the federal, the financial systems break lines. So breaks are sometimes the ability to, you know, stop what's going on. And for example, a lot of executives were doing the revolving door. They were basically going in and out, they'd go to one of these big banks, then they become regulators and change the regulations. Basically severing more of the breaks in the system. As I said, a lot of these companies became transaction mills. They were being paid regardless what the outcome would be long run of the mortgage. They were happy because they made money and just jumped off. They were paid, they could go home. And regardless what happened later, they had no reason to worry. And then another big puddle here is that we snipped the moral reasons to raise red flags and intervene. Many different ways here. Antitrust got completely changed. Robert Bork of the famous Bork hearings who didn't get confirmed because of Anita Hill, but he wrote a book in 1978 called The Antitrust Paradox, in which he basically said that, you know, monopolies are just fine as long as they deliver everyday low prices. Anything else they do. He was arguing that most antitrust is antiquated and unnecessary. And so the Reaganites basically went with this and started weakening antitrust, but Clintonites helped. One of my deductions here is that Bill Clinton was a really good Republican president. He along with other progressives all around the world bought the neoliberal agenda and bought the need to weaken antitrust, all those kinds of things. So we end up with people trying to put the breaks on and that not actually working. So here's we couldn't see what was happening. We're kind of blind to the advance because derivatives were not publicly listed in any way. They were not registered securities. And in the middle of all this, something I should have shown you a little earlier, lenders started proving no dock stated income, also known as liars loans and ninja loans and ninja loan is no income, no job, no assets. And I remember the day I heard about, you know, ninja loans and I'm like, wait, that sounds like a recipe for disaster. That sounds absolutely horrible. And in the meantime, politicians and regulators were busy selling the ownership society. They were busy saying everybody gets to own their own home. This is part of the American dream. Here are elements of the American dream. Anybody can make it rags to riches stories, successful, humble origins. This is the land of unlimited opportunity. Progress is our measure of economic growth. Everybody should own their own home. Everybody should go to college. We are the melting pot. A detached single family home is the ideal. So go go buy your home, right? This was all part of the narrative that everybody was pumping so that we could, I guess, become prosperous. So along the way, we also snipped bankers and investors responsibility for long term outcomes in a whole bunch of different ways. First of all, collateralizing mortgages disconnected the lenders from the borrowers. In fact, you now have mortgage originators, basically separate companies that would create the mortgage and then instantaneously sell it off. So they were getting paid for originating a mortgage. They're very happy. They just ignored a lot of the risks afterward, especially once they were given permission to not worry so much about tracking down whether the income the person had declared on the application actually was real. Another thing that comes out from Michael Lewis' investigations is that the major investment banks stopped being partnerships, not all in the same way. But the one that he talks about, he has an interview where he sits down with John Goodfreund from Solomon Brothers, and Goodfreund afterward told him, your interview destroyed my career and made your career. But Goodfreund basically took Solomon public, and other investment banks kind of had to follow. So Shearson buys Lehman, and you get Shearson Lehman in 1984. Goldman goes public in 1999. So suddenly, the investment banks, which traditionally had been all about the bankers' reputation and about their assets on the line, holding these assets, and that's how they actually made money, to suddenly, these were public corporations with completely different ideas about their responsibilities and their role in transactions. So that was a problem because they no longer had any real skin in the game, long term, other than their longer term reputation as institutions, but they were going to do okay in the long run anyway, as you'll see. Then a really big one here is that everybody started realizing that too big to fail really was too big to fail. And I discovered something called the government put. Now to know what a put is, you have to understand a put option, which means I can buy an option that allows me to force you to buy my stock down the road. That's called a put. The government put says, we're going to do something so big that if you let us go under, the whole economy goes under. So you can't let us go under. This is basically an enforced obligation to bail us out. And so these financial institutions got too big to be allowed to fail. So too big to fail was actually a very literal thing. And here's a piece from an article called Corporate Socialism, the government is bailing out investors and managers, not you. They have no honest risk mitigation strategy other than a trained naïve reliance on bailouts or what's called in the industry, the government put. And then in the background are these incredible over the top executive comp packages where not just in banking but everywhere, US executive compensation has gone completely overboard and is contributing heavily to income inequality in the United States. It's known as C-suite capitalism. I've got a whole bunch of information on that. But basically what it meant was that the senior executives were busy trying to maximize their short term comp packages because as we see from trends, tenure for senior executives in most corporations in the US keeps getting shorter and shorter and shorter. So when you sign, you get yourself a nice golden parachute. And then you try to maximize that in the near term. So all of this was about rampant short termism. Everything I've described is, I think pretty crappy. I mean, we're sort of running blind. Everybody's been forced to play on this merry-go-round. And the first few people who jumped off like Goldman did pretty well in the end. And I'll have a final video about sort of the lessons learned from what happened and what we might have done or what we could still probably do. But I haven't talked about CDSs or credit default swaps, which are basically insurance you can buy on somebody else's CDOs. And so AIG and other companies, but mostly AIG, sold insurance against asset and you didn't have to hold the asset to bet against it. So if you've watched the movie, The Big Short, when they're in the casino and everybody's betting on everybody's betting on everybody's betting on everybody else's instruments, that's what happens. So the pile of money that's in these things gets gigantic. And my question is, I'm sorry, how did any risk officer ever sign off on CDSs? How was this permitted? How is this not illegal? How is this crazy? And the guy who was on deck at the time, the chief risk officer at AIG was Bob Lewis. How is he not in jail? How did he walk out on this whole thing? These are questions that have to come up once you start kind of looking at this. So AIG financial products is the group that insured CDSs and basically brought AIG down. There are a few more twists and turns to this story, but I think I've taken you through this territory enough and I will put a link to this spot in my brain in the comments below so you can jump in here and browse around all you want. I am interested in all your comments. I'm sure I got a lot of things wrong. There are a bunch of other theories for what caused the entire debacle, including that Fannie Mae and Freddie Mac were pushing really hard. I don't buy that theory and I've got some logics in here for why I don't buy that theory. But remember that long ago, and here George Bailey from It's a Wonderful Life, you know, played by Jimmy Stewart, who is an actor who played in these movies and many more. Lenders used to know their clients personally and banks used to hold the loans to maturity. That was typically what happened. That now looks like a quaint and antiquated little world. We've come very, very far from that world and I don't know that we've left that world to our benefit. I think that if we reestablished some of the linkages, some of those responsibilities over time that existed, we might actually be able to heal some of the problems in our financial system that persist to this day. I'll get into those problems in the next video.