Why was it a financial crisis and NOT a bank crisis?

Because the problem wasn’t with the bank side of the “too big to fail” institutions. However, their trading side of the house, mostly hedge funds and speculation, was so heavily leveraged in “creative” mortgage derivative securities, that the whole house would collapse just like Leeman Brothers and Bear Stearns.

Why do we need big banks? Mainly because of large multinational corporations and for mergers and acquisitions. Your local bank can not move hundreds of thousands, or millions, of dollars nor can it finance or sell bonds for a 1.5 million and up merger or acquisition.

Part of Glass-Steagall was removed by deregulation (1980) but it was the Gramm-Leach-Bliley Act (1999) that repealed the separation of banking and speculation. The theory was good. As long as there was a transparent market.

Only 12% of Goldman Sachs profit was from banking. The majority was from “proprietary trading“. Of course this is an open invitation for corruption. What if the bank makes a trade based on your trade? Say they buy one million shares at 12.42 per share and then make another trade for you and the share value is now 12.48? Then they sell their earlier purchase? How much of this was done no one knows. Certainly not the SEC. What prevents them from making trades based on inside information of M&A?

But it was the derivative market that broke all the rules. The main problem was there was NO transparent market. The banks made the market. No one could even tell you how many dollars were tied up in derivatives. Or even if the derivative market was larger than the mortgage market. It was 1929 all over again. The original idea of derivatives was to provide a hedge for mortgage backed securities but it evolved into a giant scam. The rating companies, like Moody’s, didn’t do an adequate job rating the mortgages. Everyone was looking in the rear view mirror at the housing segment which historically had been very stable. The rating companies should be the ones paying the big salaries and NOT the hedge funds and traders.

Few inside Wall Street saw a future problem. The majority of those who saw what was happening were outsiders. The best book to date is The Big Short by Michael Lewis. Lots of F-bombs – not by the author but from the people being quoted. These few shorted anything related to subprime. Even the big banks by the end. Still, they never anticipated how bad things would become.

Some Republicans had a much better plan. Let the “Too Big to Fail” go into bankruptcy with the FED playing the same role as FDIC for regular banks. The banking operations of the “Too Big to Fail” would be supported. The hedge funds and speculators would lose everything. It wasn’t the banking side of the entity that was over leveraged.

How Does Goldman Sachs Make Its Profits? (Part 1)

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How Does Goldman Sachs Make Its Profits (Part 2)

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