Inside Job Reaction Paper

This crisis, the United States and the world is facing is the effect of the lack of control and regulation on certain financial activities. Because of the continuing opposition of different individuals and companies with the imposition of regulations on these financial activities, it continued to be uncontrolled under the administration of different Presidents of the United States.

Due to advances in technology, many financial products were introduced like derivatives which bankers may use to earn money through speculating. And because of the harm that this activities may bring to the economy, the Commodity Futures Trading Commission (CFTC) is established.

CFTC with its head Brooksley Born, attempted to make regulations on the use of derivatives, but this was contradicted by many investment banks and individuals like Larry Summers and Alan Greenspan. = “Why do these companies and individuals oppose the imposition of regulations on the use of derivatives?” Is it really for the benefit of the economy or is it because of their personal interests.

This deregulation gave rise to increase in lending activities. Lenders give loans even to those people who really do not have the ability to repay them (subprime loans). This is because lenders are confident that they can earn money with that activity by selling the loans to Investment Banks such as Lehman Brothers, Merryll Lynch and Goldman Sach.

This investment banks will pay rating agencies such as Moody’s, Standards and Poors and Fitch to evaluate their Collaterized Debt Obligation (CDO) so they can sell that CDO’s to Investors, and the Home Buyers are now obliged to pay to these investors.

I think that there should be a law governing this type of activities. One of the major problem here is the high ratings these rating agencies are giving to the CDO’S even though they proved to be so risky. It is questionable why very risky investments receive AAA ratings which is the highest rating for investments, but rating agencies have no liability even if their evaluations proved to be wrong, they say that their evaluations are just opinions and investors should not solely rely on it for their decisions.

Lots of problems came after that, housing prices increased because many were able to purchase a house, but if the Home Buyers are unable to pay their debt, their houses will be foreclosed, that is why home foreclosures were high during 2001. Another problem is that investment banks have very high leverage ratios because their borrowed money is greater than their own money. Another financial product that came is the Credit Default Swaps (CDS) which means that if a debtor is unable to pay their debt, the investors who purchased the CDS will be compensated for their losses after paying premiums to an insurance company like AIG. Not only those investors owning CDO’s may insure their CDO’s, speculators like investment banks, even the same investment bank who sold the CDO insured, may buy Credit Default Swaps. The question here is, why do investment banks pay rating agencies, sell CDO’s to investors and also speculate that the debtors will default on paying the same CDO?

Here we can see and say that investment banks may be manipulating CDO’s and that they know that these loans will probably be unpaid, so that they can earn not only from the sale of that CDO but also from speculating and buying CDS. And if the Home Buyers are unable to pay their debt, AIG will now be obliged to pay the investor and the speculators who bought CDS from them. In the end of the cycle, the ones who suffer is the Homebuyers and the AIG, the Home Buyers lose their houses by foreclosure and the AIG pays the Investor and the speculators. The one with the highest benefit would be the investment banks who earn profits from selling the CDO and buying CDS, while the investors will not suffer unless they did not buy any CDS. On the time of crisis, lending industry started to collapse because they cannot sell their loans anymore, while investment banks are also starting to become bankrupt because they could not sell their CDO’s to investors.

Unemployment rate increased and there is a cut in U.S spending. This would affect not only United States but also those countries that rely on them like China and Singapore. Who is the main reason for this crisis? It may be those people who made so much money out of those criminal activities that occurred before the crisis. A lot of people lost their jobs during the crisis while many CEO’s of investment banks who participated in fraudulent activities got increased bonuses and retired with plenty of money. Under the administration of President Obama, many people say that there has been no major difference or change provided by the financial reforms established by the President. The people who were on the government before the crisis are the same people who are appointed by the President.

“The same people and institutions that caused the crisis are still in power and that needs to change, they will tell us that we need them but what they do is too complicated for us to understand, they will tell us that it won’t happen again, they spend so much to make reforms, it won’t be easy, but some things are worth fighting for”. Those who are in power should not pretend that they are acting for the benefit of the public if they are not, if they really are concerned about the economy, they should do what’s best for all and not just for themselves.