Connect with us

Global Affairs

The Financial Crisis: Who’s the real culprit?

 4 min read / 

The global financial crisis began in early 2007 with the bursting of the US housing bubble, and then continued throughout 2008 and 2009, spreading to the rest of the world. We will explain the causes and discuss which of the institutions is the most likely to be considered the real guilty party.

Except for two-quarters in 2001-2002, the US experienced a great GDP growth rate for the 2000s, with a peak of 7% in the early 2004 and an average of 3.4% from 2000 to 2006. This growth went along with a positive inflation rate, which attested at an average of 2.3% through the early 2000s, a threshold that right now is probably one of the wildest dreams of Mario Draghi and Janet Yellen. A number of factors caused the great credit expansion: banks were very likely to lend money to private individuals, that, especially after the Bush campaign “A house for every US citizen” really hoped to own their own home. This mechanism made house prices surge, translating into a real bubble.


What was happening in reality? Banks were so  full of liquidity that they started giving out mortgage loans to whoever asked for them, asking for collateral in the forms of the houses of the people they were financing. At the same time they were reselling the mortgages to investment banks that, exploiting the lack of regulations, created CDOs (Collateralised Debt Obligations), a financial instrument that pools cash-flow generating assets and slices them into different tranches, and each tranche was given a different level of seniority in terms of claims of the underlying pool. The tranches were usually broken into three parts:

  1. AAA-rated tranche: payments are very likely to be done in full
  2. BBB-rated tranche: likely to be repaid almost at full value
  3. Risky and Non-rated tranches

On average, the returns for the first tranche were at 3%, for the second at 6-7% and for the third over 10%. Considering a risk-free rate remaining at around 1%, CDOs represented a great deal for investors. The rating agencies didn’t even bother finding out the real value of CDOs; they assumed them to be safe and ended up assigning AAA ratings to mortgages given to families with jobless parents and four children. Was the situation known? Of course, it was, but as Charles O. Prince III (Citigroup CEO) stated at the start of the crisis,

“As long as the music is playing, you’ve got to get up and dance. We’re still dancing”

In 2007, when the bubble burst, more and more people began defaulting on their mortgages, leaving the banks with thousands of unprofitable houses (the collateral of mortgages). House prices dropped, causing more and more people deliberately default on their mortgage, given that they could now buy a house at a much lower price. Credit froze, the TED spread, the difference between the interbank lending rate (LIBOR rate) and the risk-free rate, went up significantly, meaning that banks didn’t trust each other and didn’t want to lend each other, reducing the quantity of money in circulation, and if we sum even the huge drop in consumer confidence given by the government’s misunderstanding of the situation that led to the crisis, we are in a huge recession from 1929. If we were to find a culprit, we would have had been spoilt for choice. Commercial banks, hedge/mutual funds and investment banks were doing their job: profiting as much as possible. Everything changes when rating agencies are considered: their favourable ratings on CDOs coming from subprime residential mortgages and other debt obligations were crucial for the sale of these bonds to all the institutional investors. We just have to think that in 2007, as housing prices began to decrease, Moody’s downgraded 83% of the $869 billion in mortgage securities it had rated at the AAA level in 2006.

Therefore, of course, we have to condemn the whole system behind the crisis: an unwise government, lack of regulations and the selfish investment and commercial banks, but in my opinion, the rating agencies were the ones who played the biggest role, as they were supposed to find out the real value of the underlying assets of CDOs, and they clearly didn’t. Furthermore, the rating agencies were paid by the same entities whose bonds the agencies were rating, creating one of the most controversial conflicts of interest in the recent financial world. Therefore, it is fair enough to state that “the greatest shareholders” of the 2007-08 financial crisis were the rating agencies themselves, which weren’t able to identify the real models to objectively evaluate the risk associated with some financial instruments and inflated the bubble over and over.

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Global Affairs

BP and Iraq Sign Development Deal for Kirkuk Oil Fields

 2 min read / 

BP Kirkuk deal

Iraqi Government and British energy giant BP have signed an agreement for the future development of the Kirkuk oil fields in Northern Iraq.

A statement on the Iraqi Oil Ministry’s website said the “memorandum of understanding” between the government and the London-based oil company would enable further development of the oil fields as well as “to open a new page of work” for the North Oil Company, a subsidiary of the Oil Ministry, on “solid foundations”.

BP Director, Michael Townsend, said the company would conduct the necessary surveys and prepare the required statistics.  He claims the company will increase production by 750,000 barrels of oil a day.

The Kirkuk Oil Field, discovered in 1927, is one of the largest oil fields in the world, producing half of Iraq’s oil exports, a reported million barrels a day. However, it has also been a wellspring for local instability: the fields had been seized in 2014 by the Kurdistan Regional Government, who piped oil across the Turkish border, a few hundred kilometres to the north. The fields were only retaken by government forces in October 2017.

Baghdad is attempting to reassert its authority throughout its provinces and according to Iraq’s Minister for Oil, Jahbar Ali al-Allaibi, Thursday’s announcement will “speed up the rehabilitation process”.

During the Saddam Hussein era, the fields suffered irrecoverable damage due to poor management. Excess production was reinjected back into the ground making Kirkuk’s oil thicker and therefore harder to extract.

On Wednesday al-Allaibi met with Britain’s ambassador, John Wilkes, where according to the ministry’s website, they talked about joint cooperation between the two countries in the oil and gas industry.

Keep reading |  2 min read


Trump’s Presidency and Russian Relationship: The Future

 4 min read / 

Trump Russia

Much has been said about Donald J. Trump’s love affair with Russia. Questions deserve a thorough and honest investigation. As distasteful and risky it may be, the best outcome of the enquiry is accusations continue to swirl, Trump limps through three more years, and in 2020, he is crushed at the ballot box. The world moves on. If removed from office, odds are Trump whips his base into a frenzy. Only the height and duration of civil unrest is in question. A worse case is that Trump emerges emboldened, eager to settle Putin’s longstanding challenge.

Putin Mocks Trump

The competition is real. Putin’s economic and political dominance gnaws Trump. Putin knows this. So, he taunts the President and dares Trump to employ the same ruthless tactics he exploited to consolidate power and possibly become the world’s richest man. Since Trump only sees green, he took the bait. The race is on to be the world’s first trillionaire.

Russia’s population is 142 million. Its $3.86trn translates into a measly $26,900 per capita GDP. In contrast, the 326 million people of the United States generate $18.62trn in GDP, nearly five times Russia’s total. The US per capita GDP of $57,600 more than doubles Russia’s. Despite Russia’s meek economy and reports  that Putin has embezzled up to $200bn in assets, Putin remains incredibly popular in Russia.

The apathy regarding this unparalleled heist makes Trump and Putin salivate over what they could jointly pilfer from the world economy. To advance their contest, the pair will identify a common threat. US-Russia relations will warm. Under the guise of “Peace through strength,” Russian sanctions will be lifted, and the Magnitsky Act repealed.

The administrative state in retreat, animal spirits will run wild. Trump’s name will be emblazoned across the globe. Countries desperate for jobs will be compelled to forge deals sponsored by Putin and Trump. Ethics be damned, the race to the bottom of the $120trn global economy will prompt a wave of corruption never seen before. Every facet of human decency will be compromised: environmental regulations, free and fair-trade by-laws, intellectual property, and human rights protections. The collusion is real.

In time, complicity will turn to double-crossing. It’s the Trump-Putin way. Makeshift “me-first” trade deals will collapse. Boycotts, divestitures and sanctions will be commonplace. Cooperation will evaporate. New political boundaries will be drawn with little world condemnation.

It doesn’t have to happen this way. Patience is a virtue. The checks and balances of the three branches of government are powerful mechanisms to thwart overt corruption.

Yet, for the impatient who seek Trump’s impeachment or removal via the 25th Amendment, be careful what you wish for. Only Trump can tame his army. To assume Trump will plead mercy at the feet of the administrative state contradicts Trump’s lifelong persona. He will relentlessly counterpunch and encourage his followers to do likewise. The short and long-term political and social risks are astronomical.

If Trump stems the tide, consolidates power and aggressively partakes in Putin’s race for two terms, the risks outstrip his forced removal. The consequences will be multi-generational.

Rope-a-Dope Is the Key to Containing Trump

The only path that possibly prevents extensive collateral damage is to check Trump into policy oblivion. Legislators must play rope-a-dope for as long as it takes, even three years if necessary. If Democrats take back both houses in 2018, the tactic will not set up Trump and his base for a final knock-out punch in 2020. For that to occur, numerous members of the GOP must join the effort. They too must throw periodic jabs at Trump then absorb a barrage Trump’s counterpunches.

With foes in every corner, even Trump – the self-proclaimed greatest counterpuncher in history—and his base will wear themselves out well before 2020. Then the decisive knockout punch can be delivered at the ballot box—without collateral damage.

Trump is severely wounded. If he gracefully and peacefully surrenders the Presidency, great. But don’t expect it. Rope-a-dope deployed by both parties is the countries best hope for a peaceful end to the Trump Presidency. Any other scenario risks the once unthinkable; an ‘American Spring’.

Keep reading |  4 min read


May Meets Macron

May Macron

The UK prime minister agreed to pay £44.5m towards tighter border security at Calais.

Editor’s Remarks: The French president arrived in the UK for the Anglo-French summit amid widespread complaints from the Tory party about just why Britain is paying another £44.5m for tighter security in France. One Tory MP pointed out that this addition brings the total figure the UK has paid to France in recent years up to £170m. France, meanwhile, says that the amount is necessary because the migrants in Calais are trying to get to the UK, who must, therefore, contribute towards their costs. The talks were also consumed by the imminent task of reaching consensus over the UK’s trade deal with the UK after Brexit goes through.

Read more on Europe:

Keep reading |  1 min read


Send this to a friend