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The culprits

By Marcel Côté

The worst recession in 75 years is behind us, and globally hundreds of millions of people suffered from its impact. Unlike most recessions, this one was caused by a limited number of individuals. Who were they?  

The recession was first sparked by low interest rates maintained by the US Fed, which created a speculative real estate bubble. While a burst real estate bubble isn’t enough to trigger a global financial crisis, the resulting toxic securities poisoned the world’s financial system, spreading the disaster. The poison was concocted by a few major banks that financed the 2005-2007 real estate bubble in return for staggering profits. Because of greed and irresponsibility, these bankers, less than 10,000 in all, thrust us into the 2008 financial crisis that shook the world.

From 2005 to 2007, some 20 of Wall Street’s largest investment banks earned most of their profits from synthetic financial products, which were set up using debt securities that were pooled and repackaged into bonds with more consistent maturities and risk levels. These products, better known by their acronyms CDO, ABCP, SIV, were backed by the credibility of the investment banks that structured them and found takers in the international financial system. When the banks found themselves short on quality loans to build these products, they turned to the US real estate market. Their voracious appetite led them to extend artificially inflated mortgages, with absolutely no financial justification. No down payments, no credit checks, no principal re-payments and especially no documentation supporting loan applications were required. Wall Street and its rogue lenders had to be fed.

So who were these Wall Street ogres? The biggest names in international finance — Goldman Sachs, Citibank, Merrill Lynch, Morgan Stanley, UBS, RBS, HSBC, la Société générale, etc. Few banks were able to resist the lure of easy money, except for Canadian banks, which abstained from this financial feeding frenzy.

The party ended in 2007. Declining US housing prices caused a meltdown in the mortgage market and especially low-quality subprimes, which set off a vicious circle. No longer able to rely with any certainty on the actual value of underlying mortgages, the market for synthetic products crumbled, causing a cash crisis in institutions that had borrowed to purchase these mortgages. More and more banks failed, including Lehmans, the fourth largest US investment bank, which declared bankruptcy in September 2008 after it was abandoned by the US government.

For an entire month, the world’s financial markets were paralyzed. Banks had no confidence in each other. Access to credit was significantly limited, which led to investments being postponed for lack of financing and the bankruptcy of many debt-ridden businesses. And so began the deepest recession in 75 years.

Pleading the need for urgency to save the international financial system, governments invested billions of dollars to shore up banks, saving most from going under. However, a few big names were wiped off the map: Bear Stearns, Merrill Lynch, Fortis and Lloyds. No institutions paid out bonuses in January 2009. Nearly all bank officials were axed, except at Goldman Sachs, the largest producer of toxic synthetic products, whose CEO restated its balance sheet and hung on to his position. Watching from the sidelines, Canadian banks were only slightly affected.

A year later, the crisis is just a memory, bonuses are back and the big investment banks are looking for new ways to profit from other people’s money. They are also battling the imposition of more stringent regulations. You would think nothing had happened.

The real culprits were not penalized, and there’s no sign that the investment banks have learned their lesson.

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