I movie called ‘Inside Job’. It was about the

I watched the second part (‘The Bubble’) of the
movie called ‘Inside Job’. It was about the biggest financial bubble in the
history. On Wall Street, annual cash bonuses spiked. Traders and CEOs became
enormously wealthy during the bubble.
During the bubble, investment banks were borrowing heavily to buy more loans
and create more CDOs (Collateralized Debt Obligations). The ratio between
borrowed money and the banks’ own money was the leverage. The more the banks
borrowed, the higher their leverage. Here comes one of the parts that impressed
me. The SEC decided to relax the limits on the leverage ratio. This means banks
could borrow more money, get more leverage and higher profits. But if something
went wrong, everybody would face huge problems. Investment banks were
leveraging up to the level of 33:1. This means a 3% decrease in the value of
their asset base would make them insolvent. So, they were just focusing on that
day’s profits but not thinking about future messes they could face.
Second, I am surprised at the following idea, which is actually a great one in
terms of profiting but of course, not moral and fair. AIG started selling
derivatives and credit default swaps. This was a system where many people could
take out insurance against other people’s risky loans, and they would all benefit
if the loan failed. Here is a simplified example, if I owned a house, not only
I could insure my house, but also other people could. So, if my house got
damaged, I would get compensation and those other people, who had also insured
my house, would get it as well. This means the number of losses would become
proportionately larger and correspondingly the number of profits of insurers.
Finally, rating agencies were rating toxic and risky CDOs as highly safe as
government securities. Two-thirds of the loans were rated triple-A meaning that
they were very secure but actually being not. And when rating agencies were
sued for fraud, they answered “those are merely our opinions, you should not
rely on it.”
Overall, I am impressed how all of them gained some (and actually a lot of) benefits
from that situation at the expense of innocent citizens.