Did you or someone you know lose a job, business, home or money in their retirement accounts during the Great Recession that began in 2007? If so, you know that the losses continued to affect people around the world for the next decade, or longer.
Millions of Baby Boomers lost so much money in their IRAs and 401(k)s that they had to postpone their retirement ... if they were able to retire at all.
If you want to understand the fraud behind the Great Recession, and the actions that need to be taken in order to prevent it from happening again, either read the book or watch the movie, "The Big Short." The movie, in particular, explains in terms that nearly anyone can understand how it all started.
Background Information About The Big Fraud Behind "The Big Short"
After the Great Depression in the 1930's, Congress passed the Glass-Steagall Act. The purpose of this act was to prevent another collapse in the banking system, such as the one that occurred during the Depression.
While there were many aspects to Glass-Steagall beyond what is mentioned here, an important one was that stock brokerage firms and banks were required to be completely separate. Banks needed to be conservative and stodgy, sticking with low-risk investments. Brokerage firms had more restrictive rules to follow, such as limiting the amount of stock that could be purchased on margin, but they could take more risks than banks.
Beginning around 2002, the Glass-Steagall Act was dismantled. Banks and brokerage firms were allowed to merge and buy each other, creating large banking institutions like Lehman Brothers that were considered "too big to fail."
Once banks and brokerage firms were connected and other financial rules were weakened, new types of investment products were created. Banks began to package mortgages into bundles that their brokerage departments could sell like stocks.
Simultaneously, the conservative rules banks had previously followed before approving mortgage loans also began to be relaxed. More "Ninja" loans, which stood for mortgages offered to people with No Income No Job, became available.
At first these bundles of mortgages were good investments, since they were primarily made up of AAA mortgages. However, these bundles of mortgages began to contain more and more of the BB or Ninja loans. These loans had a high default rate. When enough of the borrowers of those loans defaulted, the entire bundle of mortgages became worthless.
This is where the fraud came in. The investors were not told that they were buying bundles of mortgages that contained a high percentage of Ninja loans. Instead, they were told their investments were made up almost entirely of AAA loans.
Sooner or later, these investments were bound to collapse ... but only a few people recognized that this was on the verge of happening. Those who did see it coming shorted these investments ... hence, "The Big Short." However, when it happened, the losses brought down several of the big banks ... so many, in fact, that the world's economies almost certainly would have collapsed if the banks had not been rescued.
This created a ripple effect that brought down more than the big banks. Billions of dollars were lost in the stock market. Jobs were lost. Defaults on mortgages accelerated. With higher unemployment and money lost in the stock market, people could not afford consumer goods. The auto industry and related businesses began to collapse. As these industries got in trouble, unemployment spiraled up, and the economies spiraled down.
Most of us know that it has taken close to a decade for the economy to recover ... and it is still very fragile.
Now that you understand the background, you will appreciate "The Big Short" even more, whether you watch the movie or read the book. It is well worth the two hours, especially if you never want to see anything like this happen again!
See the trailer of "The Big Short" at: https://twitter.com/thebigshort/status/668881794112946176
Photo courtesy of "The Big Short" on Twitter.
#TheBigShort #InvestmentFraud #GlassSteagall
