Lisa Simpson
Jul 29,2010
In: Foreclosure

View of the Financial Disaster from 2007 to 2009

Traumatic periods, the financial disaster from 2007 to 2009.

Hank Paulson, previously of Goldman Sachs and later Treasury Secretary from the time of Bush in 2006 August has presided one of the most traumatic periods in the history of America – the financial disaster from 2007 to 2009. He has penned down his experiences and analysis in his book ‘On the Brink’.

He was at the helm when the economy looked strong with stocks riding high but already had been borrowing excessively. China was exporting to America and the money was shipped to USA. This made Wall Street rich but allowed disparity in income to heighten.Credit was too easily available for a long time. Paulson says that he had given warnings of troubles in money markets.

In 2008 September the government of USA took over the two mortgage giants Freddie Mac and Fannie Mae. They were in the red for $5 trillion in the mortgage and securities category. Over leverage and too much benefit from lax regulations had done the harm.

Paulson, a firm believer in free market had plans to allow government entry in the private sector but he did not want to give it the colour of nationalization. He was alert to the fact that confidence of foreign countries in America would wobble and negatively impact on the dollar.

The regulating system was extremely poor being run by the very companies that they regulated. The oversight entities were in bits and pieces so as to be effective and powerful. There were differences between the Federal Reserve, Treasury as well as the SEC about who should be charge of regulating the banks.

The crisis burst upon the scene when the housing boom based on low interest no-questions-asked mortgage loans collapsed. With money from mortgages not coming in the banks were in deep trouble. When negative equity showed up even those who could afford to pay refused to do so.

The mortgage loans had been made into packages and sold as securities to investors around the world. There was no transparency in these operations. It impacted on banks not only in USA but also in Europe. With erosion gnawing into the standards, the economy ‘hit a brick wall’.

When Bear Stearns walked into trouble JPMorgan bought it off for pennies. Washington overreached itself to help the banks with money coming from the taxpayers. It led to widespread criticism. The lesson Paulson learnt from the Bear Stearns case was exhaustive because on the field was a singe buyer – JPMorgan.

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