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How Regulation and theEvolution of Wall Street Led

to the Financial Crisis

I. Post-Great Depression

Q- What do you think the legislation that was passed did?

• 1930s-1979: Tightly regulated financialsector

1. 1933-1935: Glass-Steagall Act andSecurities and Exchange Act

2. Bankers/traders salaries same asother professionals

II. The Reagan EraQ- Why was there a huge push for

deregulation?A. 1980s: Laissez-faire and trickle-down economics

1. Substantial deregulationa. Garn-St. Germain Act deregulated savings and loanscompanies

2. Savings and loans scandal and crisisa. Wall Street

3. 1987: Allan Greenspan becomes Chairman of the Fed 4. 1987-1990: Scandals

a. Micheal Milken and Ivan Boesky convinced of fraud and insider trading

b. Charles Keating jailed for improper influence in advocating against investigating Lincoln S& L

III.The Clinton EraQ- What is the revolving door concept and how can it benefit the

system?

A. 1900s: Increasing Revolving Door and Deregulation 1. 1999: Clinton administration pass Gramm-Leach-Bliley Act

a. Administration has Wall street backgroundsb. Repeals Glass-Steagall

2. 1994: Congress passes give the Fed power to regulate themortgage industry

a. Greenspan refuses to enact regulation 3. 2000: Commodity Futures Modernization Act

a. Bans all regulations of financial derivatives and exempts from anti-gambling laws

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Cont. Clinton Era

Q- What was the dot-com bubble?

4. 2000: Dot-com bubble bursts

5. 2000-2002: NY Governor Eliot Spitzersues invest banks and settles.

IV. George W. Bush TimeframeA. Pushes for further deregulation and relaxed

enforcement despite warnings1. 2000: New highly complex financialinnovations flourish2. 2002: Arthur Anderson convinced ofobstruction of justice for shredding Enrondocuments3. 2003: Worldcom inflated assets of $11 billion4. 2004: SEC lifts the leverage limits on theinvestment banking industry, allowing them toborrow more5. 2005: Raghuram Rajan warns of dangerousincentives and risks in financial system

Cont.6. 2000-2005: Investigation of Fannie Mae and

Freddie Mac reveal massive accounting fraud7. 2006 Hank Paulson becomes Treasury Secretary8. 2000-2007: Massive housing and mortgage

credit bubble sweeps the US a. mortgage lending quadruples and housing

prices double9. The housing bubble bursts10. 2005-2008: I-Banking use credit default swaps

to bet against the same mortgage securities thatthey are selling as extremely safe

V. The Great Recession Hits

2008

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A. 20081. Timeline:

March: Collapse and government rescue of BearStearnsSept: Lehman brothers declares bankruptcySept: AIG rescued by the government

2. Effects: Record foreclosures a. Unemployment rises 5% to 10% in one year

b. Tens of billions in bailout money go to AIG andGoldman Sachsc. $700 billion emergency bailout for the financialindustry

VI. The Obama Adminstration

A. Business as usual? 1. Timothy Geithner- Treasury Secretary 2. Larry Summers-National Economic Council 3. Ben Bernanke- Reinstated Chairman of the

Board 4. Wall Street execs are given senior regulatory and

economic policy positions

Assignment Choose 1 of the following prompts to answer as

you watch the film. You will need to turn it in onMonday, April 25th.

Format:2 pages typed (double spaced, 12 pt font)

Content:Address all the questions within your paper3 specific references to the film

Option 1:

A. Who is most to be blame for the events depicted inthe film? Republicans or Democrats? Governmentor financial services companies? Regulators whostuff to their free market beliefs or investors whotook on the risk?

B. What do you think they should have done differently?

C. Do you think educational institutions should have apolicy regarding conflict of interest?

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Option 2:A. What are your own views and beliefs about the

facts presented in the Inside Job?

B. Do you have an ideology in this area (anideology about regulation)?

C. Make a list of the basic principles of “right andwrong” that you believe to be true aboutmarkets. What might lead you to change yourviews?

See handout on mstalreja.wordpress.com

Option 3:

A. Why do you think President Obamaappointed these people to these positions?

B. How would you balance the need forexperience and expertise against the benefitsof having a fresh perspective?

C. Who would you have appointed?D. Are these appointments like hiring a head

sports coach? Would rather have anexperienced coach with a losing record or aninexperienced coach with no record at all?