lecture 12, soc 149

lecture 12, soc 149 - The Multiple Roles of Big Banks and...

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The Multiple Roles of Big Banks and Investment Houses the 2008/9 collapse Big Banks like Citicorp; Bank of America, JP Morgan Chase Investment houses like Bear Stearns, Lehman Brothers, Merril Lynch, Goldman Sachs, AIG These corporations played multiple and major roles in the financial collapse All were bailed out by the Bush Administration to the tune of 800 billion dollars Some of this money was used for executive bonuses
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Role #1 Speculation with depositor money What is the usual role of a bank? Offer interest to get peopleand organizations to deposit money Deposits up to 250k (used to by 100k) insured by FDIC Make loans with deposits; old rule was 3/6/3 Pay 3% to depositors; loan money out to borrowers at 6% 3 pm tee off time
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Role #1: Speculation Repeal of Glass Steagal in the 1990s allowed banks to take depositor money and invest in financial markets Stocks, bonds, mortgage backed securities, credit default swaps None of which are insured by any government authority All of which have large amounts of risk
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Role #1 Speculation This happened in the 1929 crash Glass Steagal prevented this So when all these investments went bad Banks did not have enough money left to pay their depositors the amounts given in the statements And, obligations insurred by some investments also demanded payouts to thrid parties More drain on banks cash
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Role # 1 Speculation Add this to bad loans for subprime Banks failed: 26 in 2008, 120 in 2009; 29 so far in 2010 Depositors lost money Creditors lost money People who invested with banks lost all their money
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Role #2: Credit Default Swaps What are Credit Default Swaps Like insurance, but not really
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lecture 12, soc 149 - The Multiple Roles of Big Banks and...

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