Financial institute and market

(Quiz#03)

Submitted by: Warda Zainab

 Iceland’s Rise and Fall: From Prosperity to Financial Ruin

Before 2000, Iceland flourished with low unemployment, no national debt, renewable energy
sources, rich fisheries, excellent healthcare, and minimal crime, representing a model of
economic stability and growth.

 Deregulation and Economic Shift in 2000

The government’s deregulation and shift away from industrialization in 2000 allowed major
banks to be dollarized, enabling foreign corporations to exploit natural resources. This transition
sowed the seeds for a devastating financial collapse.

 Financial Bubble and Risk Mismanagement

Icelandic banks issued loans exceeding $120 billion—more than ten times the country’s GDP.
Reckless financial management fueled unchecked speculation, assuming perpetual gains in real
estate and stock markets.

 Regulatory Negligence

Despite soaring risks, regulators failed to impose necessary controls, and firms like KPMG
endorsed these hazardous practices. By 2008, unemployment tripled, and many citizens lost their
life savings.

 Global Financial Fallout

The 2008 collapses of Lehman Brothers and AIG sparked a global recession, plunging millions
into poverty and erasing trillions in wealth.

 A Worldwide Crisis Exposed

The crisis underscored widespread corporate negligence, regulatory failure, and a lack of
accountability, especially within the U.S., revealing global regulatory gaps

 The Road to Financial Collapse

For four decades, stringent financial regulations curbed reckless banking behavior, preventing
major economic crises.
  Deregulation of the 1980s

Under President Reagan, extensive financial deregulation promoted risky ventures, leading to the
savings-and-loan crisis, costing taxpayers billions while enriching executives.

 1990s Risk Escalation

Repealing the Glass-Steagall Act in the late 1990s enabled banks to take greater risks. Mergers
created colossal institutions, heightening systemic vulnerabilities.

 Early 2000s Risky Financial Products

Banks prioritized profits over safety, introducing risky derivatives and collateralized debt
obligations (CDOs). Rating agencies inflated ratings on poor-quality products, inflating the
housing bubble.

 Global Mortgage Crisis

High-risk subprime mortgages were bundled and sold globally without regard for quality, driven
by greed and short-term profits, deepening systemic risk.

 Ignored Red Flags

Efforts to regulate derivatives faced strong resistance from lobbyists and officials. By the early
2000s, lax oversight paved the way for the 2008 financial disaster.

 The Financial Bubble Bursts

Subprime mortgage lending skyrocketed from $30 billion to $600 billion between the late 1990s
and 2006. Financial institutions profited enormously despite the rising risk.

 Reckless Financial Behavior

Wall Street banks accumulated debt at dangerous leverage ratios of 33:1. AIG sold unregulated
credit default swaps (CDSs), leaving risky loans dangerously exposed.

 Ignored Warnings

Warnings from experts, including Alan Greenspan, were dismissed, and regulatory bodies like
the SEC failed to intervene, enabling reckless practices.
  Profit Manipulation

Banks offloaded risky CDOs onto clients while profiting from speculative bets against them.
Misleading ratings from agencies resulted in investors absorbing massive losses.

 Financial System Collapse

By 2007, mortgage defaults revealed systemic vulnerabilities, culminating in the global financial
crisis of 2008.

 Unraveling the 2008 Financial Crisis

Warnings about a housing bubble began as early as 2004, but figures like Fed Chair Ben
Bernanke dismissed them. Regulatory agencies failed to act despite repeated expert alarms.

 Widespread Fraud and Risky Lending

Fraudulent practices, inflated property values, and fake mortgage documents flourished. By
2006, subprime lending peaked, and toxic CDOs were sold to investors while banks bet against
them.

 Collapse of Major Institutions

Home foreclosures surged in 2008, leading to the downfall of firms like Bear Stearns and
Lehman Brothers. Lehman’s bankruptcy triggered a global crisis, and Merrill Lynch narrowly
escaped through a Bank of America takeover.

 Government Bailout and Recession

The U.S. government’s $700 billion bailout couldn’t prevent economic collapse. Unemployment
soared to 10% in both the U.S. and Europe, ushering in a global recession with widespread
socio-economic devastation.

 The Human Toll

Families lost homes due to spiking mortgage rates, and job losses crippled incomes. Entire
neighborhoods suffered from declining property values, homelessness, and widespread economic
hardship.

 Failures in Accountability
 Executive Profiteering Amid Collapse
Top executives at firms like Lehman Brothers and Countrywide Financial secured massive
payouts despite their companies’ failures. Lehman’s leaders earned over $1 billion from 2000 to
2007, and Countrywide CEO Angelo Mozilo amassed $470 million.

 Weak Corporate Governance

In the U.S., CEOs often select board members, undermining oversight. Stan O’Neal of Merrill
Lynch received a $161 million severance after poor decisions, and AIG’s Joseph Cassano earned
$1 million monthly despite leading massive losses.

 Post-Crisis Bank Mergers and Lobbying

Major banks expanded through mergers, increasing political influence. Between 1998 and 2008,
financial institutions spent over $5 billion on lobbying, shaping policy to favor their interests.

 Economists’ Conflicts of Interest

Prominent economists advocated deregulation while consulting for financial firms, often without
disclosing conflicts of interest. Figures like Glenn Hubbard endorsed risky financial instruments
while benefiting from industry ties.

 Lack of Academic Transparency

Universities did not require professors to disclose financial affiliations, raising ethical concerns
about biased economic research and its influence on policy.

 Lessons and Modern Realities

Since the 1980s, American manufacturing has declined, with jobs outsourced and wages
stagnating. The IT sector thrived, but rising tuition costs created barriers to higher education,
reducing social mobility.

 Tax Policies Favoring the Wealthy

Tax cuts for the wealthy, particularly under the Bush administration, widened the income gap.
Middle-class families took on debt for homes, healthcare, and education, exacerbating economic
inequality.

 Limited Reforms After the Crisis

 Wall Street’s Influence on Policy

Despite public outrage, financial executives avoided prosecution. Key figures like Timothy
Geithner and Larry Summers, with Wall Street ties, influenced policies, limiting accountability.

 Global Push for Stricter Regulations

Europe demanded stricter banking reforms, but U.S. resistance allowed large bonuses for
executives, fueling public anger and underscoring the need for deeper reform.

 Continuing Need for Reform

Despite the crisis, many key institutions remain unchanged. Meaningful reforms are still lacking,
highlighting the need for systemic change to ensure global economic stability and fairness.

 Continuing Need for Reform

Despite the crisis, many key institutions remain unchanged. Meaningful reforms are still lacking,
highlighting the need for systemic change to ensure global economic stability and fairness.