The Global Financial Crisis according to Nomi Prins

Global Financial Crisis Survey

Nomi Prins is a respected author and former financial executive at several of the Wall Street firms that played prominent roles in the global financial crisis. She served as a Managing Director at Goldman Sachs, a Senior Managing Director at Bear Stearns, a Strategist at Lehman Brothers, and an Analyst at the Chase Manhattan Bank. She published It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street in September of 2009 and her latest book All the Presidents' Bankers: The Hidden Alliances that Drive American Power will be out April 8, 2014. She is currenty a Senior Fellow at the non-partisan public policy think-tank Demos.

1. Which FCIC View best represents the causes of the Financial Crisis?

Majority View - but it's not fully accurate to say that the crisis was a situation of simply human irresponsibility, without adding - it was the willful bending and breaking of already weak existing laws and regulations by big bank leaders and their executives.

2. Which narrative presented by Douglas Elliott and Martin Baily of the Brookings Institute in Telling the Narrative of the Financial Crisis: Not Just a Housing Bubble best represents the causes of the Financial Crisis?

It was the fault of Wall Street (1/2) and the Government (1/2) collectively and not of our wider society.

3. I believe the crisis is ongoing

The crisis remains ongoing and will continue to manifest in stages for years. It has been whitewashed by an epic bout of Federal Reserve support from quantitative easing to cheap money, which has propped the illusion that banks are healthier and that the bad news (financially, if not legally speaking) has stopped for them. This has boosted the stock markets and in turn, promoted a false aura of confidence and related positive media fanfare - even though economic instability and inequality abound beneath that veneer, the overall quality of jobs is poor, and the cost of basics like healthcare and education remain high compared to average wages, and all of that is mixed with heavy individual and national debt.

4. What were the primary causes of the Global Financial Crisis?

The primary causes of Global Financial Crisis are a combination of

  1. Wall Street's skill at constructing extremely leveraged securities collateralized by fraudulent or shaky loans and obtaining high ratings on them through the use of credit derivatives or other techniques, thereby rendering them attractive to investors globally and thus stoking demand for such securities and loans which in turn pressed lenders and underwriters to fuel the fire,
  2. The Big Banks' aggressive practices of leveraging capital (including the 2004 SEC agreement that the mega banks could manage and report their own capital ratios, rather than be subject to externally imposed verifications),
  3. The highly profitable diffusion of risk under false pretenses of underlying security stability, as well as inappropriate constraints on the make-up, imbedded leverage and inter-dependence of complex financial products,
  4. Weak regulations and misinformed or uninformed regulators regarding the above,
  5. A complacent sound-bite minded Congress with respect to proactively, or even reactively paying attention to what was going on or considering reform measures to avert disaster, and
  6. An enabling executive Branch, including the Treasury Department and the Federal Reserve (whose leaders are selected by the President and confirmed (always) by Congress.) Please see Chapter Two of It Takes a Pillage for more detailed explanation of this politilcal-financial risk pyramid.

5. What still needs to change as a result of the crisis?

The government, on both sides of the aisle, must recognize the systemic dangers imposed on the rest of the national and global economy by a banking system whose largest banks remain not just too big to fail, but bigger and risker than before the crisis emerged. The President, of any party, must stop considering the Federal Reserve as the emergency band-aid to reckless practices, by imbuing it with pointless connections to populace sounding goals like job creation. We the people require a regulatory platform akin to the one that Glass-Steagall instilled in 1933 following the 1929 Crash and Great Depression - and before critics of such a platform moan about how times have changed and putting the genie back in that bottle is impossible, they should take a look at the true history of that Act, as outlined in my new book, All the Presidents' Bankers and elsewhere. The fact is that a) it was the Republican Senate that launched a probe into bankers' practices even before FDR and the Democrats came to lead, and b) two of the three biggest bankers of FDR"s day (the heads of Chase and National City Bank) - actively helped FDR reform the banking sector. These men collaborated with the President by willingly splitting up the trading/securities creation and commercial sides of their banks months before Glass Steagall became the Law of the Land. They did so for three main reasons - 1) They recognized that confidence and trust in banks and bankers would promote a stronger national economy for businesses and individuals alike, 2) They possessed some degree of humility over past mistakes and patriotism lacking in bank leaders today, and 3) They knew that by aligning with the President and the government, they would ultimately prosper - which they did. Today, there's no chance bank leaders will revisit or recreate the path of their own legacy firms, but Congress and the President should become the leaders we need to evoke these regulations that ensure the safety and protection of us all. Neither Bush nor Obama has shown leadership in this.

Compiled by Gary Karz, CFA
Host of InvestorHome

Global Financial Crisis Survey

Home Page      Table of Contents      Search

Please send suggestions and comments to Investor Home

Last update 2/27/2014. Copyright 2014 Investor Home. All rights reserved. Disclaimer