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MONEY, POWER AND WALL

STREET

PRESENTED BY- GROUP 3


SAHIL WADHWA 221123
SHUCHI SINGH 221141
SIDDHARTH NAHATA 221144
SIMARNEET KAUR WAHI 221145
VIDIT GARG 221164
HEENA GOEL 221054

SUMMARY

It all started at a ritzy weekend resort in Boca Raton, FL


in 1994. A group of young bankers from JPMorgan,
were celebrating the success of the company's derivative
portfolios. Young, very bright minds, partying a bit and
meeting in small conference rooms hatched a new idea.

These young people were struggling with the age-old


problem of how to manage Risk. Out of these
discussions came the idea of Credit Default Swaps, a
derivative that ensured a loan against default, a novel
idea. Up to this point derivatives had always involved
speculation about the future value of some tangible
commodity like corn, coal, or beef.

CDS

A credit default swap (CDS) is a financial swap agreement that the


seller of the CDS will compensate the buyer (the creditor of the
reference loan) in the event of a loan default (by the debtor) or
other credit event. The buyer of the CDS makes a series of payments
(the CDS "fee" or "spread") to the seller and, in exchange, receives
a payoff if the loan defaults.

SUMMARY (CONT)
The JPMorgan managers came up with the idea to use
derivatives to manage their bank loan risks .Banks are
required to set aside a certain percentage of capital in
reserve for every loan they make in order to ensure that
if a certain number of loans default they will be able to
cover the loses. But, what if banks could find another
way to cover potential losses without setting aside their
own capital? The banks would then have more capital to
lend.
In 1994, one of JPMorgans whiz kids, Blythe Masters
brokered the worlds first Credit Default Swap with
Exxon.

SUMMARY (CONT)
HIGH PROFITS
COMPETITORS FOLLOWED
WORLD WIDE CREDIT BOOM

Brooksley Born in 1998 attempted to alert congress to


the dangers and sought to regulate these Swaps and
derivatives. The Banks lobbied hard against this. The
Banks won. Legislation was passed by congress and
signed into law by President Bill Clinton to repeal the
depression-era Glass-Steagall Act, thus opening the way
for Banks to market and sell derivatives without any
public accountability whatsoever.

The result was an explosion in Credit Default Swaps beyond


commercial credit risk into consumer credit risk with
emphasis on home mortgages. In places with rapidly growing
housing markets, like Georgia, predatory lending practices
emerged. In 2002, Governor Roy Barnes managed to pass
legislation putting limits on aggressive mortgage lending
practices. The mortgage lobby heavily funded his political
opponents and got the law overturned when Barnes failed to
win re-election.

Home sales skyrocketed. Swaps grew exponentially.


Investors could now bet on derivatives based not on
mortgages themselves but on other derivatives. Derivatives
on derivatives on derivatives.

Subprime mortgages fed the growing hunger for Swaps and


CDOs.
Conditions became such that neither the bankers nor the
legislators of the countries involved even understood how
these swaps in conjunction with subprime lending worked.
The Frontline correspondent asked Terri Duhon pointblank
why did everyone keep going when it became clear to her that
JPMorgan should reduce its exposure to Swaps and CDOs.
She replied: UmmtheI meanlookvery simply, there
are certainly some investors, some banks, some borrowers
who are a bit greedier than they should be.

SUBPRIME LENDING

When it became more obvious that the derivatives market


was nearing a climax, Goldman Sachs took a particularly
aggressive position Goldman Sachs made money off of other
banks that had invested in their CDOs. Banks in Germany
became the first to fail.

By 2008, things were going terribly wrong but, due to the


lack of public disclosure, almost no one knew it yet.
Suddenly, massive numbers of mortgages were in default and
those holding Swaps had to pay up.

FINANCIAL CRISIS
The financial crisis was triggered by a complex interplay of

policies that encouraged home ownership, providing easier access to


loans for (lending) borrowers, overvaluation of bundled subprime
mortgages based on the theory that housing prices would continue to
escalate, questionable trading practices on behalf of both buyers and
sellers, compensation structures that prioritize short-term deal flow
over long-term value creation, and a lack of adequate capital
holdings from banks and insurance companies to back the financial
commitments they were making.

CAUSES
Widespread failures in financial regulation and
supervision
Dramatic failures ofcorporate governance andrisk
management at many systemically important
financial institutions
Combination of excessive borrowing, risky
investments
Lack of transparency" by financial institutions,
Ill preparation and inconsistent action by government
that "added to the uncertainty and panic
Systemic breakdown in accountability and ethics
Deregulation ofover-the-counter derivatives
especiallycredit default swaps.

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