After the 1929 Great Depression, the banking industry was tightly controlled. The U.S financial sector was stable in the next 50 years. The financial sector in the late 1990s was consolidated into a few giant global company, they are so large that their failure could threaten the entire economic system. The deregulation and technological advances in the late 90s has led to the explosive growth of complex financial products which is known as derivatives. In 1998, Citicorp merged to travelers to create the largest financial services company in the world. In 1999 Gramm- Leach - Bliley Act overturned the Glass Stegal Act which protects the money of investors from risky investments. SEC and CFTC were responsible for overseeing the investment banks …show more content…
Rajah, who is the former chief economist (IMF) published paper titled "Has financial improvements made the world riskier”. Goldman Sachs sold to investors more than $ 3 billion dollars of toxic assets in the first half of 2006. They also buy CDS from AIG to bet on these toxic assets, by the way, they really were piling risk on AIG's books. Predicting the collapse of AIG itself, they spent US $ 150 million dollars in their CDS protection against potential collapse of AIG. Logically if their investors lost more money, Goldman Sachs will gain more profit. Morgan Stanley bet that all of their investments will fail. CDO market collapsed and investment banks were left with hundreds of billions of dollars in loans, CDOs and real estate could not unload. The Great Depression began in November 2007. In March 2008, Bear Stearns was running out of cash. In September, the Federal Government took over Fannie Mae and Freddie Mac, which had been on the verge of collapse. Two days later, Lehman Brothers collapsed. These entities are rated AA or AAA were bailed out in the day. Merrill Lynch, on the edge of collapse, has been acquired by Bank of America. Henry Paulson and Timothy Geithner decided that Lehman must go into bankruptcy, leading to the collapse of the commercial paper market. On September 17, AIG was insolvent taken over by the government. The next day, Paulson and Fed Chairman Ben Bernanke asked Congress for $ 700 billion to bail out the banks. The global financial system has become paralyzed. On October 3, 2008, although President Bush signed Troubled Asset Relief Program, global stock markets continued to fall. Layoffs and foreclosures continued with unemployment rising to 10% in the United States and the European Union. On December 2008, GM and Chrysler faced bankruptcy. Foreclosures in the United States reached an unprecedented