I like George Soros's metaphor of oil tanker ship, explaining the entire situation. They are very big therefore to prevent capsizing the ship due to slashing around the oil within one big tank, they have to compartmentalize it. Same way after great depression the regulators introduce various tires of compartments ( here it is money instead of oil). Glass-Steagall Act(1933) prohibited commercial banks from participating in the investment banking business. For 40 years there was no major financial crisis in US. President Ronald Reagan supported by economist and lobbyist started a 30 year period of financial deregulations. In 1982 Reagan administration deregulate saving and loan company , allowing them to make risky investment with their depositors money. I am not questioning his good intentions but when it comes to speculative business especially using derivatives ( Warren Buffet called it weapons of mass destruction) instead of regulations they encourage it to the extent of banning the regulations(H.R.5660). Derivatives are good for mitigating risk but it can also be used to speculate and make …show more content…
Since mortgage takes decades to repay lenders were very careful. In the new system lenders sold their mortgage to investment bank and investment bank combine thousands of mortgage and other loans to create complex derivatives called Collateralized Debt Obligation(CDO) . The investment bank then sold CDO to investors. This securitization food chain linking all together with investors all over the world. Now home owners pay their mortgage money, it went to investors all over the world and lenders don't care about whether borrower can repay. So they started making riskier loans. From 2004 onwards FBI warned about excessive activities of fake supporting loan documentations and other fraudulent activities. Hundreds of billions of dollars per year flowing through securitization