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Lewis, Michael) The Big Short: Inside the Doomsday Machine

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The #1 New York Times bestseller: a brilliant account―character-rich and darkly humorous―of how the U.S. economy was driven over the cliff. When the crash of the U. S. stock market became public knowledge in the fall of 2008, it was already old news. The real crash, the silent crash, had taken place over the previous year, in bizarre feeder markets where the sun doesn’t shine, and the SEC doesn’t dare, or bother, to tread: the bond and real estate derivative markets where geeks invent impenet…

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I keep hearing people ask why nobody is in jail over the financial crisis. Who (names, not companies) should be arrested and what crime did they commit?(r/NeutralPolitics)

Accountant here. I’ve studied the financial crisis pretty well in my graduate studies, undergraduate studies, and just in my free time. Things like this fascinate me. I wanted to respond to several comments, but thought I’d just make one post, and address a few things. I’m also late to the thread so maybe this won’t ever be seen.

> The conclusion I draw from it is basically that the loans banks were granting were largely fraudulent, and they pretty much ignored all the huge red flags in the audit results. Source

This is half-true. There are a few inaccuracies, which are common misconceptions. First, the investment banks weren’t the ones who originated the loans. They bought them from loan originators, most of whom went out of business in one way or another. This is important, because it’s part of where the problem came from. Since the originators were just selling off the loans, they had no incentive to lend to borrowers who would ever pay the loans back.

The second inaccuracy (and this is common also) is about the red flags in the audit results. Auditors aren’t hired to detect fraud. Occasionally they do find it, but that’s not their main goal. Their main goal is to make sure that the financial statements released by a company are free of material misstatements and follow Generally Accepted Accounting Principles (GAAP). Under U.S. GAAP, investments like these are recorded on the books at fair market value. The issue is that when there either a) isn’t a liquid market or b) the market is in a bubble the values on the books can be pretty far off from what they’d be worth in a liquidation situation. Once the banks started realizing what was going on and started selling, it was like a fire sale. Prices were essentially “whatever we can get for it so it gets off our books.” This is what caused the massive writeoffs.

>Then they packaged and resold the loans anyways, telling the buyers that due diligence had been performed. That’s fraud.

It’s not the seller’s responsibility to do due diligence, it’s the buyer’s responsibility. There are disclosure rules, but since these securities were being sold to other institutional investors, there wasn’t a whole lot of disclosure required. It’s also not fraud. Fraud has a very specific definition under U.S. law and it’s one of the most difficult things to prove in a criminal case. More on that later.

>I think part of the problem is the lack of investigation into specifically who is to blame. Or perhaps there has been an investigation and it only turned up a handful of individuals; then the question becomes “does it make sense to destroy these half dozen people when we know they were not alone and could not be blamed for the entire global crisis”? Source

There’s been a LOT of investigation by the SEC, DOJ, Congressional Committees, etc.

>This is a great question, I really hope to see some deserving answers from people who accept the premise (that specific people should be in jail for actions related to the crisis). Source

Herein lies the problem with prosecution. We all may believe that some law was broken. Heck, we probably know that some law was broken. However, of the things that caused the subprime crisis, 99.9% (totally made up statistic) was very much legal and within accounting rules. Of the 0.1% where a law was broken, the problem becomes proof. Fraud is probably the most common thing people want to see the Wall Streeters convicted of. However, fraud is incredibly difficult to prove. If you dig around, there have been a great number of people who have been convicted in civil matters, but not many in criminal matters. This is because the burden of proof that the US Government (via the SEC) has to prove is significantly lower for civil cases than for criminal cases. For a criminal fraud case, you have to prove intent and that’s very difficult to do unless you’ve got an email saying, “Man, I can’t believe these schmucks are buying these worthless piles of shit for almost 100 cents on the dollar. It’s like taking candy from a baby.” Even if you had an email like that, it’s still incredibly difficult to prove what the intent was.

Finally, it’s difficult to pinpoint who caused what. You could argue that low interest rates set by the Federal Reserve in the late 90’s contributed. You could say that “The American Dream” of being a home owner contributed. It’s pretty evident that lax lending standards, buying and selling complex securities that only a handful of people in the world understand, dumb borrowers who didn’t bat an eyelash when they were offered a $300k mortgage on their $24k per year salary, and the lack of oversight all contributed. It’s a complicated thing. If anyone’s interested I can recommend a few books, movies and documentaries if you’re interested in more information.

EDIT Book/movie/documentary recommendations (in no particular order):

  • The Big Short by Michael Lewis – Very easy to read, and show the crisis from the side of the guys who made a ton of money from it. Also you should read his book Liar’s Poker about the bond markets in the 80’s.
  • Margin Call – Great movie that shows the crisis from inside one of the big trading firms. I believe it’s based on JP Morgan. You can stream this for free if you’re an Amazon Prime member.
  • Too Big To Fail – Fantastic movie based on Andrew Ross Sorkin’s book. This shows the reaction from the perspective of U.S. Treasury Secretary. Very well written, very accurate, and the acting is also very good.
  • Too Big to Fail by Andrew Ross Sorkin. Sorkin is one of the writers for the financial blog DealBook for the NYT. This book is a little more in-depth and not quite as easy to read as Michael Lewis’ book, but it’s still very accessible.
  • Inside Job – Documentary narrated by Matt Damon. This one discusses how the crisis affected different countries. It starts in a small town in remote Iceland. Very good, though it comes off as being a little bit of a ‘conspiracy’ type documentary at times.
  • Any of the Frontline stuff – I specifically recommend Money, Power and Wall Street, The Warning, and The Untouchables.

There are others, but those are the ones I typically recommend to people.

EDIT 2 – Thank you all for the upvotes. This is my most upvoted comment ever and it’s about something with substance. Also thanks to /u/Lapper for posting to /r/DepthHub Link

EDIT 3 – Thank you so much /u/semiotomatic for the Reddit gold! I’m speechless!

EDIT 4 The trifecta! Thank you to /u/Ganonderp_ for submitting my comment to /r/bestof Link

EDIT 5 I think this thread has about run it’s course. I just wanted to thank everyone for the really great discussion and questions. I hope it was as enlightening for you as it was for me. /r/NeutralPolitics is a great place. I’d also like to thank you for doubling my comment karma in a single day for talking about something of substance and that I’m pretty passionate about. Also, I got approximately zero work done today, so thanks for that.

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NeutralPolitics

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889

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$7.94

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Book Binding

Hardcover

Type Code

ABIS_BOOK

Book Author

Michael Lewis

Book Edition

1st

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latest edition

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Lewis, Michael) The Big Short: Inside the Doomsday Machine

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I keep hearing people ask why nobody is in jail over the financial crisis. Who (names, not companies) should be arrested and what crime did they commit?

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