The role of wall street in financial crisis
Introduction
The Wall Street financial crisis was caused by a set of interdependent factors which were as a result decisions made (or the lack thereof) by people or institutions who had roles to play in the Wall Street system. These decisions were driven by varied interest which resulted in measures that were beyond what the system could handle. In order to bring out how Wall Street was responsible, it is important to first list the main players in Wall Street and their particular roles.
The Investment banks and other financial institutions
Banks were able to circumvent the credit rating systems through innovation whereby they came up with complex financial structures to meet their selfish profit interests. Financial institutions especially banks marketed mortgage securities that were risky yet making bets on them. In addition, a lot of sub-prime lending was done beyond the limits with the aim of cashing on high prices of houses. The banks therefore managed to fleece their unsuspecting clients who when the prices were falling started defaulting (Michael Lewis, p. para.8-11). In fact during the first public hearing of the causes of the meltdown, John Mack, chairman of Morgan Stanley admitted that they actually made large bets on the continued rising in house prices and hence sold securities that were made up of sub-prime mortgages (Puzzanghera, para.2).
Credit rating agencies
These rating agencies had systems that were outdated which was evident when financial institutions would get away with unscrupulous lending to investors as their products were certified by those agencies as up to standard (Michael Lewis, p.4 para.3-4). During a subcommittee hearing on the causes of the crisis it was also evident that the rating agencies were operating with inherent conflict of interest. Precisely because they obtained their income from the same firms whose products they were required to inspect and as result the firms put pressure on them and they in turn prioritize market share to analytical strictness (Levin, para.6).
The Federal Government
The government’s deregulation policy where the industry was let to run with less interference from the government played a significant role into this crisis. Particularly because there was a lot of information pointing to the time bomb in the Wall Street that if the government would have acted on would saved the situation or at least mitigated the losses, however it took a laid back position and left the Wall Street to run in to the ditch. At the same time laws were dodged without their notice because the government was not actively involved (Michael Lewis, p.4 para.5, 6 & 8).
From the article ‘The End’, it clearly comes out that a major cause of the financial crisis is attributed to negligence of the Federal government, the outdated regulatory systems, selfish interests of investment banks as well as mortgage firms. This unearths the rot that is underlying Wall Street operations and also questions total control of Wall Street that has been left in the hands of firms’ executives, who will stop at nothing to attain their selfish profit ambitions even if it means using insidious means to attain them even in the face of looming danger. The government has also introduced policies and does not monitor their application in order to determine their effectiveness and hence make adjustments if need be. For instance sub-prime mortgages.
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