For Reagan, A Banker Made to Order Not Your Stereotypical Economist What stood out about the man who would become the world's most powerful banker. Savings & Loan Crisis -- Late '80s As thrifts are deregulated in 1982, speculators, crooks move in; 700 institutions fail. The '80s Go-Go Years New investors plunge into the bull market. It seemed it would go on forever. One famous fund manager leads the charge. The new Fed chairman, Alan Greenspan, is a believer in Ayn Rand's philosophy -- free-market capitalism means no regulations, no government intervention. “He was a believer in Ayn Rand... Little bit curious ... because what is central banking?” READ MORE » Joseph Stiglitz “Deregulation ... looked better at the time than it does to some people now.” READ MORE » Martin Feldstein “Greenspan is a political animal.” READ MORE » Paul Krugman

The New Clinton Economic Team "The Committee to Save the World" By 1999, Clinton's top economic policymakers -- Greenspan, Rubin and Summers -- are riding high. Debates Behind Closed Doors Clinton's cabinet clashes on the issue of regulation vs. unfettered markets. The Economy Guns Forward Clinton's top economists tell him to cut the deficit; it will benefit the economy. They're proved right. The country's best-known financier, Robert Rubin, joins forces with Greenspan. Both men believe the less regulation on the market, the better. “The Clinton administration was very interesting because it was very divided.” READ MORE » Joseph Stiglitz “I remember sitting there thinking, 'Now, wait a minute. [The deficit] is going to set a lot of our plans back.'” READ MORE » Robert Reich

A Major Derivatives Scandal Surfaces Here's How It Works... Derivatives and how they help business -- as explained by a former derivatives banker/lobbyist. "So Along Comes this Idea" An inventor of credit derivatives explains how they made it easier and safer for banks to lend -- and far more profitable. Interest Rate Swaps From his top perch at Salomon Brothers, Henry Kaufman starts seeing potentially big problems with these instruments. Procter & Gamble sues Bankers Trust claiming the bank's derivatives deals has cost P&G millions. The lawsuit reveals what's really going on in the completely dark and unregulated derivatives market. “Unfortunately for Bankers Trust, it's all caught on tape... ” READ MORE » Michael Greenberger “We were seeing some very dangerous things happening in that market.” READ MORE » Brooksley Born

One Regulator Is Closely Eyeing Derivatives Born's "Concept Release" Document She describes the paper -- her first move toward regulating OTC derivatives. It causes an earthquake in the administration. The Pushback on Born Heats Up Rubin calls in Summers. He tells Born: "You're going to cause the worst financial crisis since the end of WWII." An Emergency Meeting Rubin summons his secretive council to stop Born from going forward on regulating derivatives. The new chairperson of the CFTC, Brooksley Born, sees systemic risk in the virtually unregulated, high-stakes derivatives market. She starts a campaign to regulate the secretive, multitrillion-dollar market. “There needed to be some light shone on this market...” READ MORE » Brooksley Born “I walk into Brooksley's office one day; the blood has drained from her face.” READ MORE » Michael Greenberger “This tight-knit group persuaded me that we really would face a situation of financial turmoil...” READ MORE » Arthur Levitt

A Meltdown Begins at Long-Term Capital Management Could LTCM's Failure Unwind the Financial System? The New York Fed isn't waiting for the answer. It convenes an emergency meeting of Wall Street's 14 largest banks. This hedge fund invented complex mathematical formulas and placed bets using derivatives -- all of it done in secret. LTCM's crisis also reveals how the world has become financially interconnected. “I thought that it was exactly what I had been worried about.” READ MORE » Brooksley Born “The banks used their political influence to get a publicly orchestrated but privately financed bailout.” READ MORE » Joseph Stiglitz “They have dodged not a bullet but a nuclear weapon by getting the banks to buy this, propping it up.” READ MORE » Michael Greenberger

No to Born; No to Regulation And Congress Goes One Step Further... It puts a regulatory freeze on anything Born's CFTC can do in the area of over-the-counter derivatives. Brooksley Born Resigns Born describes what happened after she left the CFTC. Despite LTCM's near-collapse, Congress and top regulators resoundingly reject Brooksley Born's push to regulate derivatives. “I think any consideration of regulation probably came and went within a few days...” READ MORE » Brooksley Born “Government inevitably is going to reflect the pressure of special interests, particularly as elections get near.” READ MORE » Joseph Stiglitz “I firmly believe [the legislation] was written on Wall Street...” READ MORE » Michael Greenberger

The Banking Laws Are Changed Enron Accountants' Dirty Books Arthur Andersen goes out of business after helping Enron outsmart the SEC's accounting regulations. For decades big banks pressed Congress to repeal the 1933 Glass-Steagall Act and allow investment banks and commercial banks to merge. It finally happens. The new superbanks are free to make riskier investments. “It was clear that it was a question not of whether but when Glass-Steagall would go.” READ MORE » Arthur Levitt “The market had practically repealed Glass-Steagall anyway.” READ MORE » Alan Blinder “Without Alan Greenspan, [we] wouldn't have changed the laws when we did.” READ MORE » Charles Geisst

Tech Bubble Bursts in Late '90s It had been fueled by the notion that old rules no longer applied (such as, businesses needed to make a profit). Investors and the SEC smell a rat in the way investment banks handled those IPO deals. “There has always been a 'new economy,' every decade since the beginning of the industrial revolution.” READ MORE » Robert Shiller “[We] assumed that the Information Revolution and the Internet had eliminated recessions...” READ MORE » Michael Mandel

There's This Fellow Named Madoff... Many Red Flags For years, there are letters to the SEC, skeptical articles appear on Madoff. The SEC investigates -- finds nothing amiss. The First Time the SEC Missed Madoff It was 1992. The SEC shuts down an unlicensed feeder fund -- but stops short of investigating Madoff. Two Boston financial analysts figure out Bernard Madoff probably is running a Ponzi scheme. “We were competitors. We were looking for an angle to basically figure out what this man was doing.” READ MORE » Frank Casey [Saul said]: “You got money, you can invest it with my son-in-law Bernie. You'll get 20 percent.” READ MORE » Michael Bienes

Housing Prices Can Only Go Up! "Greenspan Spiked the Punch Bowl" A critic's assessment of Greenspan's interest-rates policy. The IMF's Numerous Warnings? All Ignored Starting in 2007, governments were in denial about the fractures in the financial system. Economist Simon Johnson explains... Feldstein "Lays a Bomb" on Central Bankers What Martin Feldstein's told federal bankers when he stepped up on the podium at the 8/07 Jackson Hole conclave. After the Internet bust, and then 9/11, Alan Greenspan lowers interest rates. It fuels a massive housing boom. But by 2007, the party's over. “[Greenspan] explained at the time that it was a balance of risks...” READ MORE » Martin Feldstein “I don't join the criticism of him for keeping interest rates down. ” READ MORE » Barney Frank

Exit Greenspan Alan Greenspan retires, replaced by Ben Bernanke. Before leaving office, Greenspan receives the Presidential Medal of Freedom, the country's highest honor. “He had turned on a fire hose under the U.S. economy...” READ MORE » Adam Davidson “Boy, has there ever been a greater retrospective downgrading?” READ MORE » Paul Krugman

Bear Stearns' Free Fall A Deal Saves Bear -- But Has a Catch JPMorgan agrees to buy Bear. But Paulson doesn't want any more bailouts and he drives home the "moral hazard" point. Rumors fly about Bear's huge exposure in subprime mortgages -- soon to be dubbed "toxic assets." Investors rush to pull their money out of the investment bank. “We were having trouble finding banks that would even take our securities.” READ MORE » Alan "Ace" Greenberg “It was sort of a gut-check moment. ... The fear of the unknown was enough to say, 'Let's do this loan.'” READ MORE » Michele Davis “My sense is that the Bear Stearns rescue actually engendered overconfidence.” READ MORE » Paul Krugman

The U.S. Nationalizes Fannie and Freddie The crisis is spreading. And the two mortgage giants with $5 trillion in assets, are the definition of "systemic risk." “If Fannie Mae and Freddie Mac hadn't been saved ... global capitalism would have ended...” READ MORE » Adam Davidson “[The] conservatorship for Fannie and Freddie was at least something that we had time to plan...” READ MORE » Michele Davis “It goes back to the Great Depression that in a financial crisis ... the government takes control of the mortgage market.” READ MORE » Mark Gertler

Lehman Brothers Nears Collapse How the Bankers Went At the Lehman Crisis Merrill's John Thain on the emergency Friday meeting at the Federal Reserve, convened by Paulson. The Weekend That Changed Wall Street "It was an 'Oh my god' moment. Bankers finally realized the implications of Lehman going bankrupt" - Maria Bartiromo, CNBC But Treasury Secretary Paulson, a free marketer, refuses to have the government bail out Lehman. For him, moral hazard trumps systemic risk. “People said, 'Oh, let them go belly up,' and then it turned out dead bellies aren't as much fun to look at...” READ MORE » Barney Frank “I called Sec. Paulson and said we would not be able to do this deal without some government support.” READ MORE » Ken Lewis “By law, the Fed can only lend against 'good collateral,' and also with an institution over which it would have recourse.” READ MORE » Mark Gertler

A Secret Deal Bank of America Gets Merrill Ken Lewis is on top of the world. And Merrill Lynch has dodged a bullet. As Lehman melts down, it appears Merrill Lynch, the second-largest investment bank, could be next. Paulson, Ken Lewis, John Thain secretly cut a deal: Bank of America will buy Merrill. “I proposed to him that we would be interested in selling a 9.9 percent stake in Merrill to Bank of America...” READ MORE » John Thain “I said, 'If we're going to do something, I want to buy the whole company...'” READ MORE » Ken Lewis “The Merrill purchase we hoped would stop the domino effect.” READ MORE » Michele Davis

Markets Crash, Credit Freezes The U.S. Government Bails Out AIG AIG had sold credit default swaps -- a type of insurance -- against the collapse of Lehman, assuming it could never happen. The Merrill deal can't stop the meltdown; Lehman was more interconnected than anyone realized. “The economy was legally dead for a few hours Wednesday and Thursday...” READ MORE » Adam Davidson “This is DEFCON 4, whatever. This was the complete nightmare.” READ MORE » Paul Kruman “That week was the perfect storm. A money market fund breaking the buck ... that's never supposed to happen.” READ MORE » Michele Davis

Government Asks for $700 Billion The Paulson Three-Pager Requesting $700 Billion Economist Simon Johnson's opinion on the document Paulson sent Congress Sept. 18, 2008 asking for the money. The Controversy Over Paulson's Three Pages Treasury's Michele Davis explains how a short rundown was what Congress had wanted. Paulson tells congressional leaders the money's needed to unstop the credit markets -- or else the world's financial system will melt down in a matter of days. “It's the economic equivalent of 9/11 in my view... There was literally a pause in that room where the oxygen left.” READ MORE » Chris Dodd “They said they needed the authority to give $700 billion to unstop the credit market ... by Monday.” READ MORE » Barney Frank “Congress [has] a gun held to its head by the nation's top economic chief: ... 'Give me $700 billion or the economy gets it.'” READ MORE » Elizabeth Warren

Top Bankers Summoned to Washington Thain's Take on the Momentous Meeting Here's how Merrill Lynch's CEO sums up the day's discussion and the government's demand. "It Was A Gift to Them To Do Their Patriotic Duty" Elizabeth Warren's views on the 10/13 meeting in which government became a major stockholder in the banks. Did Taxpayers Get A Fair Shake? That's the question TARP Oversight Cmte Chair Elizabeth Warren asked Paulson. She got a letter back… To boost the nation's confidence in the banks and get them lending again, Paulson tells nine CEOs each of their banks will get tens of billions; the government will become a major stakeholder. “It just seemed to me that the ... right thing to do was to take the money. Little did I know the pain that would invoke...” READ MORE » Ken Lewis “None of us ever wanted to be in a position where you had government ownership in a bank. That was just anathema.” READ MORE » Michele Davis “Now we have a public-private mix that is the most dangerous of all.” READ MORE » Elizabeth Warren

Now He Tells Us! Testifying before Congress on the financial crisis, Greenspan admits that his premise that markets could be trusted to regulate themselves was wrong. “I was astonished ... because he's not the type of personality to do a lot of mea culpas.” READ MORE » Sheila Bair “A very important moment ... comparable I think to McNamara's confession of error with regard to the Vietnam” READ MORE » Barney Frank

"It Was One Big Lie" SEC Is Called On the Carpet How could the agency have missed Madoff's fraud for so long? Bernard Madoff, head of a prominent Wall Street trading firm -- and an unlicensed investment adviser -- confesses to a Ponzi scheme that's cost investors $65 billion. “[The SEC] had a specific roadmap to the fraud ... and it still didn't catch him.” READ MORE » Harvey Pitt “The question of when it became a fraud is fundamental to the Bernie Madoff mystery.” READ MORE » Diana Henriques “I said, 'Someone's setting him up.'” READ MORE » Michael Bienes

Government's Message to Bank of America Bernanke and Paulson tell Ken Lewis: "You cannot pull out of the Merrill deal" -- even though BofA is facing $15 billion in losses on Merrill's balance sheets. “We went to them and told them what we were considering...” READ MORE » Ken Lewis “The Fed lawyers ... didn't see anything in the contract that could prevent the merger from going forward.” READ MORE » Michele Davis “The fact that we were losing money I don't think was a surprise to anyone.” READ MORE » John Thain

The New President's Challenges The National Debt How it has reached $10 trillion? Obama's Options for Troubled Banks He's got the "closed" option v. "open" option approach. Here's some history. Credit markets are frozen, there's rising unemployment and housing foreclosures, two wars -- plus a growing national debt. “There is no question that we are on an unsustainable fiscal course, and we need to change course.” READ MORE » Peter Orszag “The truth is, you can't endlessly borrow money and have a sound economy...” READ MORE » Paul O'Neill “The Obama administration obviously decided to stress the fiscal stimulus ... and the banking played second fiddle.” READ MORE » Simon Johnson