Banking crisis

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[[File:Bundesarchiv Bild 102-12023, Berlin, Bankenkrach, Andrang bei der Sparkasse.jpg|thumb|right|225px|A crowd of depositors tries to withdraw their savings from a failing bank in Berlin, 1931.]]
{{Economics}}
A '''banking crisis''' usually refers to a situation in a general "market adjustment"<ref group=note>In many cases (notably 1929 and 2008), this is rather like calling [[nuclear war]]fare an "exchange of hostilities".</ref> when [[faith]] in banking institutions falls, and people start trying to move their [[money]] to other places for safe keeping. This is called a "run on the banks". It can also occur due to overextending low quality loans, which in a down market can become essentially worthless.

Economies around the world have suffered financial crises for centuries. Afterwards, politicians boast of newly-adopted regulation that will minimize the risk of a future crash. But such claims are rarely borne out by experience.

One of the most famous banking crises in modern history occurred during the [[Great Depression]], which only massive [[government]] intervention and guarantees (mostly in [[World War II]]) were able to turn around.

==Notable historical banking crises==

===The South Sea Company (1711–1720)===
{{cquote|Let but Fortune favor us, & the World will be sure to admire our Prudence. If we fail, let’s een keep the mishap to ourselves; But tis Ignominious (in this Age of Hope and Golden Mountains) not to Venture.|||{{wpl|Alexander Pope||,}} an investor in the South Sea Company<ref>''The Cambridge companion to Alexander Pope'', edited by Pat Rogers (2007) Cambridge University Press. ISBN .</ref>{{rp|178}}}}
Although not well known today, the South Sea Company is a prime example of just how crazy things can get (especially when financial fraud is involved). Originally set up as a public–private partnership to consolidate and reduce the cost of Britain's national debt, it was marketed to the general public as a trading company that in theory would equal or surpass the Dutch East India Company in terms of profits. [[Pyramid scheme|In reality, the company NEVER made a profit in trading.]] The way the company made money was to hype the stock price and use various financial tricks to keep the stock rising. But 1720 is the year when things went ''insane'', as the stock went from a low of £128 in January to £1050 by June, making the company worth ''10 times'' the debt it had originally been set up to manage. To put that in perspective, a comparable situation would be if in 2015 there was ''one'' US company whose stock was worth $186 trillion on the NYSE. It had gotten to the point in 1720 where the South Sea Company was lending people money to buy stock to keep the ball rolling. Of course, that type of hype cannot be sustained, and the stock eventually fell, hitting £175 by September. As for the debt, the company was supposed to consolidate and reduce this; in 2014, the Chancellor of the Exchequer (equivalent of the US Department of Treasury) announced that it would be paying off that debt.<ref>
[http://www.nytimes.com/2014/12/28/world/that-debt-from-1720-britains-payment-is-coming.html?_r=0 STEPHEN CASTLE (DEC. 27, 2014) "That Debt From 1720? Britain’s Payment Is Coming" ''New York Times'']</ref> To put ''that'' in perspective, the United States paid off its national debt (from 1776 onwards) in 1835.

===Panic of 1907===
Most<ref group=note>But don't forget the [[Austrian school|Austrians]].</ref> agree the banking panic of 1907 forged a consensus of the need for banking regulation and a [[central bank]] in the [[United States]].<ref>[[Milton Friedman|Milton R. Friedman]]. [http://www.epubbud.com/read.php?g=P4CAR3FG&tocp=33 "Origin of the Federal Reserve System"], ''Free to Choose''. San Diego: Harcourt, 1980.</ref><ref>[http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=2825:TT&sid=aJECcMDaTiwM Eric Dinallo, Testimony to Congress, November 2008 on (Naked) Credit Default Swaps]: "''A more lasting result was passage of New York’s anti-bucket shop law in 1909. The law, General Business Law Section 351, made it a felony to operate or be connected with a bucket shop or 'fake exchange' …Section 351 prohibits the making or offering of a purchase or sale of security, commodity, debt, property, options, bonds, etc. without intending a bona fide purchase or sale of the security, commodity, debt, property, options, bonds, etc. If you think that sounds exactly like a naked credit default swap, you are right.''"</ref>  This led to creation of the [[Federal Reserve]] in 1916 to oversee banks and serve as a lender of last resort in times of a cash crunch (or more formally, "liquidity crisis").

===Black Tuesday===
[[File:American union bank.gif|thumb|right|275px|Depositors outside the American Union Bank in New York City, which had just gone out of business, 1931.]]
By 1930, there were approximately 30,000 banks in the United States. Most of these were mom 'n pop, unregulated neighborhood banks.<ref>James Stuart Olson. [http://books.google.com/books?id=CDD1aGiJJTkC&pg=PA26&lpg=PA26&dq=30,000+banks+closed+holiday+fdr&source=bl&ots=oHhSwFCntm&sig=fbbHyhzoIC4jhQJlxDt2xApydFo&hl=en#v=onepage&q=30%2C000%20banks%20closed%20holiday%20fdr&f=false ''Historical Dictionary of the Great Depression, 1929-1940''.] Santa Barbara: Greenwood Publishing Group, 2001.</ref> When the Crash of 1929 occurred, unemployment and foreclosures began to rise.<ref group=note>The failure of Austria's {{wpl|Credit-Anstalt|Credit-Anstalt}} in 1931 was the first in a wave of international banking crisis which further unsettled Wall Street after the Crash of '29.</ref> Some people needed to withdraw their savings from these banks, only to find the bank didn't have the cash in the vault and was holding worthless paper loans on defunct businesses that laid everyone off, or foreclosed real estate that had sunk in value with no market buyers.

In February 1932, the governor of [[Michigan]] declared a banking holiday throughout the state. This sent a tremor throughout the country. Rumors of [[inflation]] and going off the [[Gold standard (economics)|gold standard]] flooded the country, leading to more withdrawal of [[gold]] from the banks. Foreign depositors began withdrawing balances which set in motion an increased flow of gold out of the country. By inauguration day of the new president, twenty-one states had closed their banks.

President [[Franklin Roosevelt]]'s first act was to declare a bank holiday. After three days of re-organization and mergers, when the banks re-opened, fewer than half survived. [[Fractional-reserve banking]] was implemented with regulatory oversight by the Federal Reserve mandating reserve requirements (a portion of bank deposits held in cash reserve). Banks were also required to purchase deposit insurance to rebuild bank customers confidence with FDIC bailout gaurantees. Other reforms followed such as the {{wpl|Glass-Steagall Act}} to regulate and monitor who was granted a bank charter and how they managed their assets and other people's money, as well as the Banking Act of 1935 which established the Fed's Open Market Committee.

==Great Recession==
[[File:Northern Rock Queue.jpg|thumb|right|350px|Anxious depositors outside Northern Rock in [[England]], during the early stages of the recession.]] 
{{cquote|You [[Groupthink|couldn't advance in a finance department]] in this country unless you taught that the world was flat.|||Warren Buffett on the [[Chicago_school#Still getting it wrong after all these years|"efficient" market paradigm]] (back in 2005<ref>[http://query.nytimes.com/gst/fullpage.html?res=9B00E1D71E3FF93AA15753C1A9639C8B63&pagewanted=1&pagewanted=all The Heresy That Made Them Rich], ''The New York Times''</ref>)}}

This newest recession was caused by the subprime mortgage crisis in 2007. It left many people devastated, purchase power decreased and people lost their savings. That recession combined with waves of refugees contributed to the rise of populism in Europe and United States.

The great recession presented the perfect opportunity for 
[[gold standard (economics)|goldbuggery]]
 [http://www.visualcapitalist.com/wp-content/uploads/2016/01/bank-consolidation.jpg consolidation] and buying up competing businesses and assets that were performing poorly due to the recession. It produced the most bubbalicious form of economy, and in the ten years that followed we've learned absolutely nothing from it except that we won't rise up to stop the bankers next time.

===Credit default swaps===
The {{wpl|Commodity Futures Modernization Act of 2000}} (CFMA) was pushed by [[Republican]]s (see [[Phil Gramm]] and [[Alan Greenspan]]) and signed by President [[Bill Clinton]] on the advice of Treasury Secretary {{wpl|Larry Summers}}.<ref>[http://abcnews.go.com/blogs/politics/2010/04/clinton-rubin-and-summers-gave-me-wrong-advice-on-derivatives-and-i-was-wrong-to-take-it/ Clinton: I Was Wrong to Listen to Wrong Advice Against Regulating Derivatives], ABC News (Larry Summers was then appointed by [[Barack Obama]] as Director of the President's National Economic Council.)</ref> This Act not only prohibited the Securities and Exchange Commission (SEC) from securities oversight of credit default swaps (CDS), it prohibited insurance regulation as well. As a result, the CDS market boomed, and it was the product of choice used to hedge risks. 

On top of this, the ''de facto'' repeal of the Glass-Steagall Act in 1999 presented investment banks with the spectre of competition from much larger, much stabler, much more richly [[capital]]ised commercial banks.<ref>[http://www.washingtonpost.com/repeal-of-glass-steagall-not-a-cause-but-a-multiplier/2012/08/02/gJQAuvvRXX_story.html Repeal of Glass-Steagall: Not a cause, but a multiplier], ''The Washington Post''</ref>  Many investment banks responded by embracing greater risk and increasing levels of leverage in order to maximise income from market sources that commercial bank regulations prohibited commercial banks from entering.

The main "writers" of credit default swaps were large insurance companies, asked by investment banks around the world, who were securitizing much of the newly created "sub-prime" loans. The end result was that the true risk of lower-quality borrowers was held by individuals and institutions who had not evaluated, and were not aware of the risks. Because of the Gaussian<ref group=note>Aka, "normal"; "Gaussian" is the alternate name for the normal distribution, and only used to make you look smarter than you are.  The first warning sign...</ref> copula formula,<ref>[http://blogs.scientificamerican.com/guest-blog/2013/01/30/leveraged-yield/ The Real—and Simple—Equation That Killed Wall Street], ''Scientific American''</ref> and a belief that the various securitizations were not correlated, the least-risky tranches<ref>[http://www.investopedia.com/terms/t/tranches.asp Tranches] on Investopedia</ref> of securitizations were packaged together and sold via CDS to these insurance companies, who believed them to be almost riskless.  

Because state regulators were not requiring insurers to retain enough in reserve, AIG underwrote over $3 trillion (to compare, more than the entire [[GDP]]s of [[India]], [[France]] or the [[UK]] at the time) worth of these derivatives. And these default swaps, of course, were purchased by holders of crappy loan bundles (mainly [[Goldman Sachs]], in the case of AIG) as [[Irony meter|insurance against a system-wide shock]]. The unintended consequence was that the limited number of large firms (notably AIG) that issued credit default swaps managed to re-concentrate much of the risk that securitization had theoretically distributed throughout the economy — on their own balance sheets.

===Relationship to the [[War on Terror]]===
George Friedman writes in ''The Next Decade'', "The Bush Administration didn't want to raise taxes to pay for the war on terror, and Fed cooperated by financing the war by, essentially, lending money to the government. The result was that no one felt the war's economic impact - at least not right away." Low interest rates encouraged home buying and increasingly "sub-prime" loans, some with adjustable mortgage rates. The [[Iraq War|war in Iraq]] went badly,{{fact|joke}} and the Fed never got around to raising rates.<ref>Friedman, George, 2011. ''The Next Decade''. New York, Doubleday. P. 42. ISBN 978-0-385-53294-5</ref>

===Beginning to fall apart===
[[File:TED_Spread_Chart_-_Data_to_9_26_08.png|thumb|250px|Beware the TED spread.]]
As mortgage rates on adjustable rate mortgages rose and individual borrowers were unable to make payments on their loans after the expiry of teaser rates and other features, default rates in securities began to rise and repossessed houses began to flood the market. Noticing this, a number of market participants tried to get "short" of the housing market, creating even ''more'' demand for CDS, but now based not on insuring actual housing risk, but just [[Gambling|making bets]].

The system was set to correct itself, and did so in late 2007 and 2008. Spreads on housing risk indices increased dramatically as expected losses rose, and a number of large market participants who had large, leveraged bets on the continued housing boom began to fail, from structured investment vehicles (designed as a rating-arbitrage vehicle) to derivatives products companies (a purely-synthetic high-leveraged vehicle) failed first, but were shortly followed by a number of housing-related hedge funds.

===It's a TARP!===
By the fall of 2008, the US government was struggling to prevent the all-out collapse of the financial system, and eventually settled on an undersized $700 billion rescue package<ref group=note>Equal to about one quarter of all federal outlays at the time, and $200 billion ''more than'' the balance sheet of the Federal Reserve Board, which would have to purchase the new government debt from the U.S. Treasury.</ref> to try to tackle the crisis before the US economy (and by extension, the entire [[Earth|world]]) froze into a second dark age. The original draft pursued by the [[Dubya|Bush]] administration was 3 pages that included a non-reviewable provision,<ref>[http://www.nytimes.com/2008/09/21/business/21draftcnd.html Fuck off, Henry Paulson]</ref> but grew to 451 pages. It passed with House [[Democrats]]' help on September 29.<ref>[http://www.nytimes.com/2008/10/04/business/economy/04bailout.html?pagewanted=all Bailout Plan Wins Approval; Democrats Vow Tighter Rules], ''The New York Times''</ref>

Later, it was revealed that the added 448 pages weren't enough to stop AIG from drenching themselves with undeserved bonus money.<ref>[http://blogs.hbr.org/2009/03/perilous-obfuscation-aigs-bonu/ AIG's Bonuses: A Dangerous Failure of Leadership], Harvard Business Review</ref> (Because the [[devil's advocate]] never dies, there were some in the [[media]] who believed the outrage was all a bunch of [[populist]] claptrap.<ref group=note>It's on Wikipedia if you want to [[torture]] yourself.</ref>)

===Casualties of the crisis===
{{cquote|''The foreclosure rate is the worst since the Great Depression, [but] it's spurious to evoke memories of that great national calamity when talking about today — it's akin to equating a sore throat with stomach cancer... Whatever the political outcome this year, hopefully this will prove to be yet another instance of that iron law of economics and markets: The sentiment of the majority is always wrong at key turning points. And the majority is plenty pessimistic right now. That suggests that we're on the brink not of recession, but of accelerating prosperity.''|||Donald Luskin, [[National Review Online|NRO]] columnist and author of ''I am [[John Galt]]'', on Sept. 14, 2008<ref>[http://www.washingtonpost.com/wp-dyn/content/article/2008/09/12/AR2008091202415.html The whole thing is spectacular.] ([[John McCain]] really knew how to pick 'em.)</ref>}}

As the losses started to mount, many banks faced hard times.  Some collapsed, some were nationalized, some were swallowed up by larger rivals, and others needed government bailouts. At the end of September 2008, over 284 banks and lenders worldwide had collapsed, the largest ones being:

*'''Northern Rock''' - A large British bank and mortgage lender, Northern Rock had a business model where it borrowed money from larger banks in order to extend mortgages to its borrowers. When the markets lost liquidity, it borrowed £25 billion from the Bank of England, but even this failed to save it. Eventually on February 17, the [[New Labour|UK government]] had to nationalize the bank, leaving thousands of shareholders with nothing and costing 2000 jobs.<ref>[http://news.bbc.co.uk/2/hi/business/7007076.stm Timeline: Northern Rock bank crisis], BBC</ref>
*'''Bear Stearns''' - One of the first to appeal to the US government for help, Bear Stearns was propped up by the US government and eventually sold to JP Morgan on March 17.<ref>[http://www.nytimes.com/2008/03/17/business/17bear.html?pagewanted=all JP Morgan Pays $2 a Share for Bear Stearns], ''The New York Times''</ref>
*'''Dresdner Kleinwort''' - [[German]] investment bank taken over by Commerzbank AG. 31 August.<ref>[http://www.dw.de/germanys-commerzbank-agrees-to-buy-dresdner/a-3606354 Germany's Commerzbank Agrees to Buy Dresdner], Deutsche Welle</ref>
*'''[[Fannie Mae]]''' and '''Freddie Mac''' - The two largest US mortgage lenders were taken over by the US government, except on a much larger scale. The two government-sponsored enterprises, which guarantee about half of the US mortgage market (worth a cool ''$12'' trillion) were placed in conservatorship on September 7, costing the federal government a potential $200 billion.<ref>[http://consumerist.com/2008/09/06/nobody-panic-government-seizes-freddie-mac-fannie-mae/ Nobody Panic: Government Seizes Freddie Mac, Fannie Mae], ''The Consumerist''</ref>
*'''{{wpl|Lehman_Brothers#Causes|Lehman Brothers}}''' - [http://www.nytimes.com/video/business/1247464530167/wall-street-one-year-later.html It begins.] Up to the credit crunch, Lehman was the fourth largest investment bank in the US, but on September 15 it fell victim to the crisis and filed for Chapter 11 bankruptcy protection. Previously, it had approached the [[South Korea|Korean]] Investment Corporation for backing, who wisely walked away when it became clear how exposed Lehman were to the crisis. Thousands of jobs were lost, although UK bank Barclays picked up some of the US assets.<ref>[http://www.theguardian.com/business/2008/sep/16/barclay.lehmanbrothers1 Barclays to buy Lehman Brothers assets], ''The Guardian''</ref><ref group=note>Incidentally, {{wpl|George Herbert Walker IV}} was Investment Management Director at the time.</ref>
*'''Merrill Lynch''' - Another major investment bank, Merrill Lynch actively sought to be taken over by Bank of America in order to prevent its own collapse (Merrill had already written off $50 billion due to sub-prime losses, and had failed to secure overseas investment). The deal was worth a bargain basement $50 billion. 15 September.<ref>[http://www.nbcnews.com/id/40795080/ns/business/t/how-merrill-lynch-bankers-helped-blow-their-firm/ How Merrill Lynch bankers helped blow up their own firm], NBC</ref>
*'''American International Group (AIG)''' - The biggest insurance group in the US, AIG was rescued by the US Federal Reserve to the tune of $85 billion, effectively nationalizing the company. 16 September.<ref>[http://online.wsj.com/articles/SB122156561931242905 U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up], ''Wall Street Journal''</ref>
*'''Halifax Bank of [[Scotland]] (HBOS)''' - The UK's largest mortgage lender, HBOS, came under scrutiny from investors, concerned at its exposure to the slowdown in the UK market. As a result, its shares plummeted and it was taken over by rival bank Lloyds TSB on September 18 in a deal worth only £12 billion. Such a takeover would have been impossible before the credit crunch, as UK competition laws would have prevented a merger of two of the largest UK banks.<ref>[http://www.nytimes.com/2008/09/18/business/worldbusiness/18iht-hbos.4.16284753.html HBOS falls to Lloyds in £12 billion deal], ''The New York Times''</ref>
*'''Washington Mutual''' - On September 25, WaMu (the self-professed "[[Wal-Mart]] of Banking") was closed by its regulators and sold to JP Morgan for a pocket-change amount of $1.9 billion. With assets of $307 billion it was the largest bank to fail to date, and its acquisition by JP Morgan meant that the latter is now the second largest bank in the US.<ref>[http://news.bbc.co.uk/1/hi/business/7637026.stm Regulator sells Washington Mutual], BBC</ref>
*'''Bradford & Bingley''' - Mortgages from B&B placed into public ownership by the British government on September 29, while the bank's £20 billion in savings deposits, 2.7 million customers and its 197 branches were sold to [[Spain|Spanish]] bank Santander, who also bought up the struggling Alliance and Leicester bank.<ref>[http://www.telegraph.co.uk/finance/financialcrisis/3100146/Santander-buys-Bradford-and-Bingleys-branches.html Santander buys Bradford & Bingley's branches], ''The Telegraph''</ref>
*'''Fortis''' - One of the largest banks in the Low Countries. Rescued and part nationalized by [[Belgium]], the [[Netherlands]] and Luxembourg. 29 September.<ref>[http://www.ft.com/cms/s/0/2b240ff6-8fd7-11dd-9890-0000779fd18c.html#axzz2i2J3zlnR Timeline of Fortis downfall], ''Financial Times''</ref>
*'''Wachovia''' - Bought out by Citigroup. 29 September.<ref>[http://money.cnn.com/2008/09/29/news/companies/wachovia_citigroup/?postversion=2008092913 Citigroup buys Wachovia bank assets for $2.2B], CNN</ref> However, Wells Fargo outbid Citigroup, acquired Wachovia on December 31 and converted it to Wells Fargo.<ref>[http://uk.reuters.com/article/2009/01/01/wellsfargo-wachovia-idUKN0133136720090101 Wells Fargo completes Wachovia purchase], Reuters</ref>
*'''Glitnir''' - Icelandic bank nationalized. 29 September.<ref>[http://www.vi.is/files/1350175258Icelandic%20Financial%20Crisis.pdf Timeline of the Icelandic Financial Crisis], Iceland Chamber of Commerce</ref>
*'''Hypo Real Estate''' - German bank bailed out by German government. 29 September.<ref>[http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aYrHPYX01iuQ Hypo Real Estate to Get EU35 Billion Bailout From State, Banks], Bloomberg</ref>
*'''Dexia''' - Belgian bank bailed out by Belgium, France and Luxembourg. 30 September.<ref>[http://www.nytimes.com/2012/12/29/business/global/eu-approves-dexia-bailout.html?_r=0 EU approves Dexia bailout], ''The New York Times''</ref>
*The nation of '''[[Iceland]]'''? 6 October.<ref>[http://www.guardian.co.uk/world/2008/oct/05/iceland.creditcrunch The party's over for Iceland, the island that tried to buy the world], ''The Guardian''</ref>
*'''Landsbanki''' - Icelandic bank bailed out by [[Russia]]n funds, 8 October.  Refuses to recognize deposits by foreign nationals.<ref>[http://www.rte.ie/business/2008/1008/iceland.html Britain to compensate Iceland bank savers], RTE</ref>
*'''Yamato Life''' - The first [[Japan]]ese victim of the crisis, insurance company Yamato Life went bankrupt on October 10.<ref>[http://news.bbc.co.uk/1/hi/business/7662572.stm Fear grips global stock markets], BBC</ref>
*You and me.  'Nuff said.

===[[RationalWiki]]'s hot tip for shares to short-sell now=== 
*'''HSBC''' (Hongkong and Shanghai Banking Corporation) - You heard it here first. '''Update 26/09/08'''<ref>[http://news.bbc.co.uk/1/hi/business/7637071.stm Bank giant HSBC axes 1,100 jobs], BBC</ref>
	
====It's official, we're worse than Jim Cramer====
If you actually took our advice, well... [[sucker|sucks to be you, fucker]]!

===The moral of this story===
[[Deregulation]] in one part of the economy has had far reaching consequences, causing a global slowdown in the money markets and a knock on effect to [[consumer]]s. It has treated us to the somewhat bizarre spectacle of a particularly [[right-wing]] Republican government nationalizing vast swathes of the American economy, to the point where the United States government now not only ''owns'' about half of the mortgaged properties in the US, but also is in the business of insuring against defaults on those very same properties — a potential "double-whammy" of monstrous proportions.  At this juncture, the slinging about of phrases like "house of cards" might not be considered inappropriate.

===Let's make it bleeding obvious===
{{cquote|[We have] an ideological fixation with free markets and lack of regulation...obviously, people missed the boat on a lot of the risks that a lot of financial instruments entailed.|||Stephen J. Kobrin<ref>[http://knowledge.wharton.upenn.edu/article/why-economists-failed-to-predict-the-financial-crisis/ Why Economists Failed to Predict the Financial Crisis], University of Pennsylvania</ref>}}
[[Free market]] [[libertarianism]] didn't work. [[Keynes]]ian policies enacted since the Great Depression prevented what used to be a common occurrence in "free markets" — disastrous contractions which created extreme hardship — even though the [[con artist|market players]] and their [[Ronald Reagan|political tools]] continue to try to break things, most notably via [[supply side economics]] and deregulation of financial institutions.<ref>[http://www.huffingtonpost.com/jonathan-tasini/its-bozo-the-clowns-fault_b_143882.html "It's Bozo the Clown's Fault"], HuffPo</ref>

===The Republican cover story===
{{cquote|No believer in the free market can think that bankers have to be told by government bureaucrats to go out and make money.|||Dean Baker<ref>[http://www.cepr.net/index.php/blogs/beat-the-press/the-blame-the-community-reinvestment-act-industry The Blame the Community Reinvestment Act Industry], Beat the Press</ref>}}
In December 2010, the Financial Crisis Inquiry Commission released its report to [[Congress]], and "there was a virtually unanimous, critical reaction: the report said little new."<ref>[http://www.theatlantic.com/business/archive/2011/01/fcic-the-private-sector-failed/70511/?single_page=true The Private Sector Failed], ''The Atlantic''</ref> However, during the process of writing the report, the GOP  broke off from the rest of the commission and released their own report, putting [[wingnut]] [[talking point]]s into the record: They excised words like "Wall Street," "deregulation," and "shadow banking system." The official [[Denialism|alternate-universe narrative]] is as follows: "[[Democrats]], especially [[Barney Frank|Bawney Fwank]], blocked new regulations<ref group=note>Really. They ''prided themselves on government regulation''.</ref> on Fannie Mae and Freddie Mac, which forced them to loan to po' 
[[racism|black]]
 
[[racism|hispanic]]
 people.<ref group=note>The racism here might seem latent, but take a look at [http://nymag.com/daily/intel/2008/10/matt_taibbi_and_byron_york_but.html this Byron York interview.] Shorter York: Poor black people diddit. And for further debunking of this point, and some more racism by [[Neil Cavuto]], see [http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html this article in McClatchy], and, oh yeah, can't forget [[Ann Coulter]]: [http://townhall.com/columnists/anncoulter/2008/09/24/they_gave_your_mortgage_to_a_less_qualified_minority "They Gave Your Mortgage To A Less Qualified Minority!"]</ref> They were forced to make these bad loans because of the Community Reinvestment Act, passed by the dastardly [[Jimmy Carter]]. Democrats did it, [[Reaganism|gummint bad, gummint bad, gummint bad, Reagan smash]]!"

Fannie and Freddie did buy up and repackage a lot of bullshit loans, yet it's completely absurd to put the blame for a global financial crisis entirely on them. And the CRA as well — nobody is quite sure how a law passed under Carter (revised in the early 90s) could be responsible for a housing bubble in the mid-2000s.<ref>[http://ccc.sites.unc.edu/files/2013/02/DebunkingCRAMyth.pdf Debunking the CRA Myth – Again], University of North Carolina</ref><ref>[http://fas.org/sgp/crs/misc/R43661.pdf The Effectiveness of the Community Reinvestment Act], Congressional Research Service</ref> Fannie and Freddie actually ''stepped out'' during the peak of the housing bubble due to accounting fraud charges and then joined in on the fun buying up shitty loans after Wall Street had eaten away their market share.<ref>[https://www1.oecd.org/daf/fin/financial-markets/41942872.pdf The Current Financial Crisis: Causes and Policy Issues], OECD</ref><ref>[http://www.bis.org/publ/work259.pdf?noframes=1 The housing meltdown: Why did it happen in the United States?], Bank for International Settlements (The good stuff is on p. 5-15.)</ref><ref>[http://web.archive.org/web/20111110051208/http://www.jchs.harvard.edu/publications/finance/UBB10-1.pdf Understanding the Boom and Bust in Nonprime Mortgage Lending], Harvard JCHS (The good stuff is on p. 103-112.)</ref> But at least "Fannie and Freddie weren't guaranteeing loans in [[Latvia]]."<ref>[http://www.nytimes.com/2010/12/17/opinion/17krugman.html Krugman being snarky]</ref>  Both claims have effectively become [[PRATT]]s for economists.<ref>[http://www.economist.com/blogs/freeexchange/2010/09/housing_markets_3 Fannie and Freddie: guilty?], ''The Economist''</ref>

Adding further insult to injury, see the [[Canada|completely ravaged, horrific commie wreck of an economy only a few kilometers north]], eh.<ref>[http://www2.macleans.ca/2009/04/07/contrasting-canadian-and-us-banking-regulation/ Contrasting Canadian and U.S. banking, regulation], ''Maclean's''</ref><ref>[http://www.ritholtz.com/blog/2013/04/why-canada-avoids-banking-crises/ Why Canada Avoids Banking Crises], Barry Ritholtz</ref><ref>[http://crooksandliars.com/cltv/2013/06/daily-show-you-cant-ram-banking Come on, ING, lighten up a bit.]</ref>

==As yet unannounced==
Right now, the global financial system is playing a game of Jenga. Once you start removing bricks, it becomes more and more unstable, until finally, a brick crucial to the stack is removed. This can happen for any number of reasons.

Some experts believe that the cause for the next crash will be stock equities, since there's a disconnect between stock prices and quarterly earnings.<ref>Authers, John, [http://www.cnbc.com/2015/09/15/robert-shiller-this-is-the-sign-were-in-a-bubble.html "Fears grow over US stock market bubble"], ''Financial Times'' via MSNBC (9/14/15 at 6:12 AM ET).</ref> That might convince investors to cash in, causing a panic as the prices drop more, causing more investors to cash in, and so on.

But since the oligarchs are playing Jenga, that only makes it a possible culprit. Another is the so-called "shadow banking" industry (every bank is connected to each other through loans we can't see), which is subject to fewer regulations. Another is China's deflating real estate and securities markets.<ref>Balding, Christopher, [http://www.bloomberg.com/view/articles/2016-06-06/china-s-shadow-banks-now-pose-a-systemic-risk "The Shadow Looming Over China"], Bloomberg (6/6/16 at 6:00 PM EDT).</ref> It could happen because a TBTF bank takes on outsized risk based on bailout guarantees,<ref>Dayen, Daniel, [http://www.thefiscaltimes.com/Columns/2016/04/15/Big-Bank-Living-Wills-Are-Failure-and-Point-Bigger-Problem "Big Bank 'Living Wills' Are a Failure — and Point to a Bigger Problem"], Fiscal Times 4.15.16.</ref> causing a bank run, causing a crash.

==Silicon Valley Bank collapse==
{{cquote|"Just as there are no [[atheists]] in [[foxhole atheist|Fox Holes]], there are also no [[Libertarians]] during a financial crisis..."|||{{wpl|Barry Ritholtz}}<ref>[https://archive.ph/hIzr7 "Just as there are no atheists in Fox Holes, there are also no Libertarians during a financial crisis..."] by Barry Ritholtz, @ritholtz, Twitter, 2023 March 11, archived on 2023 March 13</ref>}}

{{wpl|Silicon Valley Bank}} (SVB) was a commercial bank founded in 1983. Before its collapse, it was notable for its specialization in technology startups (by the bank's count in 2015, 65% of them) and many venture capital firms.<ref>[https://www.nytimes.com/2015/04/02/business/dealbook/silicon-valley-bank-strengthens-its-roots.html "Silicon Valley Bank Strengthens Its Roots"] by Nathaniel Popper, New York Times, 2015 April 1</ref> For this reason, it attracted attention from investment pundits who lauded the firm as (unusually for a bank) a "growth" oriented stock to buy.<ref>[https://www.barrons.com/articles/buy-silicon-valley-bank-stock-51631298464 "Silicon Valley Bank Has Found a Niche in Tech Start-Ups. The Stock Is a Buy."] by Carelton English, Barron's Stock Pick, 2021 September 13</ref> (Perhaps ominously, the notoriously often incorrect <ref>[https://seekingalpha.com/article/4533169-the-inverse-jim-cramer-strategy "The Inverse Jim Cramer Strategy"] by Scott Gries, Seeking Alpha, 2022 August 11</ref> pundit {{wpl|Jim Cramer}} recommended that investors invest in SVB on his Feburary 8 2023 ''Mad Money'' show.)<ref>[https://www.foxnews.com/media/cnbcs-jim-cramer-eviscerated-touting-silicon-valley-bank-weeks-disastrous-collapse "CNBC's Jim Cramer eviscerated for touting Silicon Valley Bank weeks before disastrous collapse"] by Alexander Hall, Fox News, 2023 March 10</ref>

On March 8th 2023, SVB revealed that it was seeking to raise $2.5 billion to plug a hole in its balance sheet. This announcement triggered a run on the bank; two days later, SVB was "dead", its assets handed over to the {{wpl|Federal Deposit Insurance Corporation|FDIC.}}<ref>[https://www.economist.com/finance-and-economics/2023/03/10/what-does-silicon-valley-banks-collapse-mean-for-the-financial-system "What does Silicon Valley Bank’s collapse mean for the financial system?"], Economist, 2023 March 10</ref> 

Essentially, the root cause hedged on SVB's unusual concentration in the tech industry. In the 2010s, national banks in developed economies were holding interest rates near zero (a hangover from the Great Recession). This was a good situation for the tech industry (whose business model was often "we will lose money now to make lots of money later"), as the low interest rate made riskier investments more attractive. Thus tech (as well as even riskier "investments" like [[cryptocurrency]]) was a very popular investment vehicle, notably creating a {{wpl|stock market bubble}} in tech stocks that peaked in November 2021.<ref>[https://www.economist.com/business/2022/05/14/tech-bubbles-are-bursting-all-over-the-place "Tech bubbles are bursting all over the place"], Economist, 2022 May 14</ref>

It was not as good of a situation, however, for SVB. They were flush in tech assets, but given its unusual specialization in the technology industry, there was much less opportunities for them to engage in the traditional way that banks make money (eg use these assets to make traditional loans). Much of these tech assets instead were invested in securities like Treasury bonds and mortgage-backed securities, securities which were at significant risk of a decline in value in case there was a significant rise in interest rates. Which, of course, happened beginning in March 2022, and continuing through 2023, when the Federal Reserve raised rates several times to temper high inflation.<ref name="levinesvb">[https://www.bloomberg.com/opinion/articles/2023-03-10/startup-bank-had-a-startup-bank-run "Startup Bank Had a Startup Bank Run"] by Matt Levine, Bloomberg, 2023 March 10</ref><ref>[https://www.theverge.com/23635692/silicon-valley-bank-svb-collapse-explainer-startups-venture-capital "The tech industry moved fast and broke its most prestigious bank"] by Elizabeth Lopatto, The Verge, 2023 March 12</ref><ref>[https://www.washingtonpost.com/business/2022/12/14/fed-rate-hike-december/ "Fed raises rates by half a percentage point in last 2022 hike"] by Rachel Siegel, Washington Post, 2022 December 14</ref><ref>[https://www.usatoday.com/story/money/2023/03/12/fed-risking-recession-hiking-rates-reduce-inflation-can-it/11446506002/ "The Fed is hiking interest rates to tame inflation even at the risk of recession. But can it?"] by Paul Davidson, USA Today, 2023 March 12</ref><ref>[https://www.forbes.com/advisor/investing/fed-funds-rate-history/ "Federal Funds Rate History 1990 to 2023"] by Taylor Tepper, Forbes, 2023 February 1</ref>

Adding to the woes of SVB was the fact that, as financial columnist {{wpl|Matt Levine (columnist)|Matt Levine}} put it, "nobody on Earth is more of a herd animal than a Silicon Valley venture capitalist".<ref name="levinesvb"/> Because SVB was unusually concentrated in venture capitalist (VC) funded businesses, they were also unusually exposed to issues caused by a "VC herd panic". One business writer, calling this a "[[social media]] induced bank run", in fact speculated that the collapse started with a single trigger: an article declaring SVB "technically insolvent" in a newsletter called ''The Diff'' that was popular in venture capital circles.<ref>[https://fortune.com/2023/03/12/silicon-valley-bank-may-be-victim-of-first-social-media-bank-run-says-one-theory/ "The first social media bank run? A newsletter popular with VCs may have been the domino that started the Silicon Valley Bank implosion"] by Steve Mollman, Fortune, 2023 March 12</ref> Whatever the trigger was, it was clear that panic had set in among several VCs (including [[Peter Thiel]]'s "Founder's Fund") after the March 8th 2023 announcement, and the collective action of several VCs pulling all of their assets out of the bank at once was enough to cause the bank collapse.

Post-collapse, it was noted by many columnists that SVB CEO {{wpl|Gregory W. Becker}}, as well as other SVB lobbyists (some who previously served as senior staffers to [[Kevin McCarthy]]), lobbied for a weakening of the {{wpl|Dodd–Frank Wall Street Reform and Consumer Protection Act}}, an act passed in July 2010 that overhauled financial regulations in light of the shenanigans of the Great Recession. This effort by Becker and many others was successful; the {{wpl|Economic Growth, Regulatory Relief and Consumer Protection Act}} passed the Senate with a supermajority (all [[Republicans]] and 13 [[Democrats]]) in 2018, and was signed into law by [[Donald Trump]] that year.<ref>[https://thehill.com/policy/finance/378491-senate-passes-bipartisan-bill-to-rollback-dodd-frank/ "Senate passes bipartisan bill to roll back Dodd-Frank"] by Sylvan Lane, The Hill, 2018 March 14</ref><ref name="interceptsvb">[https://theintercept.com/2023/03/11/silicon-valley-bank-used-former-mccarthy-staffers-to-weaken-regulations-lobby-fdic/ "Silicon Valley Bank Used Former McCarthy Staffers to Weaken Regulations, Lobby FDIC"] by Ken Klippenstein, The Intercept, 2023 March 11</ref> Some analysts speculated that the weakening of the Dobb-Frank regulations, which particularly benefited regional banks like SVB, may have helped facilitate SVB's poor choices in allocating capital and lack of investment diversity.<ref>[https://www.forbes.com/sites/mayrarodriguezvalladares/2023/03/12/how-trumps-deregulation-sowed-the-seeds-for-silicon-valley-banks-demise/?sh=228574113432 "How Trump’s Deregulation Sowed The Seeds For Silicon Valley Bank’s Demise"] by Mayra Rodriguez Valladares, Fortune, 2023 March 12</ref> Specifically, the 2018 legislation meant that large regional banks like SVB were moved below the threshold where one had to undergo regular "stress tests" in order to test the resiliency of the bank's finances. It is possible, therefore, that had this regulation remained intact, SVB's capital allocation problems could've been detected and mitigated well before it became a crisis.<ref name="interceptsvb"/>

Predictably, there was guffaws on social media as well as other commentators regarding the hypocrisy of the often [[libertarian]]/anti-regulation venture capital CEOs screaming in their Twitter feeds for the government to completely bail the bank out. In addition, commentators noted the pure ''chutzpah'' of Silicon Valley business leaders demanding that taxpayers bail them out ([[corporate welfare]]) when, in fact, it was the panic of Silicon Valley venture capital CEOs that triggered the run in the first place.<ref>[https://www.cnbc.com/2023/03/11/silicon-valley-bank-failure-has-investors-calling-for-government-aid.html "Investors implore the government to step in after Silicon Valley Bank failure"] by Matt Rosoff, CNBC, 2023 March 11</ref><ref name="timessmallgovernment">[https://www.latimes.com/business/story/2023-03-12/with-demands-for-a-bank-bailout-silicon-valley-shows-its-small-government-mantra-was-just-a-scam "With demands for a bank bailout, Silicon Valley shows its ‘small government’ mantra was just a pose"] by Michael Hiltzik, Los Angeles Times, 2023 March 12</ref> Naturally, a reaction of other Silicon Valley types was to blame the Fed for having the audacity to raise interest rates to combat inflation.<ref name="timessmallgovernment"/>

Other political figures were exposed for similar hypocritical stances. An example of this is {{wpl|Lawrence Summers}}, who responded to the crisis by demanding that depositors be "paid back in full", meaning even beyond the standard FDIC insurance limit. Earlier Summers was previously critical of [[Joe_Biden#Student_loan_debt_crisis|Joe Biden's proposal for student loan relief]] due to it supposedly being (according to him) inflationary.<ref name="timessmallgovernment"/> 

Also predictably, with no evidence, purveyors of the usual [[Republican]] tactic of blaming everything wrong on the planet on the "[[woke]] libruls", such as [[Ron DeSantis]], [[Fox News]], and the [[New York Post]], naturally blamed the collapse on "[[woke]]" [[DEI]] policies, [[global warming]] policies, and other rather ridiculous ''bête noires'' / [[red herring|red herrings]] of the populist right.<ref>[https://floridapolitics.com/archives/594666-svb-desantis-dei/ "Ron DeSantis blames Silicon Valley Bank’s collapse on DEI"] by AG Gancarski, Florida Politics, 2023 March 12</ref><ref>[https://nypost.com/2023/03/11/silicon-valley-bank-pushed-woke-programs-ahead-of-collapse/ "While Silicon Valley Bank collapsed, top executive pushed ‘woke’ programs"] by Katherine Donlevy, New York Post, 2023 March 11</ref><ref>[https://www.foxnews.com/media/home-depot-co-founder-torches-woke-silicon-valley-bank-collapse-warns-recession-here-already "Home Depot co-founder torches ‘woke’ Silicon Valley Bank collapse, warns recession may be here already"] by Kayla Bailey, Fox News, 2023 March 11</ref>

===Crypto bank collapses===
Two additional related banks collapsed around this time as well, {{wpl|Signature Bank}} and {{wpl|Silvergate Bank}}. {{efn|In yet another spectacular fail, Signature Bank was recommended as a great investment by Jim Cramer in April 2022, as he believed (in hindsight, completely incorrectly) that Signature Bank would actually benefit from the Federal Reserve raising interest rates to control soaring inflation.<ref>[https://www.cnbc.com/2022/04/12/cnbcs-jim-cramer-says-these-four-financial-garp-stocks-are-investable.html "CNBC’s Jim Cramer says these four financial GARP stocks are investable"] by Krystal Hur, CNBC, 2022 April 12</ref>}}{{efn|Technically, Silvergate did not ''quite'' collapse, but entered [https://www.bloomberg.com/news/articles/2023-03-08/silvergate-plans-to-wind-down-bank-operations-and-liquidate voluntary liquidation], which is banker-speak for "we almost collapsed, so we're quitting while we're ahead".}} Like SVB, these banks suffered from overexposure to one sector, but these banks were focused on an even riskier asset class than tech: cryptocurrency. Both banks started from humble beginnings (as a small bank focused on wealth management for wealthy clients and a small community bank, respectively) and latched onto crytocurrency in the mid to late 2010s.<ref>[https://www.coindesk.com/markets/2018/12/01/how-silvergate-became-the-leading-bank-for-crypto-startups/ "How Silvergate Became the Leading Bank for Crypto Startups"] by Leigh Cuen, CoinDesk, 2018 December 1</ref><ref>[https://www.cnbc.com/2018/05/31/meet-silvergates-alan-lane-whos-bankrolling-cryptocurrency-exchanges.html "Meet the small community lender that’s become the go-to banker of the cryptocurrency world"] by Kate Rooney and Evelyn Cheng, CNBC, 2018 May 31</ref><ref>[https://www.forbes.com/sites/benjaminpirus/2019/02/22/signature-bank-already-has-hundreds-of-clients-using-private-ethereum-jpm-coin-still-in-testing/?sh=4e62747e3359 "Signature Bank Beats JPMorgan To Ethereum-Based Token Services"] by Benjamin Pirus, Forbes, 2023 March 12</ref> 

During the [[COVID-19]] pandemic in particular, central banks pumped money into the economy, and this paralleled with an appetite and subsequent boom for very risky assets such as crypto and [[NFTs]].<ref name="coindeskcycle">[https://www.coindesk.com/powered-by-consensus/crypto-macroeconomics-explained/ "The Macroeconomic Crypto Climate, Explained"] by Robert Stevens, Coindesk, 2023 January 11</ref> This boom also corresponded with a boom in any investment related to crypto, including Silvergate and Signature; both bank's stock saw spectacular rises during this timeframe (for instance, a 1700% increase for Silvergate's stock price from November 2019 to 2021.)<ref>[https://www.kiplinger.com/investing/cryptocurrency/silvergate-stock-sinks-on-liquidation-news "Silvergate Stock Sinks on Liquidation News"] by Karee Venema, Kiplinger, 2023 March 9</ref> Multiple stock market pundits thus pushed these companies as recommended buys during these "boom" years.<ref>[https://www.fool.com/investing/2021/05/29/better-crypto-stock-coinbase-global-vs-silvergate/ "Better Crypto Stock: Coinbase Global vs. Silvergate Capital"] by Nicholas Rossolillo, Motley Fool, 2021 May 29</ref><ref>[https://www.fool.com/investing/2021/11/02/why-silvergate-capital-is-my-favorite-fintech-stoc/ "Why Silvergate Capital Is My Favorite Fintech Stock"] by Taylor Carmichael and Jason Hall, Motley Fool, 2021 November 2</ref><ref>[https://www.kiplinger.com/investing/stocks/stocks-to-buy/603990/best-financial-stocks-to-buy-2022 "The 12 Best Financial Stocks to Buy for 2022"] by Dan Burrows, Kiplinger, 2022 February 4</ref> 

Beginning in March 2022, however, central banks started raising interest rates to combat inflation. This prompted investors to flee speculative assets like crytopcurrency.<ref name="coindeskcycle"/> As Silvergate and Signature were overexposed to the cryptocurrency market, this caused a chain of events that severely affected their finances, with the collapse of {{wpl|Terra (blockchain)|TerraUSD}} in May 2022 and the collapse of crypto exchange {{wpl|FTX}} in November 2022 in particular bringing negative attention to their overexposure risk.<ref>[https://www.coinspeaker.com/stock-silvergate-tanks-ftx/ "Stock of Crypto Bank Silvergate Tanks 17% Over Exposure to FTX"] by Bhushan Akolkar, Coinspeaker, 2022 November 16</ref><ref>[https://therealdeal.com/new-york/2022/11/22/ftx-crash-could-hit-signatures-multifamily-lending/ "FTX crash could hit Signature’s multifamily lending"] by Suzannah Cavanaugh, TheRealDeal, 2022 November 22</ref><ref name="cnbccryptobankcollapse">[https://www.cnbc.com/2023/03/12/signature-svb-silvergate-failures-effects-on-crypto-sector.html "What the failures of Signature, SVB and Silvergate mean for the crypto sector"] by MacKenzie Sigalos, CNBC, 2023 March 12</ref>

Although these banks had been working to reduce their exposure to crypto deposits since the FTX crash,<ref>[https://www.americanbanker.com/news/signature-banks-deposits-plummet-as-it-scales-back-crypto-exposure "Signature Bank's deposits plummet as it scales back crypto exposure"] by John Reosti, American Banker, 2023 January 17</ref> it was not enough. Both banks failed around the same time of the Silicon Valley Bank failure, and were taken over by the FDIC.<ref name="cnbccryptobankcollapse"/> As these banks were two of the most friendly banks for trading [[Bitcoin]] in North America, some analysts believed that this could pose for some immediate problems for cryptocurrency liquidity, particularly dollar-based trades.<ref name="cnbccryptobankcollapse"/><ref>[https://fortune.com/crypto/2023/03/12/crypto-banking-options-dwindle-new-york-regulators-take-possession-signature/ "Signature Bank takeover could leave crypto companies scrambling for financial services"] by Leo Schwartz, Fortune, 2023 March 12</ref>{{efn|In a demonstration of the uselessness of stock analysts, a {{wpl|Wells Fargo}} analyst suggested that Signature Bank might make for a great investment on the Thursday before the collapse.<ref>[https://www.cnbc.com/2023/03/09/wells-fargo-says-buy-signature-bank-the-last-game-in-crypto-town.html "Wells Fargo says buy Signature Bank, the ‘last game in Crypto-town’"] by Tanaya Macheel, CNBC, 2023 March 9</ref>}}

==See also==
*[[IBGYBG]]
*[[Too big to fail]]
*The British term for a group of bankers is a "[[masturbation|wunch]]"

==External links==
*[http://www.ceps.eu/files/book/1758.pdf The Banking Crisis: Causes, Consequences, and Remedies], Paul De Grauwe
*[http://www.rottentomatoes.com/m/inside_job_2010/ ''Inside Job''], essentially the crisis for dummies.  Won Best Documentary Feature at the [[Hollywood values|83rd Academy Awards]].
*[http://oecdinsights.org/2013/10/28/from-financial-market-deregulation-to-fragmentation-ladies-and-gentlemen-you-screwed-up/ From financial market deregulation to fragmentation: Ladies and gentlemen, you screwed up], OECD
*[http://www.cjr.org/feature/the_great_story.php?page=all The great story], ''Columbia Journalism Review''
*[http://www.nytimes.com/interactive/2014/02/21/business/federal-reserve-2008-transcripts.html?_r=0 The Fed’s Actions in 2008: What the Transcripts Reveal], ''The New York Times'' (How the fuck does Richard Fisher still have a job?<ref>[http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/08/what-were-they-thinking-one-view.html One take]</ref>)
*[http://www.nytimes.com/2014/07/30/upshot/why-cant-the-banking-industry-solve-its-ethics-problems.html?_r=0&abt=0002&abg=1 Why Can’t the Banking Industry Solve Its Ethics Problems?], ''The New York Times''

==Notes==
{{reflist|group=note}}

==References==
{{reflist|2|80%}}

[[Category:Economics]]
[[Category:Financial crisis of 2007 to 2009]]
[[Category:Libertarianism]]
[[Category:Government incompetence]]
[[Category:Conservative deceit]]
[[Category:Financial fraud]]

Categories: Economics, Financial crisis of 2007 to 2009, Libertarianism, Government incompetence, Conservative deceit, Financial fraud