“Delaying the Inevitable”

Iceland was selected as a target country to divert

and diversify the effects of the impending

financial crisis. it had a relatively high standard of

living, low crime rate and was a developed

economy that was flourishing. In the eyes of the

people, nothing could possibly go wrong. What

most people did not realize however, is that this

was a bubble.

PART I: Too good to be true

At one point in time, there were cases where one

would see 19 luxury SUVs outside a bank, each

owned by a lawyer. Anyone smart enough to

enter the bank and figure out what was going on,

and who could successfully dodge all nineteen

lawyers was almost instantaneously offered the

job of an attorney, to propagate this pompous

Ponzi scheme.

In February 2007, the US-based ‘big-four’ audit

firm KPMG rated many securities in Iceland

‘AAA’, the highest and safest rating possible. By

2008, these very same ‘safe’ products were

bleeding. Unemployment in Iceland tripled within

six months. Iceland-based financial regulators,

who had catalyzed this mass destruction, in the

first place, went on to work for banks as though

they did not know what was happening.

PART II: The American Dream

The Commodity Futures Modernization Act of

2000 encouraged financial companies to invent

new ways of making money off the uneducated.

This Act came into being after intense lobbying

by investment banks and various public and

private stakeholders in the financial industry. It

led to the creation of a “securitization food-chain”,

with the big financial institutions at the top.

Post the dot-com bubble burst in the US, the

public were herded towards owning real estate,

one of the key pillars upon which the American

Dream rested. Interest rates on mortgages were

progressively lowered from 2001 up till the year

2007. The fine print on these mortgages,

however, did not maintain the interest rate

throughout the often 30-year tenure of the

mortgage. Most products were limited to an

unbelievably low interest rate for the first five

years, while post this honeymoon period, the now

magnified interest component would cause

unbearable financial stress to whoever was

making the monthly payments for their dream

home, that had now become their worst

nightmare.

Financial companies were allowed to have

leverage ratios of up to 15:1, indicating that every

fifteen dollars loaned required the banks to have

just one dollar in reserves. The regulators and

bankers were hand in glove.

PART III: The Crisis

Come 12th September 2008, the vastly over-

leveraged Lehman Brothers ran out of cash

reserves. The Fed refused to bail them out,

forcing them to file for bankruptcy. It was around

the same time that Bank of America bought out

Merrill-Lynch wrecking havoc on Wall Street,

causing the indices to plunge by 20% within one

day, with far reaching consequences across the

world.

PART IV: Economic Experts for Hire

Merrill-Lynch executive Stan O’Neal was paid

$131 million as a severance package instead of

being prosecuted. He was then picked up by the

board of AIG, as a “consultant” and paid a fee of

$1 million a month. Top Lehman partners were

compensated in excess of $1 billion in bonuses

from 2000 to 2007. Bank of America, Wells

Fargo, JP Morgan among others became even

larger than the behemoths they were before the

crisis.

Since the 1980s, “deregulation” had become a

buzzword among academicians in the Ivy

Leagues. It has become more than evident in

today’s times that business school professors do

not live on a faculty salary. Dr. Glenn Hubbard,

Dean of Columbia Business School and visiting

faculty at Northwestern University and Harvard

Business School was interviewed in this regard.

At one point during the interview, he displayed

hostility, declaring to the interviewer on camera,

“You have three minutes. Make the best use of it,

then get out”, which indicated that the interviewer

had touched upon a sensitive topic. It was found

though official sources that much of his income

was derived from consulting work at Charles

River Associates, a prominent audit firm in the

vicinity of Columbia. Economics professor and

subsequent Federal Reserve Chairman Frederic

Mishkin was allegedly paid $124,000 to write a

paper titled “Financial Stability in Iceland” by the

Icelandic Chamber of Commerce. When

questioned about the authenticity of information

contained in the paper, he said that the

government data was his source, and that one

should “have faith in the Central Bank”, the very

institution that caused bankruptcy in Iceland.

Issues relating to credit default swaps and

executive compensation were seldom written

about by professors.

Raghuram Rajan, the then IMF chief was one of

the first to signal a warning about the impending

real estate bubble going bust in his research

paper in 2005 titled “Has Financial Development

Made the World Riskier?”

PART V: The Aftermath

American society has the highest inequality of

wealth amongst developed economies. It is for

the first time in history that the average American

has less education and is less prosperous than

his parents when they were his age. The main

focus of every American’s life was to buy their

own home, have their own car, good healthcare

coverage and save for their children’s education.

Financial literacy for the average American could

have averted this entire crisis.