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 overleveraged 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 ONeal 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
todays 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 Americans life was to buy their
own home, have their own car, good healthcare
coverage and save for their childrens education.
Financial literacy for the average American could
have averted this entire crisis.