What's up guys and welcome back to wall street millennial today we're doing a video about the global financial crisis and great recession of 2008, as we have seen on this channel many times before, the excessive risks taken by large investment banks were largely responsible for the buildup Of the mortgage bubble in the eventual epic collapse, many of the big bank ceos were summoned to testify before congress about their firm's involvement in the financial crisis. In this video we'll go over the highlights of these testimonies and identify which banks are the most culpable for the great recession. This topic was chosen by our channel members. Members get access to our videos one day in advance and also gets a vote on some of our video topics.

Two of the most controversial banks during the crisis were goldman sachs and lehman brothers. Goldman sachs was controversial because they made billions of dollars bidding against the housing markets, while at the same time, selling their clients. Exposure to the very securities that they were. Betting against lehman brothers was controversial because they took on an inordinate risk on their own balance sheet, which ultimately drove the firm to bankruptcy.

The failure of layman brothers sent shockwaves throughout the global financial crisis, driving the economy deeper into recession. First, we'll start off with goldman sachs. Ceo, lloyd, blankfein goldman was one of the biggest traders of residential mortgages. They packaged the mortgages into mortgage-backed securities and sold them to institutional clients such as hedge funds and pension funds.

The people who were coming to us for risk in the housing market wanted to have a security that gave them exposure to the housing market and that's what they got. The unfortunate thing and it's unfortunate, but it doesn't, is that the housing market went south very quickly. After some of these securities, not all of them, because someone were done early but they went and so people lost money in it. But the security itself delivered the specific exposure that the client wanted to have when the housing market crashed, default, skyrocketed and many of goldman's clients went bankrupt.

Many of these clients borrowed money from other financial institutions, so their bankruptcies created systemic risk within the financial system. You don't believe it's relevant to a customer of yours that you are selling a security to that you are betting against that same security. You just don't think it's relevant and needs to be disclosed. Is that the bottom line? Yes and the people who are selling it in our firm, wouldn't even know what the firm's position is.

You are taking a position against the very security that you are selling and you are not troubled senator as i again and you want people to trust you senator. I think people, why would people? I won't trust you if you came to me and wanted to sell me securities, and you didn't tell me that you have a bet against that same security. The main controversy around goldman sachs was that they are betting against the mortgage market at the same time that they are selling mortgage-backed securities to their clients. Goldman buys mortgages and packages them into securities which they sell before they sell the securities.

They sit on goldman's balance sheet for a few weeks or even months, goldman collects fees for each mbs that they sell, but they don't necessarily want to take a long position on the mortgage market to hedge their exposure to these mortgages. They bought derivatives, betting against them. They didn't necessarily think that the housing market would crash. They just wanted a net neutral position.

It's also important to recognize who goldman's clients were they weren't selling to individual investors or retirees who would be unaware of the risks they were selling these securities to hedge funds? Pension funds and other institutional investors who shouldn't be highly sophisticated, these institutional clients should have done their own due diligence about the mortgage market if they ended up taking up too much risk with these products, it's largely their own fault. The fact that goldman was hedging their balance sheet is irrelevant, so in the context of the 2008 financial crisis, goldman sachs's culpability is quite low. Now we'll move on to laymen brothers, the bankruptcy of lehman brothers sent shockwaves throughout the global financial crisis, driving the economy deeper into recession. The main controversy layman's ceo dick fold had to answer for is why lehman took on so much risk, which put it in a vulnerable position leading up to the crisis.

The record will indicate your company is now bankrupt. Our economy is in a state of crisis, but you get to keep 480 million dollars. I i have a very basic question for you. Is this fair? Mr chairman, we had a compensation committee that spent a tremendous amount of time making sure that the interests of the executives and the employees were aligned with shareholders from 2000 through 2008 fold received 484 million dollars in total compensation for his role as ceo of lehman brothers.

He defended his compensation by saying that his salary was incentive based and designed to align his interests with shareholders. When lady brothers did well, his compensation would increase as the housing market was booming. In the early 2000s laban made billions in profits selling and holding mortgage-backed securities. Layman's stock price doubled from 40 a share to 80 a share triggering a massive bonus for fold when the bubble burst, layman went bankrupt and the stock went to zero the compensation structure incentivized full to take on as much risk as possible to maximize the short-term profits.

If the bank goes belly up and tanks the world economy, he still gets to keep that 484 million dollars that he made previously. A better compensation structure might have been to pay him in stock and have a long lock up period where he is not allowed to sell his shares this way. If the company goes bankrupt and the stock goes to zero, he will lose everything just like the rest of the shareholders. This would motivate him to be more prudent about risk management.

Did you mislead your investors, and i remind you, sir you're, under oath? No sir, we did not mislead our investors and to the best of my ability at the time, given the information that i had, we made disclosures that we fully believed were accurate. Another issue is whether layman misled investors about their exposure to the subprime mortgage market. Fuld said that they disclosed all relevant information to the public to the best of their abilities. However, many people disagreed with this statement.

Famous short seller, david einhorn thought that layman was hiding their losses on subprime mortgages in an attempt to save their falling stock price. Apparently there there is, we really need to get to the bottom of exactly what that portfolio looks like, because the word cdo, when you throw it around, has become a dirty word and it looks like there is uh assets on the balance sheet that do not have A market that are this, this bad securities and in fact the firm is saying that it's not right. The very bottom line here is is that cdo is a packaging. It doesn't refer to what is inside of the package.

Now all cdos fell materially in value between november and february, because spreads blew out across the board for all kinds of credit mortgage credit, but also lots of other kinds of credit and lehman's portfolio cdos, a quarter of which is below investment grade. They wrote down by a total of three percent gross during that period, which is not a credible write down. In my estimation, and in fact i asked aaron callan about this and she said i see what your point is. Let me get back to you on that and when she got back to me, her response really was well we're going to write them down more in the next quarter.

So the bottom line here really is is: is that there's been a package of of cdos that that took a very trivial write down and it's in the company does not have a an explanation for why they took such a modest. But layman brothers owned a lot of collateralized debt obligations or cdos. These cdo's contain various credit assets that are illiquid and thus somewhat difficult to evaluate. As the financial crisis was unfolding in 2008, all cdo's were taking in value as default.

Risk was increasing, despite this layman. Only wrote down the value of their cdos by 3, which was extremely optimistic to the point of being borderline. Fraudulent eindhorn said that this amount to misleading investors. He shorted the stock on the premise that the company's real financial condition was much worse than their management was making it out to be, as it turns out.

Einhorn was right, and just a few weeks later, the firm went bankrupt. Looking at the totality of the evidence we can assign a level of culpability for the two investment banks lehman brothers and goldman sachs lehman brothers was highly culpable as they took on too much risk, ultimately going bankrupt and taking much of the global financial system down with Them they also had a compensation structure which encouraged ceo dick fold to take on exorbitant risk to boost short-term profits. On the other hand, goldman sachs cannot be blamed for the financial crisis. They did sell mortgage-backed securities to their clients, but these clients were highly sophisticated institutional investors who should have known the risk that they were taking on goldman privily, bought the financial derivatives to hedge their positions and avoided significant losses from the mortgage collapse.

Alright guys that wraps it up for this video, what do you think about the 2008 financial crisis? Who do you think deserves the most blame? Let us know in the comments section below, as always. Thank you guys so much for watching and we'll see you in the next one wall, street millennial signing out.