Financial Recklessness and Reform: Lessons from 2008

Imagine waking up one day and realizing that your entire life’s savings were at risk due to reckless financial decisions made by major global institutions. In this captivating episode, we dissect the tumultuous events that led to the 2008 financial crisis, analyzing the reckless subprime lending, and the colossal investment banks who bet against their own junk product. We shine a light on the few who foresaw this storm coming and went against the grain to bet against the housing market. 

Ever wondered if the new financial reforms after the 2008 crisis really made a difference? We'll take you through the significant reforms, including the Dodd-Frank Act in the US and the Banking Act of 2009 in the UK. We ask tough questions about their effectiveness and highlight the importance of a collaborative, global effort to ensure their efficacy. Moreso, we emphasize the critical role of financial literacy in safeguarding our finances. 

And what about financial education? It’s a taboo subject for many, but it’s an area we should all be focusing on. We delve into the lack of financial literacy, the difficulty in discussing salaries and financial resources, and the power of negotiation for better contracts and promotions. We also examine the role of speculation in decisions like remortgages and investments, stressing the need to be aware of the risks involved. Let's not forget the lessons we learned - or failed to learn - from the 2008 financial crisis. Tune in for an insightful discussion. Remember, knowledge is the tool, but wisdom is the craft.

Transcript

Speaker 1: 0:00

Imagine for a moment it's 2007. Let's take Dave, a retired school teacher who walks into a bank with sparkling eyes and hope for the future. He's there to invest his whole life savings. The bank assures him that the housing market is rock solid.

Speaker 2: 0:18

You can't lose is what they even say. The number of times I heard that sentence. The market for housing is rock solid, but Dave's story is sadly not unique and he paints a stark picture of how the blind spots in our financial system can impact everyday people. But what if there was a warning, a hint of a storm that was coming? Today we dive into the big short a book that reveals the crack long before they became the chasms and ask the burning question have we really learned our lesson?

Speaker 1: 0:54

If you're not already, hold on to your seats, because we're about to embark on a journey that combines financial intrigue with human drama, asking the tough questions about our society's memory and resilience. Welcome back, dear listeners, to another episode, of course, of the Needle Movers podcast.

Speaker 2: 1:17

I'm Marc Jasons and I am Valerio Tomasso, and we are riveting discussion ahead, so let's jump right into it.

Speaker 1: 1:23

Okay, let's start with a summary of the big short for our listeners who might not have read the big short. The full name is the big short inside the doomsday machine by Michael Lewis, or you somehow missed the film which is based on the book just called the big short, and it was, I think, in 2015. It basically both of them brilliantly documents the events leading up to the 2008 financial crisis.

Speaker 2: 1:46

And let me tell you something this is probably like one of the few movies that I've actually had to watch two or three times to fully understand and comprehend, so it's probably not the most straightforward thing in the world, however so educational in some way. And it was an era marked by reckless subprime lending, colossal investment banks betting against their own junk product and an unregulated swap of derivatives.

Speaker 1: 2:11

I guess what stuck me the most was how the author gave us a window into the minds of few who managed to actually foresee the storm coming. These were outsiders, so non conformists, who went against the grain and bet against the housing market, which I know we're talking about 2008 and I feel sorry for Dave, who we talked about in the intro, but we're in 2023 and it feels like there's someone out there making a lot of money right now too.

Speaker 2: 2:36

And it's always the case right, and we look at people that go against the wave and we think of them as the those are the doomsday people, that people that try to like get on the news, or maybe the people that are trying to get five, five minutes of fame, and probably in a way, when those guys were speaking way back then in 2007, many people thought that they were crazy, but now, looking back, of course, we know that they were right and everyone else was wrong, and you know, when we talk about everyone else probably 99.5 percent of the people that were involved at the time and while they profited massively, it wasn't a celebratory win there is a profound sadness in understanding the systematic corruption and the sheer blindness of major financial institutions. The big shot is really a story about people. It's a story about greed, ambition, denial, and these human factors played a massive role in the 2008 crisis.

Speaker 1: 3:32

I think that's exemplified in the movie pretty well. And the traders who bundled toxic loans, the rating agencies that stamped them with triple A ratings, the executives who turned a blind eye is like a cascade of human decisions or indecisions that built up to the inevitable crash.

Speaker 2: 3:50

So let me translate this for a second. This is literally taking poo, diarrhea and something else which is really nasty, packaging it all up and saying hey man, I'm going to sell you that the best sandwich in the world. This is literally what happened in the financial crisis. Too good to be true, right, too good to be true. And that's what Marx means with the triple A rating.

Speaker 2: 4:11

So they've literally taken junk and given it triple A ratings and sold it to people, and all this exactly was turning a blind eye, which is disgusting in a way, and it's a lesson on the limits of regulations. You can't legislate morality or ethical behavior, and the hope is that by shining a light on these issues, as the big shot did, it forces the cultures of accountability and introspection in the finance world. And it's really interesting because when I went into industry for the first time as an intern, one of the very interesting things is that there was corporate training being ruled out, and one of the topics that was being covered quite significantly was around the topic of honesty and integrity and how do you react to specific situations should they arise.

Speaker 1: 5:09

So it certainly had an impact moving forward, I think it's also about remembering that human factors don't just stop at the people in the businesses, like the executives and the people who get the rating agencies who give the triple A rating. It's not just about pointing fingers at Wall Street, the general public too, which includes me and you, and well, maybe less us, less than, but still, if it was to happen now, they were drawn into the law of easy loans and the dream home ownership, right, I think. If you think now to the fact that we're in the UK and as we see interest rates rising and people are complaining about the fact that, hey, I don't think I can keep up with his payments, now it's like at what point did we question, educate ourselves and not take the financial quote, unquote truths at face value, like you sign up to something because it seems like I win when all forecasts say for now, it's really interesting.

Speaker 2: 6:10

You mentioned that right, because I think it was less than a year ago. I renew my mortgage and I remember very, very, very clearly that when my mortgage advisor sent me the paperwork for my loan, there was one box and it was in bold and he said can you afford to repay your mortgage? I know I was thinking in my head yeah, because otherwise the mortgage wouldn't be given to me. But there was in the same very same box, there was a scenario in that would you be able to repay the mortgage if the interest rate went up to 3%, 4%, 5%, 6%? And it was really interesting because I was looking at it. I was like, oh, that's bonkers, like you know, when is the interest rate going to be going to 6%, 7% or 8%? Lo and behold, what's the current interest rate? About 6%. And I'm thinking okay, firstly, I'm incredibly lucky that I renew my mortgage when I renewed it incredibly lucky.

Speaker 2: 7:04

But I'm also thinking about the hundreds of thousands of people that were not as lucky as me, in the sense that the mortgage renewal didn't happen three weeks before the interest rate went up and they found themselves in a situation where a they may have been hoping that maybe the interest rate would drop again. So they kind of hung in there with a variable rate and B then got stuck with some really, really expensive rates which are really affected the livelihood and post 2008,. The world didn't just shrug and move on. There was major reforms that took place, like the Dodd-Frank Act in the US.

Speaker 1: 7:39

Oh yeah, dodd-frank was aimed to reduce risks in the financial system. This included things like protecting consumers with rules that prevented predatory loan practices and reducing the chances of a future bank bailout by taxpayers.

Speaker 2: 7:53

And it wasn't just the US taking measures across the pond, as so we call it. The UK introduced the Banking Act of 2009. This act was significant because it aimed to improve financial stability by giving authorities the tools that they needed to deal with filling banks.

Speaker 1: 8:09

Yeah, so the Banking Act allowed the Bank of England to intervene and stabilize a bank or building society that was on the verge of collapse. This was crucial because it helped maintain public trust in the banking system and ensure that any failures wouldn't cascade into a broader crisis, which is funny when I think of the context. Maintain public trust after a bubble is just burst. It's like regain if I think of it more.

Speaker 2: 8:32

And this is probably where the term too big to fail comes in, because you know those institutions, they're huge and they hold people's money. They hold people's livelihood At the end of the day. You know I bank with Lloyds Bank. I don't know who you bank with, but I put my savings in there because you know it was the only bank account when I moved to the UK that didn't charge me to open up a bank account. But if Lloyds was to fail in five to 10 years time and my savings aren't there, you know that's a huge risk to my livelihood and putting something in there to make sure that those big giants don't fail and people don't suffer the repercussions is important. So, additionally to what we just said, the UK saw the establishment of the Financial Policy Committee within the Bank of England. So this committee's role is to identify, monitor and take actions to remove or reduce systematic risks in the financial system.

Speaker 1: 9:26

These reforms, in both the US and the UK, along with many other that were global, were steps towards a more resilient financial system. However, as with any reform, the effectiveness and implications are often debated.

Speaker 2: 9:40

And while these regulations were steps in the right directions and you know, some critics argue that they didn't go far enough, and probably some critics may be right there's a balance of strike between regulations and innovation and not everyone agrees to where the line should be drawn.

Speaker 1: 9:57

And then there's the global factor right. Financial markets are intertwined across nations, not just in the UK and US and while the US took steps, the effectiveness of reforms truly depends on a collaborative, worldwide effort. One person can't really lead it, and needs the contributions from the others as well.

Speaker 2: 10:13

So I'm going to take you back just to the beginning. So we spoke about Dave's story and it's interesting because, you know, it's this fictional hint or fictional window in somebody's life. And it's interesting because I remember in 2007 I started university now giving away my age here and I was in, I think, either my first or second meeting with my personal tutor. And I remember my personal tutor making this kind of a half joke and he said at this spending time, you're really lucky. You may want to consider doing a master's and a PhD. And I was like the hell, I'm here to do a bachelor.

Speaker 2: 10:52

And then he carries on and says you know, there's a lot of people that graduated last year with high hopes for a job in engineering, because that was the degree that I was doing, and now they're finding themselves unemployed because every single company out there is either making people redundant or shrinking the job market massively. And that's when it really hit me right, because I wasn't being impacted directly and in some way he was. It was right. I was really lucky that I wasn't in the job market at that point in time. However, I put myself in the shoes of the people that I had graduated the year before and I was thinking shit like he's right. Think about like spending so much money for your education. Then you come out of it and if you're lucky, you might get a job as a waiter, because the job market is so crap at the moment and you really have to re-sacrifice everything else again just to keep afloat.

Speaker 1: 11:49

It's funny because when I was in university and this was going on, I was luckily before it so well, lucky or unlucky and I'm sure there was rich people in uni who were getting impacted but for me this was just noise and I was like, well, I've just started, so I have some time to figure out what the landscape looks like once I graduate. But I was hearing the same things where it was like you might as well stay in education as long as you can until this, this tired, rolls over in it. We'll see if this crisis is still in play.

Speaker 2: 12:18

And what do we talk about this? Right, because until now we talked about system regulations. And I think it's good to give that background on the inside, because it's really crucial and it's at the heart of the big short. And that brings us to the critical point where you know financial education is important and if the big short taught us anything is that the value of understanding what's going on beneath the surface is truly important.

Speaker 1: 12:41

Basic financial literacy is still not even standard in many educational systems. I know I wasn't taught it all right. We got maths and they were like no extrapolate use that wherever. Just surprising given how money and finances dictate so much of our lives. Like it's beyond. You know how they say cash rules are actually. This is a Wu-Tang quote cash rules, everything around me, cream get the money. But I was going to say like money's the real world, even like money drives so many factors and yet we're not including that in just our standard educational systems.

Speaker 2: 13:13

Yeah, absolutely. I mean I was again probably lucky because I had something called consumer economics in my, I think, final year of high school which taught me about loans, credit cards and and consumer tips, which retrospectively, when I was looking at it, I was thinking that this is such a huge waste of time, but I think it gave me some sort of a level of being a consumer and understanding what loans mean and what it means to repay them, what it means to spend your savings, etc. That has actually placed me in a better position going into university.

Speaker 1: 13:47

I'd also ask the question to you and to the audience have you had a lot of friends who've had to ask you for guidance when it comes to like financial situation because they weren't taught this?

Speaker 1: 13:57

Because for me it's very apparent when especially if it comes to, maybe, houses or when it comes to just strong financial decisions, where I get this question just because I've been through it rather than because they've been taught it, and so it's like there's an, there's obviously a gap there where things can be in done but be better and be done better.

Speaker 1: 14:17

In fact, prior to this episode starting, I was saying go, what's this email from? And Val was able to answer because when we graduated university, I recall getting a financial advisor, which was like one of the rarest things people did, and then I introduced it to multiple friends of mine and, finally enough, that same advisor was at my brother's wedding the other day and he bumps into another friend of mine who he happened to advise. So I'd managed to like get a number of people engaged in it, but that made them I feel like past university, when everyone's graduated. Going into adulthood was when the point where we were trying to all get on our financial literacy and educate ourselves, because up until that point, once we've already taken out massive loans to complete our degrees, is when we're like.

Speaker 2: 15:00

So how are we supposed to manage our money and on that question that you just asked around whether people have come to me and asked me about finances or financial advice, or you know, obviously I didn't charge people, but I find that interesting, right, because I think finances are quite a personal topic and I don't think there's that many people in this country, the UK, that openly share finances or openly are putting themselves out there as not knowing much or being doubtful about one topic or the other. The only few times where I've had people ask me for advice or come to me and ask me what I've done was from really personal friends, and it was just to cross reference that what they were doing was actually correct or not. So it's interesting because we haven't got any education. By the same time, we don't openly talk about it, and it's a bit the same thing about the salaries, right.

Speaker 2: 15:56

So you work for a company and we're all very secretive around what everyone earns, although if you do a little bit of a search online and go on to I don't know fishbowl or a glass store, you can easily find how much everyone else gets paid, but we're really secretive around. Oh yeah, I don't really want to tell you, whereas if we actually spoke about it and made an open topic. We could actually educate ourselves more so that we are in a position to bargain more when it comes to getting new contracts or when it comes to getting a promotion. It's a very interesting space, but I'm not sure if it's a UK specific issue. I don't know what you think about that. I don't think it's a UK specific issue. I do know some colleagues who are very open and sharing this.

Speaker 1: 16:34

In fact I feel like they do it to like get mine out of me. But I've had a number of colleagues who are very open to share their salaries and I feel like it gives power back to the people rather than the companies they work for, especially when you do that, because at one point you don't know if they're taking the absolute piss out of your life with what salary they're paying you. And also there's a lot of unconscious biases and discriminations in the workplace that you might not be aware of but you hear about it. When it comes to celebrity actors and actresses, when they're saying, hey, I don't want to do this movie because my colleague or peer is getting paid extreme 10x my salary and I'm feeling more famous than them. Anyway, I should be commanding more money. But when it comes to our own jobs and our own workplaces, we get to know about minimum wage and then, weirdly enough, you don't know the wages within your field and that kind of can impact. But again, it's down to like you said, it's very private and personal and I feel like that's worked in people's favors. Be it both ways. As an individual, you get to keep yourself to yourself. You could be very affluent and no one needs to know, or you could be very struggling and that doesn't need to be the case but the company is able to pay you less and I've seen that most of the time where my peers get paid even less than me or extremely higher than me and if not for that candid conversation where I'm like when the company says they can't afford to pay me this, they're just saying rubbish, they're just saying nonsense, but that's like one.

Speaker 1: 17:59

I feel like one slice of the financial literacy pie, right, the financial Education pie. There are so many aspects of it and that's just in terms of when you work, let alone what you do with your money. And then if you go in and a bank tells you it's rock solid, that's wild. You don't think it's wild because nothing has taught you prior to the. I feel like the big short that if a bank tells you this is rock solid, that's should be a red flag. Like yo, you should be speculative.

Speaker 1: 18:25

Everything is speculative, even when it comes to the rates, when buying houses, if you've bought one, or if you look into buy one, just so you know. Even though interest rates are rising, the speculation is that they might fall. It is not the guarantee. There is nothing guaranteed, you know, and it all things are Temporary and we wait and see and we hope, and then so, when we're taking our remorgages, I feel like at that time row you must have done the same thing. Where it's like two or five years or maybe longer, I feel like this is the time frame. This is good. I like the rate I'm getting now. I dislike the rate I'm getting now. All based on speculation, nothing based on certain.

Speaker 2: 18:57

Yeah, 100%, and that's what that's. When you look at those Boxes in your control and look at them and say, okay, would I be able to afford, as if this went up and that went up, mm-hmm, and it's interesting, right, and I think part a part of it has been rectified. I don't think anyone in the UK legally know what can tell you for a certainty that something is rock solid, or they can't tell you that you will make X guaranteed. They will always give you scenarios and I remember that when we used to go to our, to our financial advisors they used to look at, they used to give us figures and he used to say, okay, with this level of risk, this is something that this is a scenario that we saw in the past five years. With this level of risk, this is the scenario that was in the past five years. So you are almost told this is the data.

Speaker 2: 19:45

Make up your own interpretation, which is really interesting. But I think, going back to the, to what we're talking about, financial education there's definitely been a push post 2008 to include more financial education in the school curricula, but I think it's still Quite far from where it needs to be and many people still find finance daunting and they try to avoid it, leading to uninformed decisions making and also a Little bit of a panic when it comes to making those decisions around loans, mortgages, and which then lead to making the wrong decisions.

Speaker 1: 20:22

I would say that the beauty of today is there is still a plethora of resources available. So there are the online courses, seminars, podcasts like ours, and don't forget YouTube, where you can just access for free if you're fine with ads, all aimed at Demystifying finance. It's on us to seek out that knowledge personally and, like I'm always saying in our podcast, we're here to raise your awareness of it. But there are a number of avenues now, both free and paid, where you can at least educate yourself, even if right now, the School system doesn't yet do it.

Speaker 2: 20:55

And it's not just about the personal gain right, it's an informed public and all the institutions are countable and demand better practices and hopefully Prevent another crisis fueled by blind trust, which is practically what happened. We believe that the banks were, or had, the best interest in in in their hearts, and that really didn't happen. That trust was misplaced hugely.

Speaker 1: 21:20

So one thing I want to go into, which is it's part of financial education. I'd say, and I remember you told me that you was Aware of the confusion in the movie, but which why you, I'm guessing you were watched at a number of times was about the betting concept, the, which was yeah, yeah, yeah from the big short, and it often raises eyebrows the idea of betting against or shorting the banks, which is funny.

Speaker 1: 21:45

They say it so casually and honestly. You're like what does that mean? Is the bank become smaller? But essentially, some of our main characters made massive profits because they anticipated the housing market collapse.

Speaker 2: 21:57

And the part that confused me was that there was a Essentially, that's quite like two teams One of them that thought that the housing market was going to do really well, the other one that they saw the crisis coming.

Speaker 2: 22:10

And the ones that saw the crisis coming, they kept talking about a shorting, shorting, shorting, and in my mind, I kind of made sense of what that meant. So I knew that they were betting against the growth of the market. However, in my mind, I was thinking this is not like a betting company. You can't just go in and say, okay, I'm going to vote against Arsenal winning the game, or, you know, I'm going to vote against the bank growing over the next two to three years, or whatever. So it made it really confusing in my head, and I think anyone that reads the book or perhaps watches the movie, which I highly recommend, could be confused. So they used the financial instrument called credit default swaps, which, in simple terms, were insurance policies, and they were betting that certain investments, like the side prime mortgages that we talked about so let's not forget the triple sandwich shit that I was talking about would fail, and if they did, the insurance company would then pay out and they would profit the triple sandwich.

Speaker 1: 23:16

It's a bit like taking out an insurance policy on a house you think is going to burn down and if it does, you collect the insurance money. However, if the house doesn't burn down, you've just wasted money on premiums In the big short. The house in marketing, the house in market sorry, was the metaphorical house. And also, that house was covered in gasoline and the people were smoking next to it and they could see it from the outside.

Speaker 2: 23:38

So it's crazy, like you know, to think back to what we discussed the whole of this episode today, we were looking at the 2008 crisis and we're thinking about they walking into a bank hoping that he had some really secured way forward on how to to leave the rest of these days, in a way, and people have invested their money in this housing market. People have invested their money in this burning house where there were players above it, some of it betting against it burning down and some of them betting for burning it down, and the fact of the matter is that, yes, there were some people that managed to foresee the burning down of the house, and many of us didn't believe them, but they also, quite selfishly, made a profit out of it, which probably I would have done too, to be fair. But what I'm trying to get to here is that, although we have people that managed to foresee it and calculate the market, they still didn't do anything that would have saved the people, which is a bit of a shame. And then we ended up with hundreds of thousands of people losing jobs, hundreds of thousands of people losing the savings, and ended up in quite a sticky situation, probably for a few years, that affected many of us.

Speaker 2: 24:56

I know from a personal perspective. I guess we were. My parents were quite unlucky that they had invested kind of their life savings in a way in buying a house in Italy, and they purchased the house at the peak of the 2007 market. Now that property never went back to the purchase price and now we are what 2023? From 2007, that property never went back to the original price. So you know, they are happy after all, because they've got a home, they've got a place that they can call home. Most importantly, but if you look at it from a financial perspective, they've lost a ton of money because there was for lack of better definitions very, very greedy people that were sandwiching, selling sandwiches that were nothing better than a ship sandwich.

Speaker 1: 25:52

Sounds like a disgusting sandwich to me and I hope you listeners have enjoyed the taste of that sandwich. It's been a whirlwind of discussion today and, as we can tell, the past does hold lessons and the future will always have uncertainties, but through understanding and education we can hope to navigate these complexities. So I'm just going to say thank you for joining us on this journey today. It's been another Needle Movers episode.

Speaker 2: 26:16

Absolutely. Mark and remember folks. Knowledge is the tool, but wisdom is the craft. Stay curious, stay informed Until next time. Adios.