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Trump’s Economic Era

credit default swaps without enough collateral. Banks
could now sell billions of dollars’ worth of junk CDOs
because of their triple-A rating.

The SEC did not regulate the industry, so Cassano
operated with no restraints and investors were not privy
to all the facts. When the bubble burst in 2007, AIG
was on the hook for billions of dollars while lacking
sufficient funds to honor its credit default swaps. Thus,
AIG needed a government bailout.

An excellent book on the subject is Fool’s Gold
by Gillian Tett. The book explains how the economic
collapse of 2007 and 2008 was self-inflicted because
financial incentives within banks and other financial
firms, as well as the rating agencies, warped regulatory
structures. The book is a fascinating read because she
explores the human foibles that led to the collapse.

THE COLLAPSE!

The easy money policies of the Federal Reserve
during the 1990s, the deregulation mania, and excessive
leverage resulted in the bubble bursting. Now add some
greed to the mix, throw in some hubris, add stupidity,
and we have all the ingredients of a massive collapse!
When the housing market collapsed in 2007-2008,
many homeowners found themselves upside down on
their mortgage; they owed more on their house than its
value. What made matters worse is that homeowners
took out equity loans, using their appreciation as
collateral. The bubble burst when people stopped
making their mortgage payments.

Marking to market accounting played a role in the
ensuing downturn. Marking to market is the practice of

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