An analysis of the financial crisis and collapse of Lehman Bros - Essay Example

? An analysis of the financial crisis and collapse of Lehman Bros. BY YOU YOUR SCHOOL INFO HERE HERE An analysis of the financial crisis and collapse of Lehman Bros. Introduction The financial crisis of 2007-2010 was an economic disaster impacting not only the United States, but many international regions in which the banking system was inter-linked. The international banking system had, prior to the crisis, become an inter-dependent system involving the Central Banks of many developed nations supported by the role of private and corporate investors in hedging against risk factors associated with wealth management. Incentivising this inter-dependency were market conditions prior to the 2007-2010 financial crisis which included substantially low interest rates generated by the United States Treasury Department. Lowering the national interest rate was an effort to stave off a full-fledged economic recession which, in turn, provided a dynamic environment that allowed for provision of inexpensive real estate loans. These loans were more readily available to diverse consumer segments as lower national interest rates leads to lower mortgage rates, respectively. Consumers, therefore, were being targeted by major financial institutions between 2001 and 2006 for provision of mortgage loans to not only secure better liquidity position of major financial companies, but to maintain the long-standing economic boom that had been driving significant economic growth in the U.S. between 1998 and 2005. However, by 2007, it was becoming increasingly clear to many large financial institutions, such as Bear Stearns, JP Morgan and Lehman Bros., that the bubble of economic boom was about to burst. Many of the investment strategies designed to improve the liquidity position of major banks and ensure asset growth had lost the majority of their value and companies such as Lehman Bros. were unable to find appropriate buyers for many derivatives that were backed by the high volume of home mortgages granted to higher-risk consumer segments prior to 2007. As aforesaid, the inter-dependency within the international banking system led to a crisis when asset values on certain derivatives plummeted, when major banking institutions could no longer successfully meet their debt obligations, and even sizeable financial bailouts both internal and from government were insufficient in sustaining banking operations. The main contributors to the financial crisis of 2007-2010 was not largely attributable to improper or lax regulatory forces, it was a product of poor banking leadership and inappropriate investment strategies within the financial institutions’ business models. This essay describes the catalysts for what drove the financial crisis, focusing specifically on the role of Lehman Bros. in facilitating the problem. Research has identified that the mechanisms creating the financial disaster included the derivatives market, investor and executive-level behaviour in the financial markets, poor auditing systems responding proactively to observable or quantitatively-supported market trends, and the growing consumer adoption of adjustable rate mortgages being offered by major banking institutions. The Adjustable Rate Mortgage (ARM) Consecutive and recurring drops in the national interest rate in the United States and the United Kingdom occurring between 2001 and 2006 in an effort to stave off a perceived, impeding economic recession created a favourable environment for home ownership. When the Federal interest rate is lowered, it affects the published prime rate by which financial lenders establish an appropriate interest rate on home mortgages. In 1982, the prime rate in the United States was set at a record of 19 percent (Fedprimerate.com 2013), a period where the country was emerging from a period of intense inflation increases and previous economic recession. Home mortgages generated between 1982 and 2000, therefore, were significantly profitable for lending institutions as they were able to justify loan generation to diverse consumer segments that maintained the credit credentials necessary for loan approval. Over time, the prime rate began to fall, ultimately reaching a rate of less than five percent in 2000. As such, traditional fixed rate home mortgages were no longer nearly as profitable for banks, thus creating the incentive for many large financial institutions to consider lowering consumer credit restrictions so as to generate interest in the adjustable rate mortgage (ARM) that could offset the dramatic economic losses created by dramatic decline in the prime rate. Figure 1 illustrates the dramatic shifts in prime rate valuation until 2012. Figure 1: The Historical U.S. Prime Rate Levels Source: Fedprimerate.com. (2013). Prime Rate Charts (Graphs). [online] Available at: http://www.fedprimerate.com/prime-rate-chart.htm (accessed 17 April 2013). By 2000, it was becoming profitable and viable for major banking organisations to begin offering low mortgage rates to consumers with the adjustable rate mortgage. This type of mortgage is typically offered to consumers with an interest rate that is, initially, just a few base points over the prime rate, but where the mortgage note experiences periodic adjustments to the initial interest rates offered during loan signing (Mishler and Cole 1995). One of the most common types of variable rate loans offered to consumers was the option loan, offering a 30-year continuously amortizing mortgage that is radically different than the fixed rate loans offered to consumers with better credit characteristics. This type of mortgage operates under a model referred to as negative amortization, where unpaid accrued interest on the loan is, on a monthly basis, added back to the original principal balance remaining on the loan (Sabry and Schopflocher 2007). Essentially, if the consumer is unable to pay the entire interest added with principle on each monthly billing cycle, the unpaid portion is added back to the principle where interest is, again, incurred on the entire balance. As such, it is common that the principle due continues to increase rather than decrease if the consumer is unable to make full restitution with each monthly billing statement. See Table 1 for a breakdown of the historical adjustable rate mortgage rates between 1990 and 2004 illustrating why their lower-than-fixed-interest characteristics made ARM mortgages so enticing to consumer segments. Table 1: Historical data on adjustable rate mortgages – 1990 to 2004 DATE FIXED RATE ADJUSTABLE RATE 1990 9.75% 7.87% 1991 8.60% 6.15% 1992 8.36% 5.40% 1993 7.30% 4.29% 1994 9.35% 6.65% 1995 7.47% 5.65% 2000 7.58% 7.10% 2001 7.28% 5.55% 2002 6.17% 4.38% 2003 6.03% 3.97% 2004 5.83% 4.23% Source: HSH Associates. (2013). HSH’s national monthly mortgage statistics. [online] Available at: http://www.hsh.com/natmo2004.html (accessed 17 April 2013). Figure 2: LIBOR index utilised to assess adjustable rate mortgages internationally Source modified from: Mortgage X (2013). London Interbank Offering Rates (LIBOR). [online] Available at: http://mortgage-x.com/general/indexes/libor.asp (accessed 17 April 2013). The London Interbank Offered Rate (LIBOR) is an index that assists mortgage lenders in determining the prime rate for adjustable rate mortgages. It is also an index used in the interest rate swap market. As illustrated by the graph, the LIBOR rates plummeted from a peak of 6.1 percent in 1999 to just over three percent by 2008. Thus, adjustable rate mortgages were not only considered highly viable to the U.S. market, but had become a significant problem with financial institutions in the mortgage business throughout the globe. The options adjustable rate mortgage, therefore, became very attractive to those consumer segments that were unable to procure a more appropriate and stable mortgage due to their credit restrictions. Demand for these mortgages became increasingly high during the period between 2000 and 2006 and many financial institutions were finding that these loan generations were significantly improving their total asset portfolio values. In this scenario, however, the entire fault for the financial crisis of 2007-2010 cannot be attributed solely to banks loosening credit evaluations for consumers seeking home mortgages, but can be blamed on laws established that provide greater opportunities for consumers with poor credit backgrounds. For instance, the U.S. Tax Reform Act of 1986 changed the tax codes in the United States in which consumers could now be granted sizeable tax deductions on all interest incurred on any variety of adjustable rate mortgages (Volpe and Mumaw 2009). Furthermore, a 1980 U.S. piece of legislation known as the Depository Institutions Deregulatory and Monetary Control Act completely removed the caps once placed on the interest rates that could be offered to consumers (Volpe and Mumaw 2009). In essence, the regulatory environment as it pertains to loan generation in this particular country created a very favourable environment for the provision and sustainment of adjustable rate mortgages to a variety of risky consumer segments. As demand for adjustable rate mortgages began to increase both in the United States and abroad, banking executives and governance teams were realising that even more capital could be procured by securitising this growing volume of ARM loans being generated internationally. The process of securitisation involves pooling contracted debt (in this case mortgages) and then locating buyers to invest in these securities (mortgage-backed securities). The guarantees provided to the buyer of these investment vehicles are that the tangible receivables on the loan (principal plus interest) will be recurrently repaid to the buyer, thus creating security for the investor (Raynes and Rutledge 2003). Typically, in the event of mortgage loan defaults, certain insurances are available on the security that further protect the buyer, thereby making them very attractive to the investor as a low risk securities purchase. Between 2001 and 2006, many major banking facilities were pooling mortgage-backed securities and then selling them to institutional buyers in order to improve their capital growth position. Typically, the pooled value of this investment vehicle is between ?10 and ?20 million and is not backed by a single consumer or commercial mortgage, but an entire basket of guaranteed securities. The advantages to the issuer (the banking institution) include a reduction in funding costs as the purchaser provides the capital required to securitize the cash flows of the lender, making it possible for the bank to borrow at a much lower rate than without the available capital provided by the sold security. In essence, a lender with a credit worthiness of BB might be able to borrow at the lower rates provided to institutions with an AA credit rating (Sabarwal 2006). Even more enticing, these securities are considered off-balance-sheet derivatives by which accounting-centric legislation allows financial institutions to deny reporting these as either liabilities or debts since, after securitisation, the bank legitimately no longer owns the security, only the debt obligations associated with it. The structure of the banking regulatory environment provided all of the incentive necessary to consider mortgage-backed securities as a very low-risk investment vehicle that could provide significant capital growth whilst also being able to illustrate through financial reporting that the business was in a much better liquid position than was genuinely reality. The largest concern with all of the process of providing adjustable rate mortgages and then subsequently selling mortgage-backed securities was the risk of default by the loan holders. Prior to 2004, the presence of adjustable rate mortgages then in circulation in the U.S. and abroad was only a small margin of total open mortgages. In 2004, adjustable rate mortgages were only eight percent of all existing home loans (Simkovic 2011). In only two years, by 2006, adjustable rate mortgages were representative of 20 percent of all existing mortgages (Simkovic 2011). During the period between 2004 and 2007, many consumers began to default on their mortgages due to dramatic recalculations of adjustable rate mortgages’ principal balances, which were common with the negative amortizing loan, making loans unaffordable when, oftentimes, monthly payments demanded by the lender were hundreds of dollars higher than just a few months prior. Now, it has been established that many banking institutions were engaging in securitisation activities in order to raise capital and improve profitability. Investors had been purchasing these securities in pooled package volumes between ?10 and ?20 million, in which many lenders that sold these securities had further collateralised these debt obligations. Under this structure, the banks guarantee that their assets will protect the investment purchaser in the event of mortgage defaults and by which the seller guarantees to utilise its cash flows to protect the purchaser. Recurrent defaults amid the basket of securitised mortgages in the collateralised debt obligation drove down the value of the security, forcing banking institutions to make restitution to the investor against their established contract of guaranteeing cash flows would cover non-insured losses on these high-dollar derivatives. By the time the banking governance teams realised that a very large volume of their recognised assets involved mortgage-backed securities and collateralised debt obligations, the volume of payouts required to the investor superseded the tangible asset availability of the banking institutions that sold the derivatives. When word spread throughout the industry that many lenders were approaching an illiquid position due to their debt obligations on mortgage-backed securities, finding further buyers for these derivatives became virtually impossible. In 2007, even when attempting to drive down the initial purchase price of the securities would not entice independent or corporate buyers to even consider purchasing these products (Jubak 2007). By 2007, a major underwriter for many banks’ mortgage-backed securities, Bear Stearns, witnessed a rapid devaluation of two of the business’ hedge funds associated with the mortgage industry in a total loss of $20 billion USD (Foley 2007). All of these risky activities in providing mortgage-backed securities against high-risk loans are what drove the financial crisis’ foundation. Many investors that purchased these securities were major financial institutions, thus creating an inter-dependent network of sales and purchase of derivates that were either collateralised with bank assets or provided supplementary protections. Further, as many banking institutions relied on underwriters, such as Bear Stearns, to handle the pricing negotiation for the securities and facilitate the sales and purchase processes, the banks offering mortgage-backed securities had not established their own internal processes for the sale and negotiation of collateralised debt obligations. As such, when the rapidly-spreading news that major underwriters facilitating trades between major banking institutions could not locate appropriate investment buyers nor avoid their own debt obligations in this market, banks were left with a basket of worthless assets that demanded by contract full restitution on each and every failed security. The improper regulatory environment In 1988, banking industry regulators demanded that banks maintain adequate capital reserves that were to be maintained in absolute liquid procedure. Banks were demanded to comply with the Basel I standard, a set of legislation approved by the G-10 central bankers that set specific requirements for the minimum capital that must be set as reserves in several different categories, including securing deposits, to act as a fraction of liabilities, and also to support high volumes of corporate loans that had been generated by various international banking institutions (Saita 2007). However, this standard did not regulate off-balance sheet transactions, which included the derivatives trading market, therefore Lehman Bros. and many other large banking institutions were not providing capital reserves for high-risk derivative transactions. In November of 2007, Lehman Bros. (as just one example in this industry) reported its total derivatives position at $12.9 billion. Only nine months later, in May 2008, Lehman reported its derivatives position had increased to $21 billion, nearly a 100 percent increase (Valukas 2010). Basel I demanded that banks hold eight percent of all high risk assets, which in the case of Lehman Bros. would have meant sustaining capital reserves of nearly 1.7 billion USD associated with its derivatives position by 2008. The problem in this situation as it pertains to lax regulatory forces was that the bank executives, themselves, were left to determine which assets were deemed the most high risk and then apply Basel I capital reserve obligations to these transactions/assets (Saita 2007). There were no formal regulatory audits of the high risk, off-balance sheet transactions at major banks, thus institutions such as Lehman Bros. were not sustaining adequate liquid reserves for the derivatives market which rapidly led to an illiquid position with several large banks. Naked short-selling and risky investor behaviours Amplifying the problem with the mortgage industry and the commonality of providing investors with mortgage-backed securities was the methodology by which certain derivative products were being traded between 2004 and 2006. It became common practice to issue what is referred to as credit default swaps (CDS), a type of securitised bond that serves as a contract between buyer and seller which are designed to transfer credit risk to the buyer rather than the seller when offering asset-backed securities associated with the mortgage market (Satyajit 2005). The buyer under the CDS contract is liable for making periodic payments against the investment to the seller, but receives a one-time sizeable payoff in the event of default of the underpinning financial security (CFA Institute 2008; Weistroffer 2009). This, as illustrated, is quite similar to the mortgage-backed derivative market. In 2007, there was limited legislation that attempted to regulate the sale of credit default swaps, with no established centralised clearing house to facilitate and audit CDS sales and purchase activities. As such, these were sold over the counter through a variety of facilitating entities either independent from the banks or fully-owned as a subsidiary investment vehicle. Speculation is common in the investment market and the structure of limited regulation of the CDS allowed a secondary sale of the derivative to occur, in which investors made gambles on whether the long-term value of the credit default swap would increase or decrease based on such factors as credit worthiness of the seller. Investors were engaging in making secondary sales of CDSs, a short sale of the derivative, gambling that the value (spread) of the swap would ultimately reach decline (Mengle 2007). Speculators performing naked short-selling of CDSs found that by purchasing insurance against the speculative risks of default by the original seller (the banking institution) they were further insulated in the event of future default. As a result of this intricate process of naked short-selling in the CDS market, the original seller was forced to make the default balloon payment, sometimes totalling millions of dollars, when the speculating investment buyer only had to pay a sum of approximately ?50,000 to perform the short sale process. Prior to 2007, there was absolutely no regulatory framework in the U.S. and abroad that prevented this activity from occurring. Substantial losses incurred by major financial institutions in the CDS derivatives market further depleted the capital availability of major banks which led to the financial crisis. The case of Lehman Bros. Until Lehman Bros. filed for bankruptcy in 2008, it had been classified as the fourth-largest investment bank in the world, behind Merrill Lynch and Morgan Stanley (Boedihardjo 2009). Lehman Bros. was an integral player in providing subprime and similar adjustable rate mortgages to high-risk consumers through its subsidiary BNC Mortgage and also purchaser of certain asset-backed derivatives. Lehman Bros., however, maintained executive leadership that was more risk-centric in which the business became actively involved in creating tranche methodologies in the securities market. Tranches involve consolidation of many different securities pooled together in a singular transaction (Fender and Mitchell 2005). Tranching involves the actual creation of a new class of security in which their valuation rating becomes higher than the typical rating of the primary asset pool that secures the transaction (Amato and Gyntelberg 2005). In generic terms, tranching allowed Lehman Bros. to offset the risk of selling a singular derivative, such as the mortgage-backed security, by pooling a variety of asset-backed securities that were purchased in a single transaction by the buyer. This was performed as a regular investment strategy by Lehman Bros. executives as the majority of institutional or private investment buyers did not maintain high credit worthiness in the industry. Whereas major banks maintained an AA or A rating, investment buyers domestic in the United States and abroad maintained a BBB rating. When major ratings companies provide a BBB credit rating, it is the lowest rating that indicates a firm is likely to be impacted by market conditions that could further erode credit worthiness and a measure of the likelihood by which the firm is able to repay its debt load (Kronwald 2009). With such a high volume of potential buyers for these tranched securities maintaining lower credit ratings, Lehman Bros. would have to create a product that would not only secure profitability, but also justify selling securities to entities that would, historically, be considered too high-risk for the business model. The concentrated volume of buyers maintaining lower-than-industry-average credit worthiness led to the development of pooled securities (the tranch ideology) that would, theoretically, limit the risk of securities sales whilst also protecting the long-run financial position of the seller (Lehman Bros.). Now, ultimately, the total valuation of these tranched pools of securities related to the mortgage industry declined for many of the same reasons that the derivatives market declined (ranging from speculation and short-selling to an inability to find additional buyers), however the method by which multiple securities were consolidated in the collective security sale imposed further debt obligations on Lehman Bros. that included associated bonds, collateralised debt obligations, mortgage-backed securities, and credit default swaps. The complexity by which Lehman Bros. engaged in utilising one risky derivative to protect another risky derivative sale led to significant capital declines. In fact, in 2008, prior to bankruptcy, Lehman Bros. was forced to sell over six billion USD in assets simply to fulfil its obligations in the derivatives market (Anderson and Dash 2008). This was equivalent to nearly 100 percent of the firm’s total assets which were reported in 2008 at 6.91 billion USD (Lehman Bros. 2008). Though the business had accumulated much more substantial assets (according to accounting processes) through the sale of a variety of asset-backed derivatives, these were rendered essentially worthless when investors began fleeing from the mortgage-backed security market and Lehman was unable to find an ample basket of buyers for its tranched securities. It was not common practice during the period between 2005 and 2007 for other financial institutions to engage in risky tranching activities, since it often required one risky investment serving to secure yet another risky investment vehicle. How, though, did Lehman Bros. manage to get away with this high-risk activity whilst still appearing to be in a very liquid position with external investors? Lehman Bros. executives were very adept in circumventing certain accounting rules and practices associated with investments and current assets of the firm. Lehman Bros. entered into what was referred to as repurchase agreements with buyers of the asset-backed securities, an agreement where the seller, at a future date, makes guarantees that they will buy back the securities for a price higher than the original issuance price. This practice allows the seller, in this case Lehman, to become a borrower whilst the purchaser becomes a lender and the security becomes collateralised against the cash loan provided to Lehman at a set, fixed rate (Bernstein 2009). When this occurs, the original seller (Lehman) is no longer considered the asset holder, but a borrower, therefore the transaction does not have to be placed on the balance sheet. Lehman maintained many investment positions with a variety of repurchase agreements involving securitised asset-backed derivatives that were absolutely opaque to the investment and regulatory environment due to the loophole in accounting law that allowed the business to mask its actual liquidity position. Figure 3: The dynamics of the Repurchase Agreement Industry (Repo) Source: Federal Reserve Bank of New York. (2012). Mapping and sizing the U.S. repo market. [online] Available at: http://libertystreeteconomics.newyorkfed.org/2012/06/mapping-and-sizing-the-us-repo-market.html (accessed 17 April 2013). As illustrated by Figure 3, the vast volume of institutional buyers and sellers involved in the repo (repurchase agreement) industry creates an inter-dependent network of security movements and cash payments from buyer to seller. Ranging from hedge fund investors to security investors, there is a reliance on securities dealers as a centralised agent that facilitates movement and payments of such agreements. The dynamics and lack of regulation in this particular industry illustrates how Lehman Bros. was able to mask activities associated with repurchase agreements as sales and purchases involved multiple parties making multiple transactions throughout the repo network. Stulz (2010) indicates that there was virtually no industry-oriented sentiment from auditors and investment experts in the industry that foresaw an impending economic crisis as a result of both the subprime mortgage practices and the inter-connectedness of the derivatives market. However, the accounting gimmicks that had been utilised by Lehman executives to mask the legitimate short-term liquidity position of the business provided enough evidence that the executives were fully aware of the substantial risk associated with blended security sales and repurchase agreements. Executives were placing the sale of the securities guaranteed by a repurchasing agreement as a one-time sale of the securities without making accounting notations that indicated a future debt obligation for repurchase. Lehman Bros. was also a high leverage business model, with such high exposure to the derivatives market and substantial utilisation of the credit default swap and mortgage-backed securities. With the bank maintaining such a high level of exposure in the derivatives market ($21 billion in 2008), it would have been more practical for executives to pursue leverage in less-risky ideology, seeking opportunities to purchase fixed assets to improve its liquidity position. Fixed assets in this case could have included real estate which maintain incremental, yet steady market-driven valuation improvements over time in most developed regions. Lehman Bros. total assets included substantial volumes of derivative exposures and other securities that were backed by what was already a large basket of large high-risk mortgages. Lehman Bros. could have avoided being in an illiquid position if the business had, between 2001 and 2007, leveraged its revenues through fixed asset procurement that would have improved its annual operating incomes. All situations and investment practices considered, Lehman Bros. main problem was poor governance and auditing of executive-level business activities. Not only were senior leaders performing questionable (but not outright illegal) accounting practices associated with consolidated securities sales and borrowing, but the internal structure that incentivised these practices were also a direct outcome of improper executive oversight. Lehman Bros. had been governed with a Board that followed the stewardship theory of governance, which places significant trust on the competencies of executives allowing them to be autonomous and trusted stewards of the business’ interests (LeBlanc and Gillies 2005; Turnbull 2000). There is no research evidence that indicates Lehman Bros. governance team members had established a rigorous methodology of internal auditing to monitor and control the activities of executive leadership, a necessity in a business organisation that is highly centralised and dependent on accuracy of financial reporting for capital procurement and satisfying shareholders. In fact, Lehman Bros. executives managed to hide ?50 billion in assets from the Securities and Exchange Commission in 2008 by transferring securitised assets to Britain in an effort to further hide further risky investment strategies (Peston 2010). Table 2: Volume of Risk Imposed on Lehman Bros. for all high risk investments (in millions) Business Global Value at Risk Event Risk CDO 6,577 Securitised Products 9,890 Convertible Equities 4,953 125,777 Emerging Markets 55,692 Firm Financing 16,816 Foreign Exchange 3,866 High Yield Fixed Income 10,057 60,682 Source modified from: Lehman Bros. (2008). Market Risk Management Overview, International Consortium for the Advancement of Academic Publication. Table 2 illustrates the volume of risk-centric activities that Lehman was involved with in a variety of investment markets. Global value at risk is a quantitative auditing tool used by executives and governance in the financial services industry to minimise future risk-taking activities for the entire business portfolio over a specific period of time. Event risk in the table represents potential portfolio losses that can occur as a result of fluctuating market conditions. If Lehman had established an appropriate auditing team, total global value at risk could have been determined with pooled securities as measured by event risks with convertible equities and high yield fixed income risks to de-incentivize further short-term funding using CDS and CDO methodologies and other securitised products. If Lehman Bros. had followed agency theory, the ideology of governance in which executives should be controlled and tightly monitored, it would have removed the high level of personal discretion that provided executives opportunities to engage in corrupt or otherwise improper accounting practices. Even prior to 2008, there was some industry-driven evidence that risky derivative markets were beginning to experience higher debt for the issuer when mortgage holders began to default on their adjustable rate mortgages. The business should have established a relevant internal auditing team that recurrently scrutinised executive activity, the tangible asset value of many of the business’ securitised derivative issuances, and thoroughly identified a flow-chart of potential risk associated with the sale of slices of various collateralised debt obligations issued by the firm. This model would have likely controlled the use of commissioned mortgage brokers that were paid sizeable commissions for generating high-risk subprime mortgages and better diversified internal investment strategies to take a more short-run position rather than the intended long-run position of CDSs and other asset-backed securities tied to the mortgage industry. Conclusion As illustrated, the financial crisis of 2007-2010 was highly attributable to the securities market and the intricacies of how various investors maintained investment positions in a very dynamic and inter-linked system of global finance. An amalgamation of risky adjustable rate mortgages as a frequent and chronic business strategy designed to improve the long-term capital position of the business clearly provided short-term repercussions when the adjustable rate mortgages and the contracted methodologies by which interest rates were calculated (especially negative amortisation loans) ultimately led to a high volume defaults that provided significant debt obligations for companies such as Lehman Bros. that actively engaged in these strategies. Though some blame for the crisis could, subjectively, be attributed to the lack of regulatory presence and controls over the mortgage industry and the derivatives market, the majority of culpability lies with the executives inside of the world’s largest financial institutions for not serving as appropriate agents with the primary function of satisfying the interests of the business’ employing them and the shareholders that provide significant capital growth. The inter-linkages in the global financial system involving multiple multi-national financial company buyers of risky, asset-backed securities and the methodology by which these transactions were accounted for and assessed for risk were the fundamental catalysts for the crisis. 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