Although the heat of the US credit crisis issue has passed for sometime now, people are still talking about it as an example of a disastrous economic management. Last week I was lucky to have been in the staff of the KL Islamic Finance Forum 2011 (KLIFF2011) where one of the speakers explained in detail how the crisis came to be and how it was no accident.
For those who are not clear about the credit crisis, watch the video below:

Hope you guys understood the important points in the video above, especially the cause of the whole mess; Sub-prime mortgages. But you may ask :

1. Why did the banks approve the mortgages knowing that the fellas couldn’t afford to pay back? What’s more, it’s not just 1 or 2 of these sub-prime mortgages they approved, but tonnes of them. This can’t be an accident.
2. Knowing that these were sub-prime mortgages, why then did the investment banks buy the CDOs?
3. How can the rating agencies label these investments as AAA when clearly they are not?

Well, in the forum, the speaker explained why. Apparently the rating agencies and investment banks were conspiring together on this affair. The rating agency rated them as AAA so that the investment banks could get investors for these CDOs. At the same time, they insured these CDO against default for apparently a large sum of money, knowing for sure the home owners will default. In that way, if the home owners default on their mortgages, they will collect the insurance money. That’s why we saw insurance firms such as AIG had to be bailed out by the Federal Reserve.

So, to put it simply, they are selling a car that is faulty to a buyer, insuring the car against an accident and when the accident happens, collect the insurance money.  So, no matter what, the banks will win and everyone else will loose. Very smart people these guys in Wall Street.

To make things even more screwed up, I was told that one of the conditions of the bail out was for AIG to pay their bosses a big fat bonus, which made Obama angry as a bird (if you remember one of his public addresses around that time).

So, you see, this was no accident. It was a coordinated effort by the investment banks, the rating agencies and the Federal Reserve to enrich an elite few in high places of Wall Street. Who these so called “elite” few, I leave that for you to speculate.

If only Wall Street was regulated, it might have been avoided. Instead the US government let Wall Street to practice “Self-Regulation” which simply means, “do whatever you want, we won’t stop you”. It’s like telling a pig to control its diet and setting it loose without any supervision.

So there you have it. The world destroyed by a group of greedy people from Wall Street. The good thing that came out of this, I supposed, is the uncover of Berney Madoffs ponzi scheme, which ripped off billions of dollars of “investors” money last year. Luckily this has not happened in Malaysia. Luckily also we have the Islamic Banking system which is more secure and would never let this kind of things happen. But how does Islamic Banking and finance compare to the conventional banking system? That is a topic for another time.