A Visual Guide to the Financial Crisis

This chart sums it up all well and nice. makes sense to even dummies.

That is so clear and understandable. Great, no, fantastic job. I liked how you included how the media was supporting the overconfidence in buying a home as an investment.

Very good concept albeit oversimplified – no mention of legalization of derivatives (2004), absence of dialogue concerning oversight and transparency not stressed, etc. Good effort none the less.

So, this visualization is interesting, but it’s very misleading to omit credit default swaps. If the only problem were bad mortgages, the worst of them could be bought up for a few hundred billion, end of problem. But we’ve already paid out $700 billion, and we’re still in deep weeds.

Credit default swaps, on the other hand, are estimated at $45-65 trillion dollars, and are completely unregulated. While it’s easier to blame all our troubles on bad behavior that we can understand (house flippers, real estate industry advocates, people who bought a house they couldn’t afford), the real damage was done by a huge amount of unregulated trade.

love these sites which reduce it such simple visuals.. i track “job cuts” across the world here http://www.trackthisnow.com
it tracks all the countries and all the cities in all the countries

Great graphic. Effectively designing information is always a huge challenge.

Only major thing I would say it misses is the SEC’s 2004 decision to change net capital requirements for the big 5 that led Bear Stearns, Lehman etc to become so over leveraged (30 -to- 1 instead of 12 -to- 1) that a significant decrease in their mortgage backed securities flipped the banks balance sheets and drove them into bankruptcy.

Could also touch on credit default swaps, and how exposure to mortgage backed securities dropped their credit rating thus requiring greater margins which then expended their available capital (a la AIG) which then leads to mark downs of these un-insured assets throughout other banks & institutional investors.

I think this is captured in the diagram, but just want to check. . .

It’s my understanding that, at least part of what drove this vicious cycle, was the fact that the people who approved the loans, weren’t the people who ended up with the risk for the loans. That is, in the chart, you have the Mortgage Brokers (who, I think, basically approve the loans, but aren’t lending their own money, and who got payed a commission on each loan ’sold’, so that their chief incentive was to sell as many loans, for as much money as possible, and for whom there was no personal risk in ’selling’ loans to people who couldn’t afford them?) setting up the loans, the banks lending the money, but then turning around and selling off the loans as the CDO’s mentioned in the diagram, so that the ultimate people holding the bag aren’t the people who are approving the loans?

So, you have a perfect system setup to encourage the writing of bad loans.

thanks alot i’ll keep this in mind

This is a great job. Many have said we’re missing the Credit Default Swaps and the Collateral Debt Obligations that were created from Synthetic CDOs. These are important because they allowed the described effect to be amplified many more times than the total sum of all these mortgages. If it were only the total value of the mortgages originated by banks, we’d still be in trouble but now with the amplification of these complex derivatives, we are in a hole so deep, we may never get out.

Wow very nice! Its obvious that you have put a lot of work into this chart.
-Will
http://www.allthebestofthenet.com

Grash -

I don’t watch TV. I don’t even get TV in my home!

As I said, READ “The Shock Doctrine” by Naomi Klien.

This is a continuing ongoing scam by the Uber-rich – the 2,000 people who have 50% of the wealth in the world, to con money out of the rest of us.

The NEW NARRATIVE, THE FRAMING that the ULTRA RIGHT-WING would have you believe, is that it was the something other than de-regulation that caused this, which is not true. Their narrative continues further, to blame the victims of this disaster – ie, that those who were conned into taking out these loans. But NONE OF THIS WOULD HAVE HAPPENED IF THE BANKING INDUSTRY HADN’T FORCED THE DEREGULATION THAT LED TO THIS COLLAPSE. That should be item 1 in this chart.

This is a fantastic website!

nice, I am going to send this to some of my students. thanks.

Very good. But it’s too bad you chose to make it partisan. I see a few Republicans, but I didn’t see Rep. Barney Frank, the ranking Democrat on the House Financial Services Committees push-back against more Fannie Mae and Freddie Mac reform anywhere on your chart. He had some rather outrageously wrong comments along these lines a couple of years ago. Indeed, I see nowhere on your chart that Democrats in Congress actually pushed banks to make riskier home loans or face penalties, in the name of “affordable housing.” Are you contending that didn’t contribute to what happened?

Alternative visualization:

GREED

Great diagram. I would add (at the very top) investment cash from Asian. According to the recent article by Naill Ferguson in VF, this was a major contributing factor. They wanted to invest all that extra cash in any/everything.

YOU LEFT OUT THE ORIGINAL SIN:

DE-REGULATION

…which allowed all of this to happen.

Great summary and flow chart. I agree, it could be expanded to include deregulation as a prelude, and greed as a prelude to that, and DENIAL belongs in there somewhere (perhaps as a tag to some of the quotes).

Marshall,

Thank you for the challenge!

OK, here are two of the relevant bills.

1) “The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, Pub.L. 106-102, 113 Stat. 1338, enacted November 12, 1999, is an Act of the United States Congress which repealed part of the Glass-Steagall Act of 1933, opening up competition among banks, securities companies and insurance companies.

The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services.

The Gramm-Leach-Bliley Act (GLBA) allowed commercial and investment banks to consolidate. ”

In a nutshell, this allowed the banks to monopolize, destroy competition, set outrageous fees, and interest rates on their products, etc….

2) “The Commodity Futures Modernization Act of 2000 or CFMA (H.R. 5660 and S.3283) is United States federal legislation which repealed the Shad-Johnson jurisdictional accord, which had banned single-stock futures in 1982. The legislation also provided certainty that products offered by banking institutions would not be regulated as futures contracts.”

This allowed the sale of Credit Default Swaps – a fancy financial con game.

“Warren Buffett famously described derivatives bought speculatively as “financial weapons of mass destruction.” In Berkshire Hathaway’s annual report to shareholders in 2002, he said, “Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses—often huge in amount—in their current earnings statements without so much as a penny changing hands. The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen).”

And so poof – They blew up the world’s economy.

THERE IS NO SUCH THING AS A FREE MARKET!

ALL MARKETS HAVE RULES AND REGULATIONS.

OTHERWISE IT’S ANARCHY.

HERE ARE THE SOLUTIONS:

Repeal the above acts.

End the WTO and FTA.

Increase wages across the board. (This is key – it is well paid workers who create the demand for products, goods, and services that drives all economies)

Limit CEO/mgmt pay.

Fire the CEO’s and managers who developed this house of cards.

Break up the large financial institutions that are destroying the world’s economy.

That’s all for now.

Please let me know if I can be of further assistance!

Great diagrams. I’ll sign up for Mint this weekend. Why does Bernanke still have a job? You should have used the better Bush quote — “This sucker’s going down.”

Its a shame your diagram is so one-sided, and so shallow. It’s pretty though. I think it will take another generation of historians with no political axe to grind to get to the real truth. q is right, this problem started in the mid-90’s with the push for “affordable Housing”. The de-regulation happened then. As early as 2001 the Bush administration started warning about the risks of Fannie Mae pushing for more subprime loans and securitizing more of them. During the first half of 2008 the administration warned no less than 17 times. The dirty little secret is that the GSE oversight committee (mostly Dems), has stonewalled any meaningful regulation for all these years. What I want to see is the money trail…Barney Frank’s ex was on the Board of one of the GSE’s, Franklin Raines and the absurd 90 million in bonuses for meeting quotas that HE himself set up. Oh…its dirty. I just think we’re going to have to wait for the truth to out.

One of the big lies that people have bought into is that Republicans want NO regulation…bad, Dems want regulation…good. Just think of the absurdity of that… Come-on, idealogues, think a little deeper, I know you have it in you!

Need to add Madoff crisis to the chart and it is Orange “County” not Orange “Country” in Gary Watt’s quote (unless you are alluding to Northern Ireland!)

Great graphics & visualization. Interesting blog, article and comments. Keep up the good work!

Some one rightly commented. The next time bomb in the financial crisis series is Credit Default Swaps. What else can you call the so called Credit Default Swaps on Fixed income securities – when the total bond size is 25 trillion USD and the notional value of CDS is 63 trillion USD? Do you call this protection or pure gambling? Let the regulators do something for this before it is too late.