Credit crunch gallery of guilt

The causes of the present credit crisis are many and varied. From the Fed's policy of cheap money to the bonus-driven fee structure of the City and Wall Street, there are plenty of culprits in the debt market meltdown.Sean Farrell, Sean O'Grady and Stephen Foley identify some of the major dramatis personae
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The Independent Online

Central bank

Alan Greenspan, chairman of the US Federal Reserve, 1987 to 2006

The man who underwrote the bubble. After the collapse of the dotcom boom in 2000, the attacks of 11 September 2001 and the Enron/ accounting scandals of 2002, the Fed lowered interest rates until they reached a nadir of 1 per cent in June 2003, where they stayed for a year before gently rising. Such historically low levels (negative in real terms), had the desired effect of bolstering financial markets, but also fed through to inflation and, more dangerously, a real estate and financial bubble. It also created the "Greenspan put". Homeowners borrowed and spent, often on goods made in China, hence America's vast trade deficit. The Fed is also responsible for banking regulation, but Greenspan was phlegmatic about the sub-prime phenomenon: "Where once more-marginal applicants would have been denied credit, lenders are able to quite efficiently judge the risk posed by... applicants and to price that risk appropriately." Sub-prime mortgage lending, which stood at 1 to 2 per cent of the market in the early 1990s, rose rapidly to 10 per cent of the market.

Politicians

George Bush, US President

When Bush entered the White House in 2001, the US federal government was in the black. That was before 11 September and the war on terror. A combination of radical tax cuts and higher defence spending has left America's public finances in a woeful condition. A $1.35 trillion (£670bn) tax cut put money in the pockets of the middle classes. This year, the federal budget deficit is now predicted to come in at $205bn, down from its recent peak of $413bn in 2004. Since the beginning of the Bush administration, US deficits have added $2.6 trillion to the total national debt, which now stands at more than $8.2 trillion. The Bush administration will leave a legacy of a huge budgetary crunch when members of the baby-boom generation begin retiring in large numbers.

Big UK banks

Bob Diamond, president of Barclays

It is not only the big swinging dicks on Wall Street who have taken part in the buying and selling of repackaged debt. The big UK banks have got in on the act, either by structuring and selling the stuff, investing in potentially toxic debt through obscure investment vehicles, or setting up these vehicles for clients. At the centre of the furore has been Barclays Capital, Barclays' investment bank, run by Bob Diamond. The departure of Edward Cahill, BarCap's head of collateralised debt obligations, fuelled concern about BarCap's exposure to complex debt funds. Mr Diamond has been reassuring investors there was nothing lurking in Barclays' balance sheet.

Hedge funds

Jim Simons, founder, Renaissance Technologies

The most expensive hedge-fund manager in the world, Jim Simons' first job out of college was as a mathematician working for the Defense Department cracking enemy codes during the Vietnam War. Now his hedge fund Renaissance Technologies controls $24bn in assets and charges clients 5 per cent a year to look after their cash, plus a 44 per cent of returns beyond a certain level.

What they are paying for is so-called "black box" computer programmes that harvest tiny profits from millions of automated trades. Funds such as Renaissance lost billions of dollars in the first week of August after a combination of events that their statistical models said wouldn't happen, helping spread the panic from the sub-prime mortgage sector.

Regulators

Christopher Cox, chairman, Securities & Exchange Commission

Wall Street's regulator, the Securities & Exchange Commission, has been trying to get a grip on the ballooning hedge fund industry – but it has failed. It is a difficult-to-measure industry, based largely offshore to avoid tax and disclosure rules, but it is certainly huge, with about 9,000 offshore funds holding assets estimated at around $2bn (£1bn). The SEC under Mr Cox brought in a rule requiring most hedge funds to register with the agency. Many simply ignored the rule. The SEC's approach to regulation has been in disarray ever since.

Debt investors

Herbert Suess, former CEO of Saschen LB

Someone had to buy all this stuff, and most investors only have themselves to blame for believing in the free lunch of returns without risk. At the bottom of the chain are the growing new class of wealthy individuals – from footballers and entertainers to entrepreneurs and sellers of family businesses – who were urged to invest in hedge funds. The hedge funds then bought into credit products they didn't understand, using borrowed money from investment banks. Pension funds also invested in fixed-income securities after the bursting of the dotcom bubble of the late 1990s caused fears about investing too heavily in shares. With huge demand for highly rated fixed-income assets, the investment banks had every reason to create them using ever-more complex structures.

As ever, the market attracted institutions less able to understand the investments than the hedge fund geniuses. Sleepy German institutions such as IKB and Sachsen LB stunned the market with massive losses on sub-prime securities and saw their CEOs depart as they had to be bailed out to the tune of more than €20bn (£13.5bn). Peter Hahn, a fellow at Cass Business School and a former managing director at Citigroup, said: "People said, 'I want low risk and high returns' and you had a massive buying spree by people who didn't really know what they were buying."

Credit rating agencies

Kathleen Corbet, president of Standard & Poor's

The ratings agencies apply grades to bonds and debt-related investments depending on the level of risk. Standard & Poor's and Moody's, the top two agencies, have been lambasted on both sides of the Atlantic for giving high ratings to bonds and complex credit funds linked to risky debt, particularly US sub-prime mortgages.

Critics claim agencies maintained high ratings on securities as defaults on sub-prime mortgages ballooned. S&P says it alerted the market two years ago and the fall in value of the securities is not its responsibility.

The agencies receive fees for giving ratings, meaning the more investments they grade, the more money they make. Critics say the agencies work too closely with the banks structuring debt investments, undermining the independence of their ratings.

Kathleen Corbet, the president of Standard & Poor's, resigned last week as criticism mounted, though S&P said her departure was a coincidence. The European Commission is investigating whether S&P and Moody's had conflicts of interest.

Private equity

Henry Kravis, founder of Kohlberg, Kravis, Roberts

The original barbarian at the gate, the private equity pioneer was still at the apex of the leveraged buy-out phenomenon 20 years after the battle for RJR Nabisco. But he was in danger of losing the crown to Stephen Schwarzman of Blackstone, and their battle pushed both into bigger deals. KKR's acquisitions of TXU, and First Data are amongst the biggest buy-outs of all time, at $44bn and $29bn respectively. Because LBO debt was sliced and diced and parcelled out for sale to investors across the world, no one seemed to notice as the deals got riskier, with Henry Kravis and his rivals paying higher prices that would gave them much less room to cope with any trading downturn.

Wall Street

James Cayne, chief executive, Bear Stearns

On the day that Bear Stearns was bailing out one of its hedge funds to the tune of $3.2bn, the bank's chief executive was on a New Jersey golf course. The Wall Street veteran has faced a storm of criticism for failing to understand the scale of the credit crisis, despite running a bank that is among the most heavily exposed to the mortgage-backed bond market. The Bear Stearns funds had made more than $20bn of bets on the US sub-prime mortgage market, mainly funded by debt advanced by other banks on Wall Street. When the bets went wrong in June, the funds were wiped out. Investors were forced to admit their investments in mortgage-backed debt instruments were unsellable, while lenders began to cut the amount of leverage allowed to hedge fund clients.

Mortgage lenders

Angelo Mozilo, chief executive, Countrywide Financial

As the head of the largest independent mortgage lender in the US, Angelo Mozilo was the face of the industry as it offered too-good-to-be-true mortgage deals to millions of Americans previously deemed too poor or too irresponsible to own their own home. Thanks to the innovative financing available from Wall Street, Countrywide and its smaller brethren were able to offer extraordinary "teaser" rates, which lured customers with a low introductory interest rate. With each new wave of these loans that reset to a higher, variable rate, defaults have been ratcheted higher and are now at record levels, with worse to come.

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