In October 1929, the banking system represented over $50 billion of US GDP, over half the nation's total economy at the time.
On October 24th 1929, years of mass-speculation on the un-redeemable loans of banks to the American public caused the Wall Street Crash, plunging the US into the Great Depression. In the following years, unemployment shot up 600% to 13 million, world trade collapsed, GDP fell 30%, the stock market lost 90% of it's value and over 60% of the US populace was classified 'poor' as 2 million were made homeless.
In 1933, the Securities Exchange Commission was set up to monitor and regulate future investment banking activities and the Glass-Steagal Act put in place measures to forbid mergers of investment and savings banks so as to ensure that banks could not speculate on the savings and debts of customers.
In late 1971, President Richard Nixon begins to dismantle the regulatory rules put in place in the 1930s beginning first with the transport markets. Gerald Ford and Ronald Reagan, under the economic teachings of Milton Freidman continue this tradition and throughout the 1970s and 80s the power and wealth of investment banks soars. In November 1999, Bill Clinton introduces the Gramm-Leach-Bliley Act, repealing the protection of debt that the Glass-Steagal Act ensured. Banks begin to introduce securitization - mortgage and loans banks sell their customers' debts to investment banks and the investment banks sell them to investors as Collateralized Debt Obligations. This provides protection for loan banks against their customers defaulting and thus begins a culture of risky 'sub-prime' loans and 'predatory lending.'
In March 2000, the dot-come bubble bursts and the investment banks fall back on personal debt and housing infrastructure for re-investment. At the same time, the US Federal Reserve pushes down interest and raises leverage rates to counter a recession, encouraging further risky loans and allowing banks to speculate on progressively higher levels of debt.
On August 24th 2000, Emulex, a Californian high-technology company, issues a press release stating that it was revising its profits downward and that its CEO was stepping down. The next day, when the New York Stock Exchange opened at 0930, no-one is able to reach the company's headquarters in California to confirm or assuage the rumours due to the time difference. By the time the Emulex office opens 3 hours later, Emulex's stock has tumbled 62% on the NYSE. On August 31st, Mark Jakob is arrested as the source of the story, having profited over $250,000 by short-selling his Emulex stock, a scheme now dubbed 'short and distort.'
Throughout the first decade of the 21st century, very few warn of an impeding disaster being brought on by the CDOs and the insurance being taken out on them while economists and bankers such as Alan Greenspan and Henry Paulson push publicly and internationally for further deregulation of the banks.
By March 2008, the investment bank, Bear Stearns, has $11.1bn equity propping up $395bn in assets - a leverage of 35.5:1 - a loss of only 2.8% of it's assets would result in total equity loss and bankruptcy. On the 10th March, rumours of a '30-35% that Bears Stearns would collapse' begin circulating and Bear Stearns offers a press statement, against advice from its press office that... 'There is absolutely no truth to the rumors of liquidity problems that circulated today in the market...' perhaps further fueling them. By 16th March the rumours have driven down the value of Bear Stearns to just $6bn and a takeover at $2 per share, where just two days earlier shares were priced at $172 each was enacted by JP Morgan Chase. Senator Dodd leads a popular feeling of conspiracy to drive down prices and forcibly collapse Bear Stearns: 'This goes beyond rumors, this is about collusion.'
In April 2008 Sally DeWar an executive director of the the Financial Services Authority, the UK's banking regulator, sets up an investigation into rumours at the London Stock Exchange and their ties to short selling of stock. Ireland and Iceland set up similar investigations shortly thereafter. Short-selling through false rumour begins to gain attention as a market force with the Securities Exchange Commission announcing almost daily investigations into short-sellers who they suspect of using rumour to fuel diving share prices.
The commission said Paul S. Berliner, a trader for the New York trading firm Schottenfeld Group, used instant messages to spread rumors that the Blackstone Group was considering lowering its price for Alliance Data Systems, which it had agreed to acquire for about $6.4 billion last year.On 14th September 2008, the Lehman Brothers investment bank files for bankruptcy after seeing its stock price tumble as rumours of the quality of its sub-prime holdings circulated. The insurance company AIG, who held the insurance on these sub-prime CDOs and the ones of other banks followed on 16th September. Treasury Secretary Henry Paulson fails to see the international repurcussions of allowing these two financial institutions to fail and the 'Financial Crisis' begins.
“Hearing the board is now meeting on a revised proposal,” Mr. Berliner wrote shortly after 1 p.m. on Nov. 29. “Blackstone is negotiating a lower price.”
Mr. Berliner then began selling short 10,000 shares of Alliance Data, the S.E.C. said. As the stock fell, he turned a profit of $25,000 within 10 minutes on his short positions.
Currently the US financial services sector stands at $10.1tn against the US' total economy of $14tn and outstanding over the counter derivative debt sits at a notional $684tn. This debt sits within the Shadow Banking System, being only tradeable by financial institutions that do not take deposits and is unregulated. Risk is shouldered by the parties involved and could at any time be victim to rumour or false narrative.
Since the 2008 crisis, executive members of the Securities Exchange Commission, the worlds most powerful financial regulatory body, have been under investigation for accepting bribes, destroying documents pertaining to a criminal case, unlawful dismissal of employees, and failing to act on over half of the recommendations given to them by the Project on Government Oversight. It's not hard to speculate that any form of governmental control over the banks is now ineffective.
Despite the Great Depression and the current Credit Crisis, the gambling power of the investment banks makes them the world's most powerful institutions and current policies of continued deregulation are still lobbied for and retain wholesome support in first world governments. Insititutions with financial power larger than first world nations and no form of regulation take progressively riskier gambles on the world's economy but leave themselves open to corruption by rumour and false narrative.