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.
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'
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.
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
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
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
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
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
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.
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.
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.