I understand that many people think our government should be less involved in our lives (i.e., they want a smaller government), but it just doesn\u2019t work in the world of finance. Greed is the driver when money is involved, and we have plenty of examples to learn from in recent history.<\/p>\n 2022<\/strong><\/p>\n In mid-November, we watched FTX \u2014 one of the world\u2019s largest crypto exchange platforms\u2014implode and file for bankruptcy. Initial reports suggested the collapse was caused by Sam Bankman-Fried (CEO of FTX) transferring billions of dollars from customer assets at FTX to his crypto hedge fund, Alameda Research. Additional factors were later identified. In late November, crypto lender BlockFi filed for bankruptcy, and it is too soon to predict how widespread the economic damage will be.<\/p>\n I never recommended Bitcoin or cryptocurrencies to any of my clients, and I would never invest in them myself. The risk is too high for my conservative investment philosophy. However, I know several people (even financial advisers) who have invested. Cryptocurrencies are digital assets, and many early investors reveled in the fact that there was limited oversight by U.S. or global authorities.<\/p>\n The FTX collapse is being compared to the 2008 bankruptcy of investment bank Lehman Brothers, which was a major factor in the 2008 financial crisis. Let\u2019s review the factors that almost brought down the U.S. and global economies. A lack of oversight was definitely involved.<\/p>\n 2008<\/strong><\/p>\n In approximately 2005, the mortgage industry began encouraging people to buy larger houses than they could afford \u2014 with hefty mortgages. The old rule of thumb to not spend over 30% of a person\u2019s gross income on housing was discarded, and \u201clow-doc\u201d or \u201cno-doc\u201d paperwork became common. Often, no deposit was required to buy a house. The mortgage industry argued that housing prices would continue increasing, thereby justifying the excessive mortgages they were selling to vulnerable homebuyers.<\/p>\n Everyone seemed to forget that real estate values are cyclical. According to a white paper by the U.S. Federal Reserve (containing data from CoreLogic), housing prices in the U.S. declined by about 33% from 2007 to 2009 as compared to their peak in 2006. This led to many mortgage holders being \u201cunderwater\u201d and owing more than their home was worth. Many people walked away from their mortgages and lost their homes.<\/p>\n The U.S. economy may have tolerated the housing correction, but the banking and investment industries exacerbated the problem by bundling \u201csubprime\u201d mortgages into \u201ccollateralized debt obligations\u201d (CDOs). The CDOs were bundles (or \u201cpools\u201d) of risky mortgages that the mortgage industry had sold to unsuspecting home buyers, knowing they required excessive monthly payments when compared to the buyer\u2019s income. (Clearly, the bundles should have been categorized as high-risk or subprime). The next unethical step was that rating agencies gave the CDOs (absurdly) double A and triple A ratings. Fraud was widespread, and the CDOs were marketed to investors in the U.S. and abroad as safe, low-risk investments.<\/p>\n![\"\"](\"https:\/\/d21yqjvcoayho7.cloudfront.net\/wp-content\/uploads\/2016\/11\/19\/Cygan_Skeels_Donna_sig-284x400.jpg\")
<\/a>After devoting over 20 years to financial planning, I am convinced that government oversight is required in the banking, investment, and insurance industries.<\/p>\n![\"\"](\"https:\/\/d21yqjvcoayho7.cloudfront.net\/wp-content\/uploads\/2022\/12\/03\/mb00_jd_05dec_invest-1200x800.jpg\")
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