The Financial Crises of 1933 and 2008 forever changed how the financial system was regulated.

Both crises in their aftermath highlighted weaknesses in the financial system. In the aftermath of
both events measures were put in place that sought to prevent any reoccurrence. The 1933
banking crisis was followed by the Glass- Steagall Act which separated the investment banking
function from that of the commercial bank. The 2008 financial crisis was followed by a review
of the Basel framework and the introduction of Basle III.
Prior to 1933 the United States was experiencing an economic boom and the stock market was
also quite flourishing. Businesses were so profitable that they financed continued operations
from their retained earnings rather than go through the commercial banks. The commercial
banks sought an alternate way to make money and decided to enter the mortgage, construction
and steel industries as those industries were where the money was during that time. Also, during
that time a lot of money was being borrowed because down to the common man had investments
in the stock market that was seeing huge returns on investment.
When the stock market crashed in 1929 a lot of individuals were seeing a lot of losses on their
investments and a lot of debt could not be collected. The industries also saw decline and that
meant that significant investments of commercial banks were lost. Detroit, where a number of
employees worked and had mortgages was one of the first areas the depression was felt. The
banks in that city could not collect on the mortgages as a number of people became unemployed.
President Hoover sought to stem the bank failures by giving the banks up to $2 billion in bailout
money. The list was however leaked after Hoover lost office in 1932 and this led to the crisis of
1933in which customers sought to withdraw all their funds. Roosevelt who was now at the helm,
induced a banking holiday which reviewed the operations of the banks and the weaker banks
were closed permanently. In the aftermath it was decided that the commercial bank should not
be involved in investment. This was done via the Glass- Steagall Act of 1933.

The 2008 crisis started when shareholders directives were not being followed by the Board of
Directors. The issue of corporate governance saw executives taking huge bonuses at the
financial health of the financial institutions. The banks were also engaged in subprime lending
which was granting mortgages to individuals who did not have the assets to justify the loan. This
was done as the banks know they could turn around to other institutions such as Fannie Mae and
Freddie Mac. This is known as moral hazard where risks tend to be taken when protection is
present. In this case, because the loans could be transferred banks did not take the time to collect
adequate information on their potential clients. The loans could be transferred if it was deemed
uncollectible. Freddie Mac could also seek insurance from AIG which promised that if the
mortgage firms paid a premium, AIG would guarantee payment if the loan defaulted. This is
known as a credit default swap.

When the bubble burst and the loans could not be collected on it resulted in a financial crisis.
AIG was now faced with compensating Fannie Mae and Freddie Mac, an obligation that could
not be fulfilled. The banks sought to gain new investors by hiring credit rating agencies such as
Stanley and Poor and Moodys to certify good investments when in fact they were poor ones.
This lemons problem also created what is known as information asymmetry where one party
knows more than the other in a business transaction. This could not help the situation which led
to a federal intervention.
In both crises, the heavy involvement in the mortgage industry led to the run on the financial
system as banks had significant investments in the industry. The contribution to the 2008 crisis
was a result of President Clinton repelling the Glass Steagall Act in 1999 therefore allowing
banks to once again enter the investment market. The federal government did not actively seek
to control the financial system until the crises hit. They allowed the brokers and financial
executives to control the financial system and when the crises hit, they then saw it an appropriate
time to seek to address the situation. Significant regulation was put in place after each crisis to
ensure that such a situation never occurred again.

The major difference is that the rating agencies wrote off bad investments as good ones resulting
to them being a contributing factor in the 2008 crisis. The issue of corporate governance was a
huge contributing factor in the 2008 crisis, the direction of the board of directors being far from
what shareholders wanted resulted in very unscrupulous decisions being made to the detriment of
the financial system.
The financial system has seen two catastrophic events that caused a wide spread global panic it
was through greed and negligent behavior for systematic risk that precipitated both crises. In the
aftermath was when it showed how fragile the system was to collapse and measures were put in
place to ensure that it did not happen again.