Scribd Logo
Upload

Welcome to Scribd!

  • 81 views

    The Financial Crisis of 2008: What Happened in Simple Terms

    Uploaded by

    Big AL
    The Financial Crisis of 2008 was caused by banks creating too much money too quickly by providing risky mortgages and loans. These loans were bundled into complex financial products called collateralized debt obligations (CDOs) and sold globally. When the US housing market crashed in 2008, the value of these CDOs plummeted, causing widespread losses and a collapse of the interbank lending market. Regulators failed to provide proper oversight of risky lending practices and new complex financial instruments, which exacerbated the crisis.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    The Financial Crisis of 2008: What Happened in Simple Terms

    Uploaded by

    Big AL
    81 views2 pages
    The Financial Crisis of 2008 was caused by banks creating too much money too quickly by providing risky mortgages and loans. These loans were bundled into complex financial products called collateralized debt obligations (CDOs) and sold globally. When the US housing market crashed in 2008, the value of these CDOs plummeted, causing widespread losses and a collapse of the interbank lending market. Regulators failed to provide proper oversight of risky lending practices and new complex financial instruments, which exacerbated the crisis.

    Original Title

    Presentation Script

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The Financial Crisis of 2008 was caused by banks creating too much money too quickly by providing risky mortgages and loans. These loans were bundled into complex financial products called collateralized debt obligations (CDOs) and sold globally. When the US housing market crashed in 2008, the value of these CDOs plummeted, causing widespread losses and a collapse of the interbank lending market. Regulators failed to provide proper oversight of risky lending practices and new complex financial instruments, which exacerbated the crisis.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    81 views2 pages

    The Financial Crisis of 2008: What Happened in Simple Terms

    Uploaded by

    Big AL
    The Financial Crisis of 2008 was caused by banks creating too much money too quickly by providing risky mortgages and loans. These loans were bundled into complex financial products called collateralized debt obligations (CDOs) and sold globally. When the US housing market crashed in 2008, the value of these CDOs plummeted, causing widespread losses and a collapse of the interbank lending market. Regulators failed to provide proper oversight of risky lending practices and new complex financial instruments, which exacerbated the crisis.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    You are on page 1of 2

    The Financial Crisis of 2008

    The financial crisis happened because banks were able to create too much money, too quickly, and used
    it to push up house prices and speculate on financial markets.

    What happened in simple terms


    The driving force behind the mortgage and financial market excesses that led to the current credit crisis
    was the sustained rise in house prices and the perception that they could go nowhere but up.

    Most analysts link the current credit crisis to the sub-prime mortgage business, in which US banks give
    high-risk loans to people with poor credit histories.

    These and other loans, bonds or assets are bundled into portfolios - or Collateralised Debt Obligations
    (CDOs) - and sold on to investors globally.

    The US Housing Market


    Mortgage brokers, acting only as middle men, determined who got loans, then passed on the
    responsibility for those loans on to others in the form of mortgage backed assets (after taking a fee for
    themselves originating the loan). Exotic and risky mortgages became commonplace and the brokers who
    approved these loans absolved themselves of responsibility by packaging these bad mortgages with
    other mortgages and reselling them as “investments.”

    Thousands of people took out loans larger than they could afford in the hopes that they could either flip
    the house for profit or refinance later at a lower rate and with more equity in their home – which they
    would then leverage to purchase another “investment” house.

    A lot of people got rich quickly and people wanted more. Before long, all you needed to buy a house was
    a pulse and your word that you could afford the mortgage. Brokers had no reason not to sell you a
    home. They made a cut on the sale, then packaged the mortgage with a group of other mortgages and
    erased all personal responsibility of the loan. But many of these mortgage backed assets were ticking
    time bombs. And they just went off.

    CDO's ( Collateralized Debt Obligations )


    - These are structured financial product backed by a pool of loans

    - Banks approves loans such as mortgages. Loans were repackaged by investment banks and sold to
    other investors

    - The loans were also rated in accordance to the risk level

    → Senior rating (AAA) - least risk


    - The popularity of CDOs exploded

    → 2003: $30 billion; 2006: $225 billion

    Loans were given to borrowers who effectively had no chance of paying them back. This was done so
    because as mortgages are secured to the asset (housing), thus the house could compensate for the
    borrower's’ inability to repay

    When the housing market crashed in 2008, the CDO's was worth much less than what was expected

    This heightened the risk of interbank lending as banks did not know which ones were credit-worthy

    Interbank lending thus collapsed

    Regulators asleep at the wheel


    Failures in finance were at the heart of the crash. But bankers were not the only people to blame.
    Central bankers and other regulators bear responsibility too, for mishandling the crisis, for failing to
    keep economic imbalances in check and for failing to exercise proper oversight of financial institutions.

    The regulators’ most dramatic error was to let Lehman Brothers go bankrupt. This multiplied the panic
    in markets. Suddenly, nobody trusted anybody, so nobody would lend. Non-financial companies, unable
    to rely on being able to borrow to pay suppliers or workers, froze spending in order to hoard cash,
    causing a seizure in the real economy. Ironically, the decision to stand back and allow Lehman to go
    bankrupt resulted in more government intervention, not less. To stem the consequent panic, regulators
    had to rescue scores of other companies.

    But the regulators made mistakes long before the Lehman bankruptcy, most notably by tolerating global
    current-account imbalances and the housing bubbles that they helped to inflate.

    You might also like