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2007-2008 Financial Crisis Essay

496 Words2 Pages

The U.S. economic collapse in 2007 - 2008 was due to a series of unfortunate events that governed a bailout. In 2001 the Federal Reserve rate was the lowest in 45 years at 1%. Due to the low rates borrowers were eager to become homeowners and banks were willing to lend to almost anyone regardless of their income status, credit rating, or job status and they did. However, the Federal Reserve required banks to hold a percentage of their client’s deposits in their vaults which meant they were limited to the amount of money they could lend out. So instead of maximizing the allowable amount to lend and waiting for those mortgages to get paid off, they bundled their current mortgages into a Collateralized Debt Obligation (CDO) and sold those CDO’s to investors. This action put money back into their vault and was able to grant more …show more content…

The cycle repeated and by 2004 U.S. homeownership peaked at 70%. But, by 2006 the Federal Reserve rate increased to 5.25% and subprime lenders were unable to pay their mortgage causing banks to file for bankruptcy. CDO investors soon found out that their investment was worthless due to the subprime mortgages that filled it. To prevent a financial meltdown the federal government made several attempts to aid homeowners who defaulted on their mortgages. Federal Reserve rates and discount rates were lowered but bankruptcies continued to rise. The once thriving financial market was now a subprime financial market that was in dire need. Investment banks and hedge funds held over 1 trillion CDO’s that were worthless. Finally, in 2008 the National Economic Stabilization Act was formed to buy over 700 billion distressed assets which included CDO’s to

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