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2008 Financial Crisis Essay

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The financial crisis intensified following the Lehman Brothers bankruptcy in September 2008. It triggered a world-wide economic downturn. There was a loss of confidence by US investors in the value of sub-prime mortgages caused a liquidity crisis. Large amount of capital were put into the financial market by the Federal Reserve. Stock markets around the world buoyed and this worsened the crisis. Financial institutions took to riskier investments as that yielded more return. Assuming that returns would exceed the investment, these institutions made it lucrative with higher profits to induce the investors in these risky borrowings. Concerns about America’s big deficit and the offsetting capital inflows from Asia’s excess savings had been the …show more content…

In 2008 the world economy faced its most dangerous crisis since the Great Depression of the 1930s. The pestilence, which began and resided in the US as the sky-rocketed house prices reached its nadir, soon spread throughout the globe. The losers in the United States included a) the entire investment banking industry, b) the biggest insurance company, c) the two enterprises chartered by the government to facilitate mortgage lending, d) the largest mortgage lender, e) the largest savings and loan, and f) two of the largest commercial banks, 'Indymac' and 'Washington Mutual Bank'. Mortgage leaders agreed on loans on terms unfavourable to most households as mmany of them ideally did not qualify for a loan. Some of these so-called subprime mortgages had low “teaser” interest rates in the early years that swelled to double-digit rates in later years. Credit Default Swaps(CDS) crept in insurance companies' deals with the specualtion that the insurers would assume any lossed caused by mortgage-lender defaults in return for a fee. Financial institutions bought or sold credit default swaps on assets that they did not

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In Addition to maldistribution stood the credit structure of the economy, some farmers were in deep land mortgage debt, so they lowered their crop prices in order to regain credit, and because the farmers were no longer accountable for what they owed banks. Across the nation the banking system found themselves in constant trouble. In America both small and large bankers were concerned for their survival, so they began investing recklessly in stock markets and granting unwise loans. These unconscious decisions would lead a large consequence, such as families losing their life savings and their deposits became uninsured. “ More than 9,000 American banks either went bankrupt or closed their doors to avoid bankruptcy between 1930 and 1933.”Although

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Eventually, the government-backed insurance was all but depleted, resulting in a housing bubble burst and financial crisis of 2008. Lastly, investors are the third key figure, as they bundled these loans into investment securities. In their scheme to bundle as many loans as possible, they encouraged lenders to further lower their standards for both loans and documentation

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The major players in the crisis included financial institutions such as Lehman Brothers, Bear Stearns, and AIG, as well as mortgage lenders like Countrywide Financial and Washington Mutual (Weinberg 2013). These firms engaged in irresponsible lending practices and took excessive risks, which ultimately led to their downfall. One of the "villains" of the

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The financial institutions and banks were providing mortgage facilities to anyone who came in, without proper credit checks on affordability or the ability to pay back the loans. The mortgages were based on the assumption of receiving regular payments from borrowers. The mortgage IOU’s were then converted to various bonds and other securities. The borrowers were not informed about the risks involved when they bought stocks and funds on Wall Street. Even pensions and hedge funds were converted into bonds.

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“Never assume all is well when it comes to your savings or loans. Get a printout to ensure you know exactly what is happening.” When thinking about a financial crisis in the United States, one typically recalls the most recent financial meltdown of 2008, which affected different economies around the world as well. However, there is another financial crisis that plagued the United States that is somewhat comparable to the recent 2008 crisis and that is the Savings and Loan Crisis of the 1980s. This was one of the largest scandals in banking history in the United States and it started in the 1970s and began to slow down in the 1980s before finally ending in the 1990s.

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A combination of factors created the Great Recession of 2008. The housing market crash in the United States, which a housing bubble, the overinflation of housing prices brought on by a rise in demand for houses, bursting caused. Prior to the bubble bursting, money lenders were eager to provide loans to borrowers who could not afford them because investors and lenders believed that the interest rate, the outstanding balance of a mortgage, would provide a better return than investing in something else. This eagerness to provide loans led to an increase in subprime lending, taking advantage of the lax lending policies. This led to the creation of mortgage-backed securities, securitizing mortgages by bundling thousands of individual mortgages and

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The Dodd-Frank Act introduced major American regulatory reform such as the end to protect financial institutions that are too big to fail (Lasher, 2014). During the financial crisis, the government was involved in protecting some institutions (e.g., Washington Mutual, Wachovia, etc) while not protecting others (e.g., Lehman Brothers). Additionally, the Dodd-Frank Act established changes requiring “mortgage lenders to ensure that borrowers have the ability to make payments,” which could have led to penalties if the lenders were not in compliance (Lasher, 2014). This provision of the Act can avoid lenders to offer products (e.g., no documentation loans) that could increase foreclosures. Due to the inconsistency of credit ratings on CDO’s during the financial crisis, the Dodd-Frank Act created a department that oversees rating agencies (Lasher, 2014).

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However, by 2007, housing prices began to decline, causing borrowers with adjustable-rate mortgages to face higher payments they could not afford. Many homeowners started defaulting on their mortgages, leading to a sharp increase in foreclosures. The widespread default and foreclosure rates had a domino effect on financial institutions and investors. Since mortgage-backed securities were intricately tied to the housing market, the decline in their value caused significant losses for financial institutions holding these assets. The crisis unfolded further when it became evident that many institutions had engaged in risky practices, such as excessive leverage and insufficient capital buffers.

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Introduction: The 2008 financial crisis really began 10 years earlier, with the collapse of legendary hedge fund, Long Term Capital Management L.P.(LTCM) which was launched in 1994 by John W. Meriwether who earned MBA degree from the University of Chicago and was used to be the head of fixed income arbitrage group at Salomon Brothers in early 1980s. LTCM was established with $1.1 billion in capital (Chincarini, 2012) in Greenwich, Connecticut, making it the largest start-up hedge fund to date. 12 partners of LTCM were all experienced and authoritative Ph.D. or professors with economic, financial and mathematical background from the most prestigious universities in the world including Robert C. Merton, who was a future winner of Nobel Memorial Prize and Myron S. Scholes, who was also a future

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