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2008 Financial Crisis Essay

548 Words3 Pages

Assignment #1 – Research Proposition In 2008, the economic system in the United States nearly fell into ruin as banks and other financial institutions went under. With many economists and industry experts touting that there shouldn’t exist a business that is “too big to fail”, the US Department of Treasury seized control of private mortgage companies Fannie Mae and Freddie Mac. Along with these two government-charted enterprises, casualties included the entire investment banking industry, the biggest insurance company AIG, Wall Street firms Bear Stearns and Merrill Lynch, and Wachovia. The US Government stepped in to rescue our financial system from crisis, doling out $55 billion in TARP (Troubled Asset Relief Program) and $142 billion to …show more content…

Many researchers and economists argue that the American housing market drug down the entire global economy with risky mortgages being issued to families who didn’t qualify for ordinary home loans. Labeled subprime mortgages, these loans were issued to consumers with undesirable credit (FICO scores < 600). The mortgages had variable interest rates which were initially quite low, but when they reset to higher rates, mortgage payments increased significantly. This made it nearly impossible for consumers to make the payments on time, if at all. Other experts in the field claims that 30 years of deregulation and industry self-regulation allowed risky mortgages to be issued and mortgage-backed securities to be sold to investors, pension funds and financial institutions. Did deregulation essentially leave policing of the financial industry to the institutions themselves? And did the lack of reporting requirements for credit-default swaps contribute to an industry out-of-control and riding the wave of quick, easy money at the expense of consumers and investors? And what about exorbitant CEO salaries? Financial institutions take great effort to tie CEO compensation to results. But this might encourage impetuous risk-taking and under-reporting of genuine financial positions to ostensibly “cook the books” and misrepresent financial performance to enhance

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