The Causes Of The 2008 Financial Crisis

1. Cause of the financial crisis

The financial crisis had multiple causes. It was brought on by unethical traders in the financial market and regulators’ failure in exercising proper oversight of financial institutions. On the one hand, individuals across the financial industry pursued their personal interest irrationally, ignoring potential risk. On the other hand, regulators tolerated their unethical trading and mishandled it at the beginning of the crisis. They could have done more to prevent the crisis from expanding and mitigate the damage brought by it.

Start with unethical traders. Years before 2008, due to the prosperity of real estate market, banks issued subprime mortgages to people with poor credit history and unable to afford the

Banks grouped them into pools and use them to back securities, which is known as collateralised debt obligations (CDOs). Rating agencies like Moody’s and Stand &Poor’s came into the process and rate the securities. Investors trusted these agencies and bought so-called triple A securities. However, these rating agencies were paid to grade them far too generously. The risk behind was covered. Meanwhile, investment bankers did realize the risk. They developed Credit Default Swap(CDS), which allowed them to distract the risk they were taking. CDS is a insurance for the mortgage. If the creditors fail to repay the mortgage, the insurance companies will pay instead. As return, the insurance companies will charge the banks specific amount of money as insurance fee. Depending on the stable income from banks, insurance companies issued securities. Again these securities were rated safe and bought by investors. In this process, investors were actually borrowing money from banks to invest on the securities backed by their mortgage, and the money didn’t go into the real economy. All these investments didn’t create real value but bubbles. When the housing price went too high, people

Regulations resulted from the crisis

1) Troubled Asset Relief Program, Dodd-Frank Wall Street Reform and Consumer Protection Act

“The TARP program allowed the United States Department of the Treasury to purchase or insure up to $700 billion of ‘troubled assets’ to strengthen its financial sector. Subsequent legislation, including the Dodd-Frank Wall Street Reform and Consumer Protection Act guarantee authority under TARP at $475 billion”(U.S. Department Of The Treasury). Since 2008, $429 billion has been disbursed to five main programs including AIG Investment, Auto Industry Investment, Bank Investment Programs, Credit Market Programs and Housing Programs. Almost all the big financial institutions received help from TARP, including Citi, Bank of America, JP Morgan Chase, Morgan Stanley, Goldman Sachs and etc. As of August 31, 2015 cumulative collections under TARP reached up to $441.9 billion, which exceeded total disbursements by almost $13