What Are The Causes Of The 2007 Financial Crisis

The 2007 Financial Crash The 2007 financial crash was the most impactful financial event since the Great Depression. Many of its effects are still being felt today; however many people do not understand what actually happened or how it happened. The Causes of the financial crash were a combination of mortgage-backed assets and debt. Following the second world war, housing prices have been in an upward trend. It started in the 1980s when financial institutions realized that mortgages had a greater potential. These traders were looking to expand the bond markets and found that mortgages could be placed into bonds and sold to investors. This became extremely popular starting in 1990. “Investment banks were buying mortgages from mortgage issuers,

As time went on, there were less and less new mortgages to securitize so the structured products groups at banks started repacking MBS's (i.e. taking the unsellable tranches of lots of MBS's, repackaging them and then selling the new product - called collateralized debt obligations or CDOs).” (wall street journal) The pooling of the various mortgages were thought to be safe and would reduce risk but the mortgages that were securitized were subprime, meaning that they were of poor quality. The rating agencies that tell people investing were or not securities are safe to invest in, based off the degree of exposure, didn’t comprehend the risk of these assets nor did they accurately assess them to give them a grade/ tranche. The tranches that the securities were placed in went from AAA through B. Now, those rated AAA were expensive to invest in and paid a low interest rate. While, those that were rated poorly, junk bonds, were inexpensive and paid a high interest rate, however there is a lot of risk involved. So while the world went on a shopping spree and borrowed tons of money to fund their investments, the banks made an enormous amount of income from buying

Bear Stearns went bankrupt and the government had to step in. The U.S. government paid up to $30 billion to pay off most of the toxic assets held by Bear, when JP Morgan bought out Bear. This down spiral continued as these banks were interconnected with toxic assets on the books. Lehman Brothers ended up closing its doors after not receiving the same bailout as Bear. They tried desperately but they were unsuccessful and the U.S. government decided not to bail them out. Amidst this collapse of Lehman, the government realized that by allowing Lehman to go under, other banks were soon to follow suit as well.Merrill Lynch was sold the Bank of America as well as Countrywide financial in order to minimize the impact and prevent further damage.The Government bailed out AIG which had 40 billion in toxic assets which would cause a larger meltdown if not bailed not. After the bailouts and fails of investment bank the Dow Jones Industrial Average fell 30 percent over the next few weeks. “Many other financial firms were now facing imminent bankruptcy including Morgan Stanley, Goldman Sachs, Citigroup, Wachovia and more. Many different combinations of deals and mergers were suggested, but the crisis advanced.” (Wall street journal)
Through 2008 the government was searching for ways to restabilize the financial market. The plan enacted became TARP, troubled asset relief program. TARP allowed