Finance

2008-2009 Global Financial Crisis

2008-2009 Global Financial Crisis

The financial crisis of 2007-2008 is assumed to be the result of active waiting to erupt for years. The long-time racket of dirt-cheap credit showed its signs in the summer of 2007 around financial markets throughout the world. From Bear Stearns hedge funds to BNP Paribas and even the British bank Northern Rock were all up to their neck in debt and at the peak of defaulting.

Get complete CFA Online Course by experts Click Here

Despite numerous warning signs, many investors turned clear blin eye to the actual Wall street dilemma and thus resulting in the worst financial crisis in the eight decades, and even a single person on Wall Street was convinced that the Great Recession is on the move and is going to engulf the entire global financial system. This epic but devastating financial and economic collapse cost many ordinary people their jobs, their life savings, and even their homes. This article aims to provide an overview of the 2008-2009 Global Financial Crisis.

Causes of the Crisis and how it was unfolded?

The seeds of the financial crisis were planted when the Federal Reserve decided to lower the federal funds rate from 6.5% in May 2000 to 1% in June 2003 due to a series of events like the bursting of the dot-com bubble, a couple of corporate accounting scandals, and even the September 11 terrorist attacks. By making money available to businesses and consumers at bargain rates, they focused on boosting the economy. This resulted in an ascending spiral in home prices as most borrowers took advantage of the low mortgage rates. Many subprime borrowers, those with almost no credit history, thus began dreaming of buying a home as well.

Afterward, banks would sell those loans to the large-scale Wall Street banks, which would bundle them into low-risk financial instruments that were called Mortgage-Backed Securities and Collateralized Debt Obligations (CDOs). Very soon, a large market for originating and distributing subprime loans emerged.

In October 2004, the Securities and Exchange Commission (SEC) relaxed the net capital requirements for five investment banks Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns, and Morgan Stanley. Thus, freeing them to leverage their initial investments by up to 30 times or even 40 times.

By 2004, U.S. homeownership had peaked at 69.2%. Home prices started dropping in October 2006. Many Americans faced real hardship. Their homes were now worth much lesser than what they bought them for. The subprime borrowers thus got stuck with mortgages they couldn’t bear in the first place.

Impact of the Crisis on the economy:

As 2007 rolled up, one after the other subprime lenders started filing for bankruptcy. That April, New Century Financial, infamous for being specialized in sub-prime lending, filed for bankruptcy and sent off almost all of its staff. Bear Stearns stopped redemptions in two of its hedge funds in June further inducing Merrill Lynch to seize their assets from the funds.

The whole world knew by August of 2007 that the financial crisis could not be resolved and problems quickly began reverberating to countries all over.

The global Intermarket froze completely. In the following months, the Federal Reserve and other central banks tried to take an organized action to supply billions of dollars as debts to the global credit markets. Meanwhile, financial institutions struggled with survival. 

Aftermath:

The highest ever unemployment rate in The U.S was observed at 10% and 3.8 million Americans lost their houses due to forced closures. Wall Street then decided to approve a bailout package in the first week of October 2008. This package included huge government purchases of the so-called toxic assets, enormous investments in bank stock shares, and financial lifelines to Fannie Mae and Freddie Mac.

The public was furious across the U.S. Many believed that bankers were being rewarded for recklessly disrupting the whole economy. The passage of the bailout package stabilized the stock market that hit bottom in March 2009 and then started on to the longest bull market in its history. The economic damage and human suffering were massive and disheartening.

Get complete FRM Online Course by experts Click Here

Key Takeaways:

  1. The Great Recession cost many their jobs, their savings, or their homes. The slight vision to light was seen only in early 2009 after the infamous Wall Street bailout helped in keeping the banks operating and slowly restarted the economy once again.
  2. The 2007-2009 financial crisis began years earlier with the rise of the housing bubble through cheap credit and lending standards.
  3. The burst of the bubble was so impactful that institutions were left with trillions of dollars worth of worthless subprime mortgage investments.
  4. Thousand and Millions of American homeowners owed more on mortgages than their homes.

Author: Nishtha Bahal

About the Author: I’m an go-getter at life with the aim to collect small bits of knowledge from every part of the world.I see the world as a playground, full of swings and slides of different colors just waiting to be enjoyed upon. I believe that opportunities can be created rather than waited for, and I thus I dedicate every step of mine in the direction of constructing never-ending posssibilites for myself.

Related Posts:

Asian Financial Crisis: A brief overview

Lehman Brothers

Liar Loan

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *

seventeen − sixteen =