In the pre-financial crisis of 2008, a lot of individuals were already feeling the strain brought by the the subprime mortgage crisis. Reckless borrowing by consumers along with unnecessary leveraging of Wallstreet brought the US to the brink. Some experts and analysts have made predictions of the crisis and the extent on how Wallstreet really messed up was the focus of everyone’s attention.
The first to fall was global investment bank Bear Stearns where JPMorgan Chase saved it by absorbing it in March 2008. Henry Paulson, who was the treasury secretary at the time announced to the public that citizens don’t have to worry because the country’s economy stands firm. The government also informed the public that the problem is contained only within the subprime mortgage sector.
By August 2008, the next mortgage companies to fall are Freddie Mac and Fannie Mae. The Government decided to bail them out by shelling out trillion in taxpayer money. The collapse of Wallstreet happened soonafter. As a result, Wallstreet’s five investment banks which consist of Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs, and Morgan Stanley, were either reduced to being depository banks or collapsing altogether.
The world’s largest insurer, AIG, was understood to be the next key financial body to fall. AIG was too valuable and letting it fall was unthinkable. Otherwise the consequences would result to another great depression. The government considered it necessary to bailout AIG because it has a lot of tie to many institutions where money is pretty much wrapped around it. Taxpayers were forced to pay billion to bailout the insurance giant.
The collapse of these institutions and the fall of the stock market were events reminiscent to the pre-great depression of the late 1920s and lots of individuals believed that another great depression is on the horizon. As the 2008 financial crisis was still building its momentum, Like a well-oiled machine, the housing sector skyrocketed because of easily acquired money that also happened in the 1920s. Almost everyone can own a home ever since the Feds have lowered the mortgage rate to 1%. Because of this, mortgages and other types of loans were easily granted by nearly all banks across the country without even doing some important checks on the applicant. The propensity to lie about how much money one makes was very widespread at the time and anyone who can present a credit rating passes. Jobless people were even able to obtain loans simply because lenders will not verify this critical information.
Lenders are keen and confident to grant “risky” loans because of a financing tool acknowledged as mortgage-backed securities. These loans were bulked and resold to banks in Wallstreet and banks in Wallstreet bundle these loans into higher yielding mortgage-backed securities and sold to investors around the world. Due to the “pooled risks” involving many investors from other nations, these loans are believed to be protected and because of this point of view it was assumed that it will always be safe.
Given that a lot of people were affected, these were all a big mistake that dragged each and every individual from every corner of the world into financial difficulty. Both lower, middle and upper classes suffered financially because of human greed and error. Now that the economies around the globe are slowly recuperating from the aftermath, this should serve as an important lesson to all of us to not make the same mistakes once more.
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