In the years ahead of the global economic crisis, the foundations of the wider housing market is slowly being toppled by the subprime mortgage crisis. The US was brought to the brink due to reckless borrowing from consumers coupled by Wallstreet’s excessive leveraging of these borrowings. Everybody was caught by surprise when the news broke out and the magnitude on how Wallstreet really messed up was the focus of everyone’s attention.
The first domino to topple was global investment bank Bear Stearns where it was ultimately sold to JPMorgan Chase in March 2008. Then President Bush and his Treasury Secretary, Henry Paulson, remained firm in the belief that people need not worry because the country’s economy stands firm. Also that time, the White House was confining the subject to just the subprime mortgage sector.
Freddie Mac and Fannie Mae are two mortgage giants which next fell in August 2008. The federal government was forced to bail these companies out using taxpayer money amounting to $5 trillion. Not too long, in just a matter of days, Wallstreet collapsed. In turn, Wallstreet’s five investment banks which include Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs, and Morgan Stanley, either dissolved or reduced to depository banks.
AIG,the world’s largest insurer, is said to fall next. AIG was too valuable and letting it fall was unimaginable. If not, the consequences might result to a new great depression. Letting AIG fall was a massive risk seeing as it has a lot of connection to numerous institutions where money is pretty much wrapped around it. Therefore, it was given by the Federal Government an $85 billion bailout in taxpayer money.
These ill-fated incidents that different financial institutions went through together with the stock market’s collapse were events mirroring that of what happened prior to the 1920s great depression and lots of individuals thought that another great depression is on the horizon. Before the financial crisis in 2008, Like a well-oiled machine, the housing sector skyrocketed because of easily acquired money that also occured in the 1920s. Almost everyone can own a home ever since the Feds have lowered the mortgage rate to 1%. Loans including mortgages were granted to almost everybody without checking the applicant’s credentials. Lots of loan applicants lie about how much money they make and they only need to submit a credit rating and they are approved of the loan. Even people who don’t have jobs were granted loans simply because this crucial information are neglected to be verified by lenders.
Although risky, plenty of lenders don’t mind granting these loans because of a financing tool known as mortgage-backed securities. These loans were bulked and resold to banks in Wallstreet and Wallstreet banks bundle these loans into higher yielding mortgage-backed securities and sold to investors around the globe. Due to the “pooled risks” connecting many investors from other countries, these loans are believed to be safeguarded and because of this point of view it was believed that it will always be protected.
As we all know now, these were all a big mistake that dragged each and every individual from every corner of the world into financial difficulty. The meltdown lead to companies getting bankrupt and closing which lead to job losses, which lead to foreclosures which lead to debt. Now that the economies around the globe are gradually recovering from the aftermath, this should serve as an important lesson to all of us to not make the same mistakes again.
