Charlotte Sometimes Blogs

In the years previous to the global economic crisis, the foundations of the wider housing market is steadily being toppled by the subprime mortgage crisis.   The US was brought to the threshold because of reckless borrowing from consumers coupled by Wallstreet’s excessive leveraging of these borrowings.  Everybody was caught by surprise when the news broke out the focus of everyone’s thought was the scope of how Wallstreet messed everything up. 

Bear Stearns is a global investment bank that was the first to go down 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 there is still a strong foundation in the US economy and nothing has changed it.  The administration also informed the public that the problem is contained only inside the subprime mortgage sector. 

By August 2008, the next mortgage companies to fall are Freddie Mac and Fannie Mae.  The federal government was forced to bail these companies out with taxpayer money amounting to $5 trillion.  The collapse of Wallstreet happened not too long afterwards.  Because of this, 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 completely. 

The world’s largest insurer, AIG, was understood to be the next major financial body to go down.  AIG was considered to be an entity that should not be allowed to go down.  Otherwise the consequences would result to another great depression.  The government deemed it necessary to bailout AIG since it has a lot of connection to various institutions where money is pretty much wrapped around it.  Hence, it was given by the Federal Government an $85 billion bailout in taxpayer money.

These ill-fated incidents that several financial institutions went through together with the stock market’s collapse were events that are comparable before the great depression of the ‘20s and plenty of individuals believed that another great depression is on the horizon.  Before the financial crisis in 2008, the housing bubble was fueled by easy money that also occured in the 1920s.  The federal government had made it possible for nearly everyone to own their own home by giving a 1% rate on mortgage.  Nearly all banks approved all sorts of loan applications left and right without doing some background checks.  Plenty of loan applicants lie about how much money they make and they only need to present a credit rating and they are approved of the loan.  Loans were even granted to people who don’t have a source of income simply because lenders will not verify this critical information.

Even though risky, lots of lenders don’t mind giving way 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 world.  These newly converted loans then became “pooled risks” as many investors across the globe now have their share on them and because of this point of view it was thought that it will always be safe. 

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 struggle.  Job-losses, foreclosures, bankruptcies, debts, etc. are all the outcome of this human blunder.  Now that the economies around the world are slowly recuperating from the aftermath, this should serve as an important lesson to all of us to not make the same mistakes over again.