In the years ahead of the global economic crisis, a subprime mortgage crisis was already toppling the foundations of the wider housing market. Reckless borrowing by consumers along with excessive leveraging of Wallstreet brought the US to the threshold. Everybody was shocked when the news broke out and the degree on how Wallstreet really messed up was the focus of everybody'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.
These risky loans were granted by lenders with extreme confidence because of a financing tool known as mortgage-backed securities. They resold their loans in bulk to banks in Wallstreet and banks in Wallstreet bundle these loans into higher yielding mortgage-backed securities and sold to investors around the globe. Investors who have procured these loans are known as "pooled risks" and because of this aspect 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 difficulty. Job-losses, foreclosures, bankruptcies, debts, etc. are all the consequence of this human blunder. Now that the economies around the planet are slowly recovering 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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