The financial crisis of 2008 is said to be the worst financial crisis since the Great Depression of the 30s. It has made a lasting impact on the finance and banking world¹. The main causes of the 2007/8 financial crisis was the financial debt and mortgage-backed assets¹. During the late 1990s and early 2000s, mortgage-backed securities (MBSs) were frequently being issued for the purpose of securitization. Investment banks were purchasing mortgages, repackaging them, and selling the debt to investors. This resulted in the decrease of available mortgages to securitize, so product groups at banks began to take the unsellable trances of mortgage-backed securities, repackage them, and sell them as collateralized debt obligations¹.
The US and global banks then proceeded to spend and borrow large sums of money at low rates to fund investments. Many of the top investment banks were completely funded by short term borrowing. Billions of dollars worth of mortgages were given to people with low credit rating on adjustable rates. When house prices stopped rising and began to fall, people could no longer refinance and remortgage their homes for cash and started to default¹.
The default rates on mortgages spiked and the collateralized debt obligations and mortgage-backed assets were falling, making investors lose confidence in the top trances and banks, which hold large amounts of assets. In June 2007, one of the largest investment banks in the US announced that they lost two of its hedge funds, preventing clients from withdrawing money. The Financial Crisis caused the bankruptcy of many institutions and became a global economic crisis. Businesses plummeted and the macroeconomy entered a recession in December 2007.
1. Jones, Charles I. (May 22, 2009). Global Financial Crisis: Overview. Retrieved from http://www2.econ.iastate.edu/classes/econ502/tesfatsion/globalfinancialcrisisoverview.2009.cjones.pdf