April 28

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2008 Financial Crisis


The largest financial meltdown since the Great Depression of 1929. Coined the Great Recession, large financial institutions became over leveraged taking risky bets on the security of mortgages. Mortgages are usually safe and great money makers for banks because Americans almost always pay their mortgage. When the economy began to slow, in 2007, many Americans lost their jobs leaving them unable to pay their mortgage. These usually safe investments suddenly left the highly leveraged financial institutions worse than broke. They were leveraged so much their balances sheets crumbled to zero.

If you care to know, here is some technical jargon explaining how a safe investment, became a highly leveraged on:

The banks had chopped up the original mortgages and resold them in tranches, making the derivatives impossible to price. Dull pension funds bought these risky assets because they thought an insurance product called credit default swaps protected them. Insurance company, American Insurance Group (AIG) sold these swaps, and when the derivatives lost value, they did not have enough cash flow to honor all the swaps.

Deemed to big to fail the government and JP Morgan Chase devised a plan to bail out the largest banks. The American taxpayers picked up the bill and saved Wall Street… as some would say… and I believe.

Stats:

  • $30 billion-dollar federal guarantee so JP Morgan Chase could purchase Bear Stearns.
  • $182 billion-dollar federal bailout of AIG.
  • $439.6 billion dollars spent by the treasury department, buying bank and car stocks.

See the diagram below showing how greed can take a very safe Mortgage Backed Security and turn it into and over leveraged piece of junk.