2008 Financial Crisis

In the 2008 financial crisis people speculated heavily in the housing market, which eventually crashed due to banks giving out sub-prime mortgages while credit rating agencies still gave them "AAA" ratings.

Videos

Short: https://www.youtube.com/watch?v=eD9ry2Lgglw Longer: https://www.youtube.com/watch?v=GPOv72Awo68&t=479s

  1. Interest rates were low and investors were looking for something with better returns
  2. House prices had been rising steadily for many years, so mortgages were safe as if the borrower defaulted, you could still sell the house for a good price and not lose out.
  3. Mortgages were bundled up into securities and sold to investment banks
  4. The investment banks then sold shares in the securities to customers.
  5. The Securities were rated by a credit rating agency - gave investors confidence
  6. Insurance was available against the mortgages going bust (credit default swap) - further decreasing the perceived risk
  7. As far as investors could tell, it was low risk and high reward.
  8. However, due to the sharp increase in demand for mortgages, banks started giving out sub-prime mortgages
    • Sub-prime mortgages were mortgages that the borrower could not afford, and included sharp increases in interest rates every year. Banks knew that borrowers would default.
    • Banks did not care that they were sub-prime because they sold them on and were not responsible for them.
  9. Credit rating agencies continued to give them AAA ratings because they were paid for by the banks.
  10. Investment banks didn't care about the quality of the mortgages because they sold them to investors, and they didn't bear the risk.
  11. Borrowers began to default on their loans.
  12. The influx of houses on the housing market caused the bubble to burst, causing the house price to drop
  13. More people defaulted as they realised there was no reason to continue paying when they were paying more than the price of the house for the mortgage.
  14. The mortgage insurance companies did not have enough reserves, so went bust.
  15. The government had to bail out banks because otherwise consumers would lose their houses and savings - too big to fail