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Dinakar

Nobody • 1y

The 2008 financial crisis - During the late 1990s, America was getting a huge inflow of foreign funds from Russia and many Asian countries. American banks naturally didn't want the money just lying around earning no interest, so they made it easier to get mortgages as a way to lend out this cash. These less than ideal loans were called sub-prime mortgages. Banks bundled thousands of these mortgages into a single bond known as a CDO and sold these bonds to other parties like pension funds, insurance companies and other banks to make more money. These CDOs were too risky to buy unless they were insured. This is where AIG comes in, they created an insurance to cover the costs of the bearer if the CDO failed. They were selling insurance on CDOs that had a very poor credit rating, effectively swapping it with the rating of AIG itself, this insurance policy was known as credit default swaps. Fast forward to 2007, all those sub-prime mortgages increased their adjustable rates.

8 Replies

Replies (8)

Anonymous 4

Hey I am on Medial • 1y

Great summary 🙌🏽

1 Reply

Arcane

Hey, I'm on Medial • 1y

Great post brother!

1 Reply

Anonymous 3

Hey I am on Medial • 1y

The crisis exactly exposed how excessive leverage, opaque securities, lack of regulation, and misaligned incentives in the financial innovation system can severely destroy the entire economy when a panic hits.

Anonymous 2
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Wipro • 1y

The movie was really great. 👍🏽

Dinakar

Nobody • 1y

And the housing market fell. The people who should not have gotten the loan in the first place were not able to repay the loan as the amount was increased. But at the end of the day these CDOs were insured right? Yes, but AIG became too greedy and they did not have enough funds to cover the costs of the bearers. AIG was deemed too big to fail as it was one of the biggest insurance companies and almost every other big banks and insurance companies had their policies, so if they failed, the global economy would have been doomed. So the government bailed them out by giving a massive cash loan to pay out these credit default swaps.

Anonymous 1

Hey I am on Medial • 1y

The entry of institutions like AIG providing affordable credit default swap protection on CDOs created a massive moral hazard, encouraging further risk-taking.

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