The 2008 financial crisis, also known as the subprime debt crisis, is one of the worst financial crises in history since 1930. It swept away $10,000 billion and caused more than 30 million people to lose their jobs. Many people believe that this crisis was engineered by the wolves of Wall Street.
Below I will try to explain as briefly as possible the origin of this bubble formation.
MBS - Mortgage-backed Security
First of all, we need to know about MBS (mortgage-backed security) products, which are securities backed by secured real estate loans. Simply put, customers' home loan contracts are packaged and resold to investors.
MBS not only helps commercial banks reduce risks but also helps free up credit room to continue lending (credit room is the lending limit of banks). As for investors who buy MBS, they will receive a cash flow to repay debt from those loans. In case the home buyer is unable to repay the debt, the investor can tighten the debt with mortgaged real estate.
At that time, the real estate market in the US was very vibrant and everyone believed that the real estate market could only go up and never collapse. In addition, even the US Government participates in the MBS segment through two companies, Fannie Mae and Freddie Mac, so investors consider this a safe investment.
CDS - Credit Default Swap
The next product that contributed to the crisis was CDS (credit default swap) created by insurance companies, used to insure the risk of loans.
This means that after signing this contract, if the borrower is unable to pay, the insurance company will pay the debt instead. But in return, the bank has to pay a fee based on the value and credit rating of the loan. CDS helps the credit rating of loans or MBS to be rated higher, thereby making it easier to sell.
๐ฎ GAME ON!
Thanks to the strength of the two products MBS and CDS combined with the loosening monetary policy of the 2002-2005 period, lending activities were extremely crazy. Initially, banks only lent to people who could repay their debts, but at a certain stage, qualified loans reached their limit, and they began to be more lenient in lending. Because the risk of the loan has been pushed away through MBS and CDS, why not lend?
A little more detail in this paragraph:
Commercial banks lend money to home buyers => Commercial banks take risks.
The loan is packaged into MBS and sold to Investment Banks (behind by institutional investors, whales, ...) => Investors take the risk.
But the loan is bought with CDS => Risk is transferred from the investor to the insurance company.
A little later, in the next paragraph, you will see that the risk is transferred from the insurance company to the investor again, it's very virtual ๐
Lending activities are so crazy that people with very low credit ratings and people who are unable to repay loans can borrow to buy houses, even several houses, this is called subprime mortgage, also known as is subprime debt.
But investors are not stupid enough to buy subprime debt, so the old wolves of Wall Street continued to create games with another product, CDO.
CDO - Collateralized Debt Obligation
CDO (collateralized debt obligation) is similar to MBS but it includes MBSย (both standard and subprime debt), ABSย (securities backed by other assets such as cars, stocks, etc.). ..)ย and add in other subprime loans as well. They packaged the whole thing above and gave it the name CDO - collateralized debt obligation.
The clever thing about product creators is that they combine high-rated loans with subprime loans, plus the loans are insured, so the whole CDO is always rated. higher than its risk. Another thing is that it seems that credit rating agencies are paid to evaluate CDOs so their risk level is ranked strangely skewed.
To attract investors, high-risk CDOs have extremely high profits compared to low-risk CDOs. They have successfully turned trash into gold to sell.
The imagination of the old wolves of Wall Street did not stop there, loans could be repackaged into CDOs and then reached their limit... they continued to package insurance contracts (CDS) into a CDO Newly named Synthetic CDO, these Synthetic CDOs are also credit rated and sold to investors.
As I mentioned above, the risk is now transferred to Investors through Synthetic CDO.
The story doesn't end, guys, they continue to inflate the balloon by continuing to package CDOs and Synthetic CDOs to create the 2nd floor Synthetic CDO, and in the end they even package the 2nd floor Synthetic CDO to create the 3rd floor wtf ๐.
It must be said that the old wolves of Wall Street are truly financial masters. In 2007, the CDS market value reached $62 trillion. To imagine how big it is, compare it with the world GDP in 2007 of $58.35 trillion.
When the balloon was inflated too much and whatever happened had to happen, in the period 2007-2008 the FED increased interest rates to 5.25% and maintained them continuously at that level, causing cash flow to shrink, subprime debts and even the standard began to default on its debt.
Note to avoid misunderstandings, the collapse does not only come from the Fed tightening cash flow, but mainly from those subprime debts, which will explode sooner or later. The Fed just does what it has to do.
The tipping point for the collapse was September 15, 2008, when Lehman Brothers - One of the largest investment banks in the US with a history of more than 150 years, declared bankruptcy.
The snowball has swept away $10,000 billion and caused more than 30 million people to lose their jobs. Immediately after that, the Fed had to intervene with the largest support program in history. Reduce interest rates to 0% and pump about $1,500 billion into the market along with many other policies.
Warren Buffett has said that the 2008 housing bubble was the biggest bubble he has ever seen in his life.
It will take a lot more paper and pen to tell the full story of the 2008 housing crisis and its sidelines. Above I have tried to summarize the main causes of this event to help you understand it quickly.
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