How The Financial Crisis Came About

March 9th, 2010 | Posted in Loan Consolidation

In the pre-financial crisis of 2008, a lot of individuals were already feeling the strain brought by the the subprime mortgage crisis. Reckless borrowing by consumers along with unnecessary leveraging of Wallstreet brought the US to the brink. Some experts and analysts have made predictions of the crisis and the extent on how Wallstreet really messed up was the focus of everyone’s attention.

The first domino to topple was global investment bank Bear Stearns and in March 2008, it was ultimately absorbed by JPMorgan Chase. Henry Paulson, who was the treasury secretary at the time declared to the public that there is still a strong foundation in the US economy and nothing has changed it. Also that time, the White House was confining the issue to just the subprime mortgage sector.

Freddie Mac and Fannie Mae are two mortgage giants which next fell in August 2008. The Government decided to bail them out by spending trillion in taxpayer money. The collapse of Wallstreet came about soonafter. In turn, Wallstreet’s five investment banks which include Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs, and Morgan Stanley, either dissolved or reduced to depository banks.

The world’s largest insurer, AIG, was understood to be the next key financial body to fall. AIG was too valuable and letting it fall was unthinkable. Otherwise the consequences would result to another great depression. The government considered it necessary to bailout AIG because it has a lot of tie to many institutions where money is pretty much wrapped around it. Taxpayers were forced to pay billion to bailout the insurance giant.

These ill-fated events that different financial institutions went through together with the stock market’s collapse were events that are similar before the great depression of the ’20s and a lot of people thought that another great depression is on the horizon. Before the financial crisis in 2008, Like a well-oiled machine, the housing sector soared because of easily obtained money that also happened in the 1920s. The federal government had made it possible for almost everyone to own their own home by giving a 1% rate on mortgage. Loans including mortgages were granted to almost everybody without checking the applicant’s background. Lots of loan applicants lie about how much money they make and only a credit rating will be asked. Even individuals who don’t have jobs were granted loans simply because this crucial information are not verified by lenders.

Lenders are keen and confident to grant “risky” loans because of a financing tool acknowledged as mortgage-backed securities. These loans were bulked and resold to banks in Wallstreet and banks in Wallstreet bundle these loans into higher yielding mortgage-backed securities and sold to investors around the world. Due to the “pooled risks” involving many investors from other nations, these loans are believed to be protected and because of this point of view it was assumed that it will always be safe.

Since a lot of people were affected, these were all a big mistake that dragged each and every individual from every corner of the world into financial struggle. Job-losses, foreclosures, bankruptcies, debts, etc. are all the outcome of this human error. Now that the economies around the planet are slowly recovering from the aftermath, this should serve as an important lesson to all of us to not make the same mistakes for a second time.

Steve Smith writes for All About Loans where visitors can apply for personal loans and also focuses on cheap loans , in the UK and fast secured loans for UK Homeowners.

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