The 2008 financial crisis was, in the words of some, the worst financial deserter to hit the western world since the wall street crash in 1929. The housing market had gone out of control, exceeding its true value extensively. The reason for this extreme overvaluation can only be attributed to the actions of the banks and those creating the mortgage bonds and CDO’s which, whilst being given the ratings of triple A were in fact more like double B. This rating made people believe that these bonds were safe thus causing huge investments into them. Furthermore, alongside these bonds and CDO’s were synthetic CDO’s which were essentially bets on how the original bond would preform. For example, if there was a pool of loans with a value of $50 million there could be $1 billion betting on the performance of that bond. Therefore, when the underlying bond fails due to default rates being too high, it was not just the face value of the bond the was lost it was all the other money relying on it succeeding. The cause of this entire crash of the housing market and economy was greed. The concept of the mortgage bond was fantastic and initially very successful, however the issue that arose was the limited number of mortgages. Therefore in order to fulfil the demand for these bonds, banks stated giving mortgages to people who could in reality afford to pay them back, and then packaged them along with mortgages that were secure or even put just put only risky mortgages together but have the rating agency’s rate them as secure and safe bonds. Whilst this was happening however, those that created these bonds knew they would fail and they knew it would have a catastrophic effect, however they didn’t care as they would be bailed out and give themselves huge bonuses. 

Follow My Blog

Get new content delivered directly to your inbox.