why and how the 2008 economic crisis happen?
In: Economics
Years ago, if a bank gave you a mortgage loan, they would hold the note and hopefully (usually) get paid back. Eventually other financial houses started buying them from the originating banks. It became very profitable for the banks to keep creating loans, and selling them.
They institutions that kept buy them had to accept that the originating bank had done due diligence, but the banks felt less and less need to do that. Somewhere along the way the outfits holding all these bags realized the risk had gotten unwieldy, so they started dicing all the loans into what they called “tranches” of verying risk, and selling them as “Mortgage Backed Securities”. Safer tranches would earn less, be be more likely to pay off (and be paid first, in case of a collapse). Riskier tranches offered a higher return. The riskier market was called “Sub Prime.”
This whole mess turned into a trillion dollar market. The whole concept of “collateralized debt” exploded.
Then, people who had gotten into balloon mortgage deals (nice rates to start, then eventually the payments would go up) started to see that their homes were not worth what they were becoming obligated to. Too many of these people simply walked away. This combined with the higher than you would want Subprime failures. They were largely blamed in the press, but they were never the main problem. The problem mortgages were the heavier balloon mortages, but they both yanked the bottom out of the whole collateralized debt mess.
When a couple large financial companies declared bankruptcy, the shit hit the fan.
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