What Led to the 2009 Financial Crash? In Laymen Terms

Dec 3, 2013 -

Financial Crisis Simply Explained  


Now most of us understand that the reason there was a global financial crisis in 2009 was largely due to mortgaged backed securities. There was a housing bubble and it popped. People couldn't pay back their loans. When housing prices dropped, the financial institutions couldn't get back their money even if they repossessed and tried to sell the homes. However, aside from that, the details may not be all that clear.

 
Old Financial Lending Structure


In the past decades, if we wanted to get a loan for a house, we would go to a local lender and take out a loan for a house. But of course because mortgages took decades to repay, the lenders were careful with who they decided to lend money to. They wanted to make sure that the borrower would be able to pay them back. In other words, they expected you to pay mortgage payments to them on a regular basis. Sounds reasonable doesn't it?

 
New Financial Lending Structure

In the new system, securitization was introduced. This ultimately meant that the lender was no longer at risk if the mortgage wasn't paid back. How does that work? 

Lenders began to sell the mortgages to investment banks. Then the investment banks would package them with other collateralized securities including car loans, student loans, and credit card debt and market them as CDOs (collateralized debt obligations). The investment banks would  pay credit agencies such as Moody's to rate these securities. Most of which were rated triple AAA (highest possible rating) despite the fact that the CDOs included sub-prime mortgages (riskiest loans). As a result retirement funds were now purchasing these highly rated funds because they were only allowed to buy high rated securities. Other investors also wanted a piece of this highly rated security. Now when home buyers pay their mortgages, the money actually goes to the investors versus the lender or investment bank. Only that most home buyers were given loans they didn't have the financial means to pay back.


Because of this new financial model, lenders stopped caring whether or not the borrower would be able to repay the loan. Lenders were making money off the sale of those loans to investment banks. As a result, lenders made riskier loans. The investment banks didn't care either because the more CDOs they sold the more money went to their bottom line. The rating agencies such as Standard & Poor's were also not held accountable if their ratings were wrong. After all they claimed that their ratings were mere opinions. While all of this was happening, Wall Street executives were doling out big fat bonuses for the "revenue" they were bringing in. But sooner or later, this was going to come crashing down and it did in 2009.

Has this been fixed? Well individuals in the documentary Inside Job, believe that it is a Wall Street run government. Meaning as long as there are individuals who had/have ties with Wall Street, they will act in their interests.
 
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