Ten years of the US financial crisis: The days that roiled the world markets

The Economic Times
July 15, 2018
G. seethraman

The bankruptcy of investment bank Lehman Brothers on September 15, 2008, is considered the seminal moment in the global financial crisis. But an event two months earlier deserves mention. On July 13, government-sponsored mortgage finance companies Freddie Mac and Fannie May got a big boost from the US Federal Reserve, which said it would lend more to the entities, in a bid to calm the markets that were already roiling. Banks had already stopped lending to each other due to fears of potential losses on high-risk US mortgages. The July 13 move was the government’s attempt to prop up the two providers of liquidity to financial institutions. The entities then owned or guaranteed almost half of all US home loans, at the core of the crisis. A decade since the crisis spread to the rest of the world and crippled several economies, ET Magazine walks you through the key events, actors and sub-sectors of the financial industry that were responsible for the biggest economic meltdown since the Great Depression. 

Led by a booming housing market since the mid-1990s, mortgage lenders in the US started handing out home loans like free candies — almost every passing person got one. Lenders did not even mind “subprime” borrowers — those who do not earn enough to afford a home loan. These borrowers were charged a nominal rate initially. This drove up housing prices. Subprime loans were hardly a phenomenon before the turn of the century. 

The mortgage lenders wanted more money to lend to homebuyers, so they sold their existing loans to banks and to Freddie Mac and Fannie May, which in turn sold these to investment banks. 

The investment banks combined these loans with hundreds of others into what are known as collateralised debt obligations (CDOs) and sold these to investors worldwide as mortgage-backed securities. The returns depended on monthly payments on the loans. CDO issuance hit $634 billion in 2007. Creditrating agencies called these sound investments, when they were not. No surprise there, as the investment banks were their clients. 

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