At some point we are going to have a conversation about the 2008 Financial Crisis with our kids.
The embedded video may help set the scene for why our government continues to throw hundreds of billions of dollars at a multi-trillion dollar problem which was caused by over-leveraged investment models, deregulation of banking and insurance practices and non-existent mortgage borrowing guidelines.
Quick Outline:
The Financial Services Modernization Act of 1999 repealed certain aspects of a 100 year-old law which was established to prevent another Great Depression.
By enabling the co-mingling of Depository Banking and Investment Banking institutions, an overwhelming amount of free money became available to financial institutions who were able to package up mortgages (Collateralized Debt Obligations), insure for AAA investment grade ratings (Credit Default Swaps), and sell to institutional investors (Pension Fund Managers, Municipalities, Low-Risk Mutual Funds).
This entire 10 year investment / mortgage backed securities cycle was leveraged on one very important factor – property values increasing.
As long as property values continued to increase, banks thought that homeowners would keep making mortgage payments.
If people did not make their mortgage payments, then banks were able to foreclose, sell the home, and make a profit.
However, the bubble popped, equity disappeared and banks were sitting on worthless collateral.
Related Articles
- Credit Crisis Explained
- Financial Services Modernization Act Explained
- Mortgage Backed Securities Explained
- Credit Default Swaps Explained
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