Question

Pick five main reasons that caused the financial collapse of 2008 supporting it with the evidence described in the documentary and outside sources. Please ensure to provide the analysis using both domestic and international examples, as described in the documentary.

https://www.youtube.com/watch?v=VQzEWeGJLP0

Answer 1

1) Key trigger was easy lending by banks in housing segment in an era of lowest interest rates. In California, banks decided virtually anyone could take a bank loan. Fraudulent practices were also discovered to pump up the mortgage markets. Complex mortgage deals, sub-prime lending schemes were introduced. Federal Reserve did not come up with any regulations to contain the whole sub-prime market that was building up. One such mortgage company was Countrywide Financial whose Chairman and CEO Angelo Mozila was later accused of fraud and insider trading. Companies like Countrywide Fianncial were not bothered whether loans were repaid as they never appeared in its books, as they were restructured / packaged into complex financial products across the country to Wall Street with no government system to regulate it. And injected into financial system all over the world, including London. Britain was introducing 'light touch' environment so as to give banks freehand in market space, in an attempt to compete with New York. The world was infected with the toxic products based on the sub-prime mortgages.

2) First casualty was that of investment bank Bear Sterns. Its products on sub prime mortgages started giving trouble. It was bailed out though by the US Government, making people feel that no big bank would go bust.

3) Debt ridden Lehmann Brothers going bankrupt. The entire financial system collapsed. Banks stopped lending to each other. There were repercussions around the world - millions of people lost their life's savings.

Failure on part of US government to prevent the fall of Lehmann Brothers - the rationale given was that taxpayers' money could not have been used to save private firm, though analysts feel it was like saying that the house was on fire, and fireman says I am not going to save you as you have caused it, without realising houses in the neighborhood would also collpase.

4) Near collapse of worlds biggest insurance company AIG, due to dealings of one Joseph Cassano, Head of Financial Products division of AIG. He had moved to London, for the sort of trades he dealt in were banned in the US. He insured companies against the failures of their business partners, assuring investors that never will all companies fail at the same time so it was fine. When banks started collapsing, AIG's bills pushed the company towards bankruptcy.

AIG's condition came as a complete shock to Henry Paulson, US Secretary of Treasury and the US Government, which did not seem to have any control over the whole situation in the US. 85 billion dollars of taxpayers' money was eventually used to save AIG - a step that was considered necessary since AIG was very deep into the financial system.

5) Henry Paulson used taxpayer's money for making Government's investments into other major banks - Goldman Sachs, JP Morgan, Merill Lynch - hoping to contain the meltdown. The meltdown happened anyway, and the move was heavily criticised.

Regional banks in Europe started collapsing. Iceland as a country went bankrupt. London was deeply impacted. Chinese industrialists had no money (customers could not pay for the exports Chinese had already made) and could not file for bankruptcy under the Chinese law, so they closed down and disappeared, resulting in millions of Chinese workers on the streets.

In the two months following the meltdown, there were estimated 1 million home foreclosures in the US, especially in California, believd to be the richest state of US. Tent homes began springing up, as people became homeless and lost all their investments and savings, driving middle class families into poverty.

Goldman Sachs' executives made dealings, came up with products for investors that ended up collapsing the market and driving it to huge losses during the collapse. And to top it, they were bailed out by the US Government.

In Spain, Francisco Hernando, a real estate businessmen was building a mini city of condominiums which started 2004. It was discovered later that the project was approved in record time without proper facilities like water etc. , which was through bribes. During meltdown, sales completely halted.

Dubai's real estate was majorly impacted too, though leadership denied it. But incomplete construction sites, non / part payment of dues to Japanese companies who built the public transit system, speak for itself.