Question

In: Accounting

Why does your team belive the financial Crisi of 2008 took place? Do you belive it...

Why does your team belive the financial Crisi of 2008 took place? Do you belive it could happen again or are all of the REGULATORY safeguards in place preventing any future debacles from ocurring? Is Wall Street merely a BUBBLE pop away from our next financial disaster?

Solutions

Expert Solution

Why the financial crisis in 2008 happened, following were some of the prime reasons

  • 100% or even more percentage of mortgage loans given out by banks to customers, so that they can issue securitized instruments (derivatives) based on mortgage loans issued to the customers - even if they are subprime
  • Investors invested their money in this collateral based instruments assuming that they are risk-free as the housing market was one of the safest markets. "Too big to fail"
  • This all led to banks issuing mortgage loans without any credit checks or considering the repayment capability of the borrower - which led to increased demand for houses and which led to more demand for loans.
  • Also, all the derivate securities were the pool of mortgage loans of various credit categories at the top having AAA and AA however beneath them all the subprime loans were filled up.

Could it happen again

Such a financial crisis happens when investors feel that they can't lose their money and it will always be earning more. Nothing in the investing world is not too big to fail and as an investor should always check what's beneath.

Regulatory safeguards are in place - the statement is true. But as humans, we find solutions to the future problems with solutions of the past. Recently, we were close another bubble burst with cryptocurrencies especially bitcoins. Therefore, it would not be wrong if we consider the likely hood of happening anything bad again.

Wall Street a bubble pop away

It might not be right to say that but considering the quantum of investors coming in and we are on the continuous bull upward slope since 2008. Therefore, the likely hoods of anything like that happening are continuously increasing.


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