Question

Please detail the Great Financial Crisis of 2008. Including what lead up to it, the primary cause. Banks involved, and what this Crisis meant for risk in the financial markets before and after.

Answer 1

In late1990s and early 2000s frims in financial sector came up with complex derivative products and secruritization. Real Estate was considered a safe collateral and banks were quite liberal in lending with real estate property as collateral. Banks also came up with a new model called originate to distribute. In this model, banks give loan to customers and then sell these loans to other financial institutions. Different types of loans and other products were combined to form securitized products. Once banks sell the loans they bear no risk of default. Since banks don't bear risk, they started becoming less careful in assessing repayment capabilities and value of collateralals. This led to many loans being approved with sub prime mortgages. This created a real estate price bubble and once the bubble burst, it created the 2008 economic crisis.

After the crisis regulations became more stringent in the financial market. Rules and regulations regarding dervicate trading became strict. Also, restrictions on banks ability to take risky positions with depositor's money were imposed.