In: Finance
The reasons for recession 2007-2008 were
1. Creation of housing bubble: Banks had provided large amount of
housing loans assuming that the house can be used as mortgage. At
that time prices of houses were artificially very high creating a
housing bubble. When the bubble burst prices of house nosedived
creating a crisis when customers of banks defaulted their payments.
This kickstarted the recession.
2. Loans to subprime borrower: Loans were provided even to less
credit worthy customers . This increased the chance of default and
loans given to such customers became toxic assets.
3. CDS (Credit Default Swap) : The credit risk of investment banks
were insured by third party. When default increased the bad debt of
investment banks could not be covered by insurance companies as the
default was so huge that insurance companies could not cover the
losses. Lehmann Brothers was the biggest casualty of CDS