2008 Financial Crisis - Lehman Brothers, Fannie Mae and Freddie Mac

3416 Words Oct 6th, 2012 14 Pages
Year 2008 to 2009 is an interesting and dramatic time for the financial markets, which marks the beginning of the financial tsunami that went on for a long period of time. First we have Freddie Mac and Fannie Mae taken over by the US Treasury, which is one major event contributing to the subprime mortgage crisis. Then we have the bankruptcy of Lehman Brothers which Mamudi (2008) reported to be one of the largest bankruptcy filing in US history with Lehman holding over $600 billion in assets. Then we have the collapse of investment bank Bear Stearns, the bailout of AIG and the near-bankruptcy of the country Iceland.

In 2007, many banks in US and Europe were hit by a collapse of the value of mortgage-backed securities. The investment
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Eventually, when the bubble burst, it has left the country with toxic debts.

Perhaps what we can learn from this painful lesson is that the financial system is actually very fragile. Policymakers like Fannie Mae and Freddie Mac did not recognize the role of investment banks and hedge funds, also known as the shadow banking system. Geithner (2008) explained that the shadow banking system was not subjected to the same regulations although they were providing credit to the US economy. These institutions did not have a sufficient financial measure to absorb the large defaults and MBS losses. The risks involved that follows after the series of dramatic events include decisions by central banks around the world to cut interest rates and governments introducing large economic stimulus packages.

In this event we can see that Americans and many other people around the world had been living above their means. Statistics in Zakaria (2008) report has shown that in 2008, a typical USA household owned 13 credit cards, with 40% of households carrying a balance. Barr (2009) reported that US home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5 trillion. Wolf (2009) reported that in 1981, US private debt was 123% of GDP and by third quarter of 2008, it was 290%. Labaton (2008) reported that from 2004 to 2007, the top

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