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

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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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The five institutions reported over $4.1 trillion in debt in 2007. Lehman Brothers was liquidated; Bear Stearns and Merrill Lynch were sold at fire-sale prices whilst Goldman Sachs and Morgan Stanley, the only two banks which “survived” became commercial banks and subjected themselves to more stringent regulation. Wallison & Calomiris (2008) reported that Fannie Mae and Freddie Mac owned or guaranteed nearly $5 trillion in mortgage obligations at the time they were placed into conservatorship in September 2008. These seven institutions or companies had $9 trillion in debt or guarantee obligations in total, were exposed to extremely large risks at the time, and yet they were not subjected to the same regulation as depository banks.

Uchitelle (1996) has cited speculative borrowing in residential real estate to be another contributing factor to subprime mortgage crisis. Christie (2007) has reported that speculators left the market in 2006 caused investment sales to fall much faster than the primary market. Regulations for buying homes were ridiculous, almost non-existent. Lenders offered increasingly risky loan options and borrowing incentives in hope to get as much as profit during the property bubble. MacDonald (2004) reported that the median down payment for first-time home buyers was 2%, with 43% of those buyers making no down payment whatsoever, which is a very good example of a ver bad loan. In comparison, Reuters (2007) reported that
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