The Causes and Consequences of the Financial Crisis of 2008

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English Dossier Miléna Gandroz 2A Cycle ICM What are the causes and the consequences of the global financial crisis of 2008? SOMMAIRE INTRODUCTION 3 WHY IT HAPPENED? 4 1. Deregulation policy 4 2. Securitization of mortgages 4 HOW IT HAPPENED? 6 1. The subprime crisis 6 2. The financial crisis 6 WHAT ARE THE CONSEQUENCES? 7 1. In the financial sector 7 2. In the United States 8 3. Abroad 8 WHAT IS HAPPENING NOW? 8 1. Some things are changing 8 2. But others remain the same 8 CONCLUSION 9 INTRODUCTION This dossier is about a story, the story of how and why the financial industry collapsed in 2007/2008. It is not about bad bankers which have created a global crisis affecting…show more content…
Indeed, these products were regarded as safe because they mixed different credits and the risk for all these credits to default was really low. That is why the rating agencies (Standard & Poor’s, Moody’s, Fitch for the most known) rated these products AAA which is the best rate possible. They were then created in huge quantities because all investment funds could buy them (including pension funds). The big investment banks issued a lot of CDOs and kept a part of them for their own account, which allowed them to borrow always more money. The CDOs are very profitable with a high interest rate because they include subprime mortgages. As the Fed funds rate was really low at this time, banks saw in the CDOs a way to make more money with a low risk and they granted more and more subprime mortgages. Moreover, there is a law from 1977 (The Community Reinvestment Act) which allows banks to securing their deposits by the government if they agree to lend money to people on a low income (subprime mortgages). All of this explains the creation of a housing bubble which has been feed by the credits bubble. The housing prices doubled between 1996 and 2006 while the subprime market increase from 30 billion a year of $ to 600 billion of $ a year. The banks became more and more profitable and benefited fully from the leverage effect, which allowed them to borrow incredibly large amounts of money assuming that the market would always continue to rise. In 2004, the
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