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Previous to the global financial crisis formally hit the US, a subprime mortgage crisis was already toppling the foundations of the wider housing market.   The US was brought to the threshold because of reckless borrowing from consumers coupled by Wallstreet’s excessive leveraging of these borrowings.  Each person was shocked when the news broke out and the degree on how Wallstreet really messed up was the focus of everyone’s attention. 

Global investment bank Bear Stearns was the first to fall where it was eventually sold to JPMorgan Chase in March 2008.  During that time, the White House has maintained that there is still a strong foundation in the US economy and nothing has changed it.  Also that time, the White House was confining the issue to just the subprime mortgage sector. 

Freddie Mac and Fannie Mae are two mortgage giants which next fell in August 2008.  The federal government was forced to bail these companies out using taxpayer money amounting to $5 trillion.  The collapse of Wallstreet came about soonafter.  As a consequence, the five pure investment banks in Wallstreet which include Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs, and Morgan Stanley, either dissolved or reduced to depository banks. 

The next major financial entity said to fall next is the largest insurer in the world, AIG.  There was too much riding on AIG to be allowed to undergo the same outcome as the other institutions.  If not, the consequences would result to another great depression.  It was considered a huge risk to let AIG fall seeing as it has a lot of link to numerous institutions where money is pretty much wrapped around it.  Taxpayers were forced to pay $85 billion to bailout the insurance giant.

The collapse of these institutions and the fall of the stock market were events reminiscent to the pre-great depression of the late 1920s and plenty of individuals thought that another great depression is on the horizon.  As the 2008 financial crisis was still building its momentum, the housing bubble was fueled by easy money that also happened in the 1920s.  From the time when the US government lowered the mortgage rate to 1 percent, people of every status could practically own a house.  Loans including mortgages were granted to almost everyone without doing some background checks.  Loan applicants have a tendency to lie about the exact amount of money they make and they only need to show a credit rating and they are approved of the loan.  Even people who don’t have jobs were granted loans simply because this crucial information are neglected to be verified by lenders.

Even though risky, a lot of lenders don’t mind giving way these loans because of a financing tool identified as mortgage-backed securities.  They resold their loans in bulk to banks in Wallstreet and banks in Wallstreet bundle these loans into higher yielding mortgage-backed securities and sold to investors around the world.  Investors who have procured these loans are known as “pooled risks” and because of this point of view it was thought that it will always be protected. 

As we all know now, these were all a big mistake that dragged each and every individual from every corner of the world into financial struggle.  The meltdown lead to companies getting bankrupt and closing which lead to job cuts, which lead to foreclosures which lead to debt.  Now that the economies around the globe are gradually recovering from the aftermath, this should serve as an important lesson to all of us to not make the same mistakes once more.

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