Global Financial Crisis of 2008

 

The Global Financial Crisis of 2008

By Qaqamba Matundu

The Global Financial crisis of 2008 was a critical economic crisis that affected the world. “It was primarily caused by deregulation in the financial industry that permitted banks to engage in hedge fund trading with derivates. Banks then demanded more mortgages to support the profitable sale of these derivatives. They created interest-only loans that became affordable to subprime borrowers” says Amadeo

Paulson reported that “The company’s credit default swaps are generally cited as playing a major role in the collapse, losing American Insurance Group (AIG) $30 billion but they were not the only culprit. Securities lending a less-discussed facet of the business, lost AIG $21 billion and bears a large part of the blame, the authors concluded. AIG was accruing unpaid debts -collateral it owed its credit default swap partners but did not have to hand over due to the agreement collateral provision. But when AIG’s credit rating was lowered, those collateral provisions kicked in and AIG suddenly owed its counterparties a great deal of money.

On 15^th of September 2008, the day all three major agencies downgraded AIG to a credit rating below AA-, calls for collateral on its credit default swaps rose to $32 billion and its shortfall hit $12.41 billion a huge change from $8.6 billion in collateral calls and $4.5 billion shortfall just three days earlier while this debt kicked in automatically because of the provision in AIG’s agreements, rather than the wilful terminations of its securities lending agreement.”

“The fraudulent mortgage derivatives JP Morgan and other wall street banks sold to investors helped trigger the 2008 Financial Crisis when the fraudulent loans went bust and no one had enough capital to cover the losses despite AIG providing insurance in the form of credit default swaps on the mortgage derivatives. AIG as we all know now, was incredibly reckless and was unable to cover the derivatives it had insured. Ultimately Too Big to Fail banks received billions from the taxpayers with TARP and over a trillion dollar from the Federal Reserve in the form of secret loans. No bankruptcies for the banks but plenty of painful foreclosures for homeowners who did nothing wrong. Now JP Morgan inc. is saying sorry the only way a corporation can pay out lots of money.” says Peacefull

According to Stow, Lehman, which was based in New York but had a large office in London, went bankrupt after investing in dodgy financial instruments. The bank had become heavily involved in the mortgage market and owed mortgage seller BNC Mortgage. By 2008, the bank held 30 times more in real estate than it had capital and had been borrowing too much money to fund its mortgage investments. However, the market turned, and Lehman had held on to or could not sell so many low-rated mortgages. Investor confidence in the firm declined, leading to its crash in September 2008. Its collapse sparked global panic with firms such as RBS and Lloyds having to be nationalised. The subsequent recession was the worst since between WW2, leading to the loss of millions of British jobs and a spike in the level of government dept. In the US, the firms collapse turned a US Subprime mortgage crash into a global economic downturn which lasted until late 2009. Its collapse caused mass panic among policymakers around the world.

“Bear Stearns was a global investment bank located in New York City that collapsed during the 2008 financial crisis. The bank was heavily exposed to mortgage-backed securities that turned into toxic assets when the underlying loans began to default. The collapse of Bear Stearns precipitated a wider collapse in the investment banking industry, which also took down major players like Lehman Brothers. Bear Stearns operated a wide range of financial services. Inside this mix were hedge funds that used enhanced leverage to profit from collateralized Dept Obligations (Dos) and other securities dept markets. The hedge funds posted massive losses that required them to be bailed out internally, costing the company several billion upfront and then additional billion-dollar losses in write downs throughout the year. This was bad news for Bear Stearns, but the company had a market cap of $20 billion, so the losses were considered unfortunate but manageable. This turmoil saw the first quarter loss in 80 years for Bear Stearns. Quickly the rating firms piled on and continued to downgrade Bear Steans mortgage-backed securities and other holdings. This left the firm with illiquid assets in a down market. The company ran out of funds and in March 2008, went to the Federal Reserve for credit guarantee through the Term Securities Lending Facility. Another downgrade hit the firm and bank run started by March 13, Bear Steans was broken. Its stock plummeted.” says Chen

The Irish Times reported that “On August 9^th, 2007, BNP Paribas froze funds that were exposed to US subprime mortgages, signalling the start of credit crunch that threatened the global banking system and subsequently caused the €64 billion bailouts of the Irish banking sector. Once BNP Paribas froze its funds, it sent a trigger around the world, culmination in the collapse of Lehman in September 2008. Through there had been warning signs previously that all was not well in the global financial system, this announced by the French giant confirmed the scale of the problem and short-term lending between banks ground to a halt, Cue central bank bailouts, massive write downs of assets bank failures and panic-stricken stock market. When the US subprime crisis reached Europe in full swing, the French bank BNP Paribas was forced to halt withdrawals from three investment funds”

According to the above-mentioned companies’ exposure affected African economy because Africa’s relatively liquid financial markets (e.g Egypt and Nigeria) the contagious effects were amplified by pre-crisis stock over-valuation and limited diversification of stick. The Financial crisis amplified the increase in the margin applied to loans in the international financial market applied loans especially for emerging and African countries from October 2008 sovereign debt spread have increased.