2008 Financial Crash and the US Government's Response

Overview

• The 2008 financial crash impacted the global economy.
• Multiple movies document the event from different perspectives:
  • The Big Short: Investor's perspective.
  • Margin Call: Investment banks’ perspective.
  • Too Big to Fail: Focuses on US government's efforts to prevent collapse of financial institutions.

Key Events Leading to the Crisis

• Banks issued numerous home loans, even to those who couldn't pay them back.
• Belief that the housing market was infallible led to reckless lending.
• Commercial banks sold these loans to investment banks.
• Investment banks created Mortgage-Backed Securities (MBS) from these loans and sold them to investors.
• Worldwide investment in MBS resulted in significant risks.
• AIG provided insurance in the form of Credit Default Swaps on these MBS.
• AIG could not cover the claims when MBS failed simultaneously.

Government and Institutional Reactions

• Bear Stearns: Rescued by the Federal Reserve via JP Morgan Chase.
• Lehman Brothers: Not bailed out to avoid moral hazard, signaling banks wouldn’t always be saved.
  • Lehman was the 4th largest investment bank in the US.
  • Its failure led to interbank lending market freeze and global financial instability.

Global Financial Impact

• Lehman’s failure led to a significant counterparty risk.
• Interbank lending froze, affecting the entire banking system and non-banking businesses.
• Non-banking businesses struggled to secure loans and financing, impacting operations and growth.

US Government's Response

• Troubled Asset Relief Program (TARP): Initially aimed to buy troubled assets but shifted to capital injections.
• Capital injections stabilized banks and unfroze lending.
• $700 billion allocated for purchasing troubled assets.
  • $125 billion initially injected into nine banks.
  • AIG received $85 billion to avoid collapse.
• The government had to bail out banks despite their role in causing the crisis.

Broader Implications

• The crisis was fueled by government and bank negligence.
• Public and some individuals were unaware but profited by shorting the housing market.

Recommendations

• For deeper understanding, watch videos on The Big Short and Margin Call to see different perspectives.
• Explore further how some individuals predicted and capitalized on the market crash.