The 2008 stock market crash was one of the most harsh recession the world faced, but have you ever wondered what caused the crash? The crisis gave a global economic shock, resulting in several bank failures. Economies worldwide slowed during this period since credit tightened and international trade declined. Housing markets suffered and unemployment soared, resulting in evictions and foreclosures. Several businesses failed but what caused this?
It all started in 1987 when the first CDOs were issued, Collateralised Debt Obligation is a complex finance products just like mutual funds and bonds. When a bank lends you loan you payback the amount to the bank over a period of time, here in this case you pay the amount back to the lender(the bank), but this happens over a long period of time so sold these loans to investment banks and made a little profit in a short time instead of waiting for you to pay back the loan. These investment banks took 100s of loans and made a security bond known as CDO and then sold it to their clients so when you take the loan you actually pay to these rich people who own your loan.
When the sale of the CDOs increased the investment banks bribed the companies who rated them and most if not all were given AAA (that is every stock is rated depending on the risk and AAA is the safest).
So in 1997 insurance companies like AIG and many others started to give out CDSs which were like insurance on these CDOs so any person in the world was able could bet against a CDO. The problem started when investment banks knew these CDOs would fail but still sold them and brought more CDS against the same thing they sold let’s make it easy here imagine if you make a product and you know that product would fail but still you sell it to the customers for profit and then take insurance against the product you have made. Yes, you read that right. These investment banks cheated people and there was no law stating they couldn’t do it because there were no regulatory reforms taken out for these CDOs and CDSs because most of these senior bankers were economic leaders of the world and they were the ones who made regulatory reforms. Between 2000 and 2007 the financial services industry grew rapidly with salaries and bonuses amounting to millions, senior bankers in these firms made a lot of money. Let’s take a look at the video below.
As you guys saw many bankers like him were prosecuted by the us government after the market crash and many companies settled their lawsuits by paying undisclosed amount of Money. So if you are wondering why we are writing about 2008 crash now this all comes down to one thing should we trust these financial services and invest our hard earned money. There are speculations that a financial product known as Bespoke tranche opportunity (BTO), just like the CDO and is being sold by these investment banks now though the industry is not worth (present $70 billion) what it was worth back then($200 billion) the industry is slowly making a come back. So we believe that when you invest in the market do not get driven away by these huge return on investment percentages, nobody in the world would give you money without risk.
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