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Presentation
Outline

01 What
02 The
03 Who’s
Happened? Housing Bubble to Blame?

04 05 06
The Moving Bigger
Aftermath Forward Picture
 What
Happened? 01
Real estate considered Investors stop
safest most profitable buying in and
investment banks face
insolvency

Banks create
mortgage backed
securities so Credit market
investors can buy freezes, loans
into market become
unattainable, and
downward spiral
begins
Homeowners
default on their
loans
02 The Housing
Bubble
Mortgage Backed Securities
Banks pooled thousands of individual
mortgages into securities where people could
buy shares, which further increased the
demand for mortgages.
Subprime Mortgages
The ladder of risk continues as banking
institutions looked to get more mortgages to
populate the Mortgage Backed Securities, and
began to significantly relax the needs to get a
mortgage.
Collateralized
Debt
● Pool of Debt across the board
Obligations

● Mortgages, bonds, loans

03 Who’s to
Blame?
Employees of
Banks and
● Senior managers in banks and
Investment investment firms
Firms
● The senior managers’ quantity
analysts’ models
 U.S. Securities
and Exchange
● The SEC alleviated leverage on Commission
debt rules in 2004, causing
extremely high leverage ratios in
2008

● Low expertise in the SEC

Government ● The Federal National Mortgage
Association (Fannie Mae)
Sponsored
Enterprises ● The Federal Home Loan Mortgage
Corporation (Freddie Mac)
● Responsible for buying and securitizing
mortgages
● Guaranteed uncertain home loans
 The Glass-
Steagall Act
● Passed in 1933 Repeal
● Repealed in 1999
● Helps control level of risk to investors
● Its repeal allowed banks to be able to
trade mortgage-backed securities
● The growth of mortgage-backed
securities made credit default swaps
become very popular as a way to
protect against defaults.
The Aftermath 04
 GDP Jobs
7% lower than its potential 7.5 million lost

Foreclosures Filings
over 6 million Americans 225% increase
05 Moving
Forward
Troubled Asset Relief Program

Avoiding Foreclosures

Stabilizing AIG

Stabilizing Banking Institutions

If you want to modify this graph, click on it, follow the link, change the data and replace it
Stabilizing Auto Industry

Restart Credit Markets

Public-Private
Investment Program

● March 2009
● Purchase real-estate loans
● Plan would restart the markets for legacy mortgage-backed
securities, ensuring that there is still credit available.
● $500 billion for subsidies

● Specifically to subsidize the purchase of “toxic loans” by

private investors.
Supervisory Capital
Assessment Program
● Introduced “stress tests” in 2009
● Targeted 19 banks with $100+ billion in assets
● These firms held ⅔ of all assets and more than ½ of all loans
● Must project revenues and losses for 2009 & 2010
○ Estimate level of reserves needed for baseline and adverse
scenarios
● 18/19 passed with “adequate capital buffers”
● Speculation from experts, some claimed they were designed for
banks to pass
Regulatory Changes

● Andrew Lo – economist and MIT professor

● We need effective regulation and transparency
○ More transparency = more effective allocation of resources
○ Less transparency = assumptions and fear
● Increased communication with the public
● Capital Markets Safety Board
Corporate Governance
and Education

● History of poor risk assessment and management

○ Solution? We need quantitative analysts (quants) in
management positions.
● Existing knowledge gap between senior management and
analysts
○ Management tends to hire people with a lack of formal
training in finance and economics.
The Bigger
Picture 06

Scarring
Individual's economic situation can
have lasting damage as well as
economies more broadly
● Less investment in
education, research in R&D,
etc.
● Loss of $70,000 in lifetime
income for every American
● 4.4 million Americans still
underwater as of 2018
Recovery
Housing Prices
Recovered to levels higher
than pre-crisis

Stock Market
Longest running upswing in
history

Global GDP
2.56% as of 2019 which rose
Unemployment from -1.3% in 2009

Fell from its peak of 10% in Majority recovered

2010 so 3.9% as of 2019 by 2013 - still
countries facing
deficits
● First global financial

●
crisis
Roots in Great Slowbalisation
Recession
● Drop in international
trade & financial
openness
● Brexit: “I don’t think it
would have
happened if it hadn’t
been for the political
and economic events
of the proceeding 10
years” - Alistair
Darling
Works Cited

Reavis, Cate. “The Global Financial Crisis of 2008: The Role of Greed, Fear and Oligarchs.” MIT Sloan, 16 Mar. 2012,
https://mitsloan.mit.edu/teaching-resources-library/global-financial-crisis-2008-role-greed-fear-and-oligarchs.

https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2020&start=1990

https://www.europarl.europa.eu/RegData/etudes/IDAN/2020/659383/EPRS_IDA(2020)659383_EN.pdf

https://www.washingtonpost.com/business/economy/a-guide-to-the-financial-crisis--10-years-later/2018/09/10/114
b76ba-af10-11e8-a20b-5f4f84429666_story.html

https://ec.europa.eu/eurostat/web/products-eurostat-news/-/ddn-20191023-1

https://bylinetimes.com/2019/11/07/the-2008-financial-crash-paved-the-way-for-brexit-why-dont-we-talk-about-it-a
nymore/
Works Cited

https://www.britannica.com/event/financial-crisis-of-2007-2008/Effects-and-aftermath-of-the-crisis

https://www.law.nyu.edu/news/ideas/michael-ohlrogge-great-recession-foreclosures

https://home.treasury.gov/data/troubled-assets-relief-program

https://home.treasury.gov/data/troubled-assets-relief-program/credit-market-programs/ppip

https://home.treasury.gov/data/troubled-assets-relief-program/bank-investment-programs/scap-and-cap

https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20090424a1.pdf