On 15 September 2008, the Financial Crisis of 2008 became official as The Lehman Brothers, THE financial service firm at the time, filed for bankruptcy, taking the world by surprise. It left well over $600 billion in debt, 25,000 employees jobless and in shock, and the global economy in turmoil. Here’s what you should know, and why you should care.
You’ve probably come across the term ‘2008 Financial Crisis’ at some point in your college life, perhaps in group discussions, newspapers, or Hollywood blockbusters like The Wolf of Wall Street and The Big Short. Most explanations and reasonings for the same (and other finance related issues) comprise of jargon and (really) unnecessarily fancy words, making these trends seem within and on the fringes of elite academia. This has created an inertia regarding financial literacy among students not academically pursuing commerce. This is messy, because, if anything, a teenager’s need for financial knowledge has grown more urgent over the past decade. My point is, you’ve probably heard if it, it probably affects your life, and yet you probably don’t know exactly what happened.
Often dubbed by economists and journalists as a colossal failure of common sense, the 2008 Financial Crisis was the result of excessive risk taking, a system often called ‘Casino Banking’. The problem with risk taking is that it’s not as glamorous as The Wolf of Wall Street – building a Jordan Belfort shrine won’t bag you riches and a blonde Margot Robbie, and your demise is inevitable.
Predictably, the problem starts in the United States of America, with a ‘housing bubble’ – a bubble is created when unjustified speculation leads to rapid increase in prices (something similar is happening in the CryptoCurrency trade).
Banks provide housing loans to borrowers, who in turn mortgage the property in consideration to these banks. A borrower needs a credit history in order to qualify for a loan and prove their ability (and intent) to repay the same. A credit history includes income details, debt record, education, dependent family members, so on and so forth. The underlying cause of the US banking problem was that too many bad mortgages had been written using fraudulent credit histories, and these weren’t all going to get repaid.
Borrowings from the wholesale markets were lent and then bundled into bonds (securities). These bonds were then sold; the Lehman Brothers, a leading global financial services firm, bought several mortgage brokerages and posted record profits. This failed when the all the fraud behind the mortgages came to light, and the market basically freaked out, not willing to lend through those wholesale markets anymore.
This impasse soon spread to other debt markets. Banks began to doubt one another’s solvency. Trust evaporated. The Lehman Brothers declared bankruptcy, catalyzing widespread panic. On September 15, 2008, global financial services firm Lehman Brothers famously declared bankruptcy, leading to widespread panic in the financial industry. Suddenly, the U.S. economic decline, a result of the housing bubble burst in 2007, became a long-lasting global financial crisis.
Eventually, “Uncle Sam” had to jump in with aid amounting to hundreds of billions of dollars and guarantee that major banks would not fail – this couldn’t work for the Lehman Brothers. They were considered to have crossed the point of no return.
When the financial meltdown morphed into a worldwide economic downturn, it had repercussions across every industry and in every household: people lost homes, livelihoods, and their families. It was the Red Wedding of the finance world, second only to the Great Depression. This outlines the uncertainty and error inherent in ‘anticipating what average opinion expects the average opinion to be’. No system is foolproof, and students need to take into consideration important instances from history, before making concrete decisions or getting into an overheated debate with a colleague!