The meltdown of 2008 struck the banks when they were unable to adequately deal with the financial crisis. Banks are designed to create and protect one’s wealth, but they took advantage of the people, and let people take many loaning risks that they couldn’t afford. Banks created the credit default swap which transferred credit of fixed income products between parties. In learning about the credit default swap in class, it is understood that the buyer receives credit protection, whereas the seller guarantees the credit.
Therefore, the risk of default is transferred from the holder to the seller of the swap. But swaps allowed companies to shed the risks they didn’t want to take. When the banks first created the swaps, it gave investors the opportunity to invest in bank loans. From there, banks sold derivatives on all portfolios by synthetic investment. Investors were able to invest in credit default swap and make it grow.
Credit then became a more available asset which stroke employment.
Now all banks wanted credit derivatives; which are privately held negotiable contracts that allow consumers to manage their exposure to credit risk. The main problem with this was they assumed risk could be eliminated, but it couldn’t. In order to regulate derivatives, Congress passed the Glass-Steagall Act in 1933 to establish deposit insurance, and implemented a number of banking regulations. As learning in class, this affected every business in America. There was now a high rating, and high yield. The big return was bankers now bought bundled mortgages.
Homebuyers were able to pay double, but lending was too much; making people going bankrupt in home mortgages. Borrowers gave loans greater than the value of that loan, which made the financial bubble burst, creating a recession. With bankers ignoring all the possible risks from the beginning, they feel into a deep crash. Goldman Sachs was the only bank to make money off the bubble burst by betting against their clients.
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