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2008 Financial Crisis के 2 मुख्य कारण | 2008 recession Explained and Simplified in Hindi - YouTube
Channel: Convey by FinnovationZ
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Namaskar! Today we will talk about the financial crisis of 2008
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and how did it happen?
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In 1996, dot com boom was going on in the US.
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And the technology companies stocks were running high at that time.
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But further between 2000 to 2002, this dot com bubble burst.
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Meaning the stock prices saw a sharp decline in their prices.
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And because of that people were withdrawing their money
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from the stock market.
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In 2001, the interest rates in the US had fallen to just 1%
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So at that time, the stock market was running low.
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And hence people did not want to invest in stock markets.
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And since interest rates were low,
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investors did not even want to keep their money in the banks.
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The investors were looking for a good investment opportunity.
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That time, real estate rates were increasing.
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Even the US government was encouraging its people to buy houses.
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Since the interest rates were very low,
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So the people were keen on taking loans,
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They were wanting to take loans for houses.
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This way the demand for the houses was increasing.
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And the rates for properties were also increasing.
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Therefore, investors started paying attention to real estate in the US.
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Looking at the increasing rates in real estate,
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investors started investing in real estate.
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Because they were thinking that, in the US,
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the demand for housing will keep on increasing.
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And consequently, the real estate rates also will keep on increasing.
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And this way they can earn a lot of profits.
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Investment banks also wanted to gain out of this hike in real estate.
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We all know about the banks.
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Saving accounts, current accounts, FDs, loans. They provide all of that.
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While the investment banks work as a mediator or arbitrator.
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Investment banks help companies in raising or creating capital
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They help companies in mergers and acquisitions,
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they sell derivative products, and derivative trading
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they provide a lot of facilities like that.
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Morgan Stanley, Goldman Sachs etc are all investment banks.
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So now investment banks started purchasing loans from the banks.
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They used to combine a lot of loans, make their bundles,
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and create a complex derivative product.
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They named the product as Collateral Debt Obligation or CDO.
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The investment banks got credit ratings for these CDOs
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from credit rating agencies.
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The credit rating agencies used to evaluate the CDOs.
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Meaning they used to inspect the loans and then give CDOs a rating.
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And then the investment banks would sell those CDOs to the investors.
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In a normal case when a bank gives a housing loan to someone,
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the banks check the entire credit history of the borrower.
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and it also verifies their income.
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In case of a housing loan, the loan repayment duration is very long.
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Hence before giving away the housing loans,
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the banks check a lot of details about the borrower.
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In this case, banks were selling their loans to the investment banks.
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And investment banks used to combine those loans,
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make their CDOs and sell them to the investors.
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So here, the banks transferred the risk of the loans
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to the investment banks.
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In turn, investment banks transferred the risks to the CDO investors.
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The credit rating agencies, to most of the CDOs, had given AAA rating
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AAA rating is the highest rating.
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And it means that the investment is very safe.
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Seeing the AAA ratings and very good returns,
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the investors fell upon the CDOs.
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Seeing the growing demands for the CDOs,
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investment banks started demanding more loans from the banks.
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But banks had already given the loans to people
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with a good credit history and regular income
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So now banks were also giving housing loans to people whose condition,
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was such, that there was no guarantee of them repaying the loans.
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Such low-quality loans are called sub-prime loans.
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In a bid to sell more loans and get more commissions,
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from the investment banks,
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Banks were giving away these loans without any verification.
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So the banks used to sell these subprime loans
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to the investment banks. And the investment banks used to,
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combine thousands of such sub-prime loans and create their CDOs,
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and get those CDOs, AAA rating from the rating agencies.
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Almost 70% of CDOs were given AAA rating by the rating agencies.
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Because of AAA rating, those CDOs comprising of subprime loans,
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were also getting a good demand.
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This way the banks kept giving away subprime loans,
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and the investment banks created CDOs out of those loans
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and sold the CDOs to the investors.
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Countrywide Financial Corporation and Amerequest Mortgage Company,
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Both these companies gave subprime loans worth 177 billion dollar
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In between the years 2000 to 2007,
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the investment banks sold billions and billions of dollars of CDOs.
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and were making billions of dollars of profits.
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Along with the banks and investment banks,
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the credit rating agencies also were making a lot of profits.
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Moody's which is one of the biggest credit rating agency in the US,
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its profits raised between the year 2000 to 2007 to around 4 times.
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Banks, Investment Banks and credit rating agencies,
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their honeymoon period continued like this till the start of 2008
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AIG which is the biggest insurance company in the world,
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they started giving away insurance on these CDOs.
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Like we know, Insurance is meant for protection against losses,
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For example, if we are buying insurance for our car,
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then every month or every year,
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you have to pay the premium for that insurance.
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In case, something happens to your car, then the insurance company,
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will compensate you for the damages to the car.
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And if nothing wrong happens with the car,
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the premium paid by you will be your loss.
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So AIG was thinking, that the CDOs are AAA rated,
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So the chances of their failure are very negligible.
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Hence they started providing insurance on the CDOs.
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And it was called Credit Default Swap.or CDS.
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So CDO investors, to protect themselves from losses, were buying CDS.
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The special thing about CDS was that the people not having the CDOs,
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even they could buy insurance for the CDOs.
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or simply put, they could buy the CDS.
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The people who bought CDS from the AIG, they, in every quarter,
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or every three months had to pay a premium to the AIG.
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And in case the CDOs failed, the AIG would compensate them.
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AIG gave away big bonuses to employees for selling CDS.
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But AIG did not consider that if CDOs fail,
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how much loss are they going to endure.
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Most of the subprime loans by the banks were adjustable-rate loans.
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whose interest rates are very low in the initial years.
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and after that suddenly change a lot.
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Most of the sub-prime borrowers did not have any idea
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about adjustable rates.
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And the banks also did not inform them anything about it.
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So those who bought subprime loans at adjustable rates,
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they initially had to pay very little interest,
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But after 3-4 years, in most cases, after 2007,
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the housing loan interest rates increased very much.
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Many of the borrowers had no idea about the adjustable-rate loans.
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So when the interest rates soared,
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all those who had taken sub prime loans,
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they found it very difficult to pay such high interest rates.
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And they started defaulting on loan repayments.
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or stopped the repayment of loans.
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Then the banks started selling those houses to recover its money.
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Meaning the amount of the loan was recovered by selling those houses.
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This was happening because the banks, without any proper
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checking and inspection of the borrowers
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and without understanding their capability had given them the loans.
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Most of the borrowers did not even have a regular source of income.
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yet they got a housing loan from the bank.
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Here the banks did one more mistake,
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the borrowers, for buying their house, were taking the loan
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for the entire amount from the bank.
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And not paying a single penny from their own pockets.
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In 2005, around 50% of the borrowers, for buying their houses,
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had paid nothing from their own pockets.
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For buying homes they had taken the entire money from the bank.
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Whereas, in a normal situation, for buying a house,
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the borrower has to pay some amount from his own pocket.
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and for the rest of the amount, the bank provides the loan.
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So here, for purchasing the houses,
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the borrowers did not use their own money.
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And now since the interest rates increased,
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slowly the number of loan defaulters started rising.
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And therefore the banks started auctioning and selling those properties.
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Because of so many loan defaults,
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banks came up with a lot of house properties for auctioning.
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And by the year 2007-2008, the interest rates had come to around 5%.
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And already the banks had given loans to a lot of people.
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Therefore the banks could not find any buyers for the auctions.
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Hence the prices for house properties started declining sharply.
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and dropped to very low prices.
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So the people who had taken the loan for their houses,
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the value of their loan was way greater than the value of their house.
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Because when they purchased their house,
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the rates of houses were very high.
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And now the rates had fallen too much.
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for example, if someone purchased a Rs 50 Lac worth of a house,
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with the help of a loan, and now if the value of that house,
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is Rs 30-35 lacs. Then the borrower would feel, for a house
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of Rs 30-35 lac, why should he pay a more loan which is way higher.
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Hence all the borrowers were now defaulting on loan repayments.
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Due to these defaults, banks started facing short of funds.
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And their operations came to a halt.
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Because of these defaults, the value of the CDOs became zero.
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And the investors who purchased the CDOs,
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they lost all their money.
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The investors and fund managers who knew the complete
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reality of the subprime loans,
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they knew that the CDOs could fail anytime.
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Hence they had purchased CDS, or insurance on CDOs in huge amounts.
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And when the CDOs failed they received lots of profits.
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AIG which provided insurance on the CDOs,
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incurred losses worth $99 billion in value.
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AIG was a giant company, so to save from a more severe crisis
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and also to save the jobs of the AIG employees,
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The US government bailed out to the AIG company.
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Meaning, the government itself put around $85 billion in AIG
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and rescued the company.
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Because of all this, people stopped buying CDOs.
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So, the investment banks who purchased loans from the banks
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to create CDOs, had a lot of CDOs.
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And nobody was interested in buying them.
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So investment banks had to bear the losses from those CDOs.
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And the top 5 investment banks in the US, were on their knees.
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Lehman Brothers which was the top investment bank in the US,
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went bankrupt. And around 25,000 employees of Lehman Brother's
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lost their jobs. Bear Stearns was taken over by J.P. Morgan Chase.
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And Merrill Lynch was bought over by the Bank Of America.
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In this crisis, banks and other financial institutions
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recorded a loss of $450 billion.
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One special thing here was also that
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CDO and CDS had no regulation on them.
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Who could oversee these financial products and control the agencies.
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Federal Reserves had the authority to regulate the mortgages.
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But the then Chairman of the Federal Reserves, Mr Allen Greenspan,
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refused to regulate these financial products.
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So because of this crisis, there was a credit crunch in the society.
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People were facing difficulty in getting loans
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A lot of businesses were closing down because of not getting capital
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or loans. The economic growth of the US had come to a halt.
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Unemployment was very high in the US.
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Global trades also started getting affected due to this recession.
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The US is the biggest economy in the world.
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In the times of interconnected economies,
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if a big economy faces problems, then it affects all economies
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which are directly or indirectly connected to it.
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This financial crisis of 2008, was so big that
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it affected almost the entire world.
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And it resulted in a global recession.
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Because of this crisis, many countries had gone bankrupt.
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In 2005, when Mr Raghuram Rajan was the chief economist of IMF,
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at that time, he had predicted this crisis in his research papers.
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Due to which he was criticized by a lot of investment banks.
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If you have completely understood this financial crisis of 2008,
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then please do share this video with your friends on Whatsapp.
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So that they also know about the 2008 financial crisis.
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