> All I thought at that time was "Who the fuck is Bear Stearns and Lehman brothers???"
They weren't really the "cause" of the crisis - they were just two companies that were especially badly hit by it. They were both "investment banks", which are essentially banks that provide services to large companies, super-wealthy individuals, governments, etc.
The primary cause of the crisis was a reshaping of the US mortgage sector which increased the risks of people defaulting on their mortgages and which most of the global finance industry failed to see coming. Essentially, mortgage providers started packaging up the mortgages they held into financial products, which they sold off to investors. For example, they might sell you an agreement for, say, $1 million dollars, which gives you the rights to 1% of the repayments on 1000 specific mortgages. Traditionally, mortgages are seen as safe - people rarely default on them because banks are unwilling to hand them out to people who aren't financially secure. And by packaging up a large number of mortgages and selling off small fractions of the whole thing, it seemingly becomes even safer - 1 or 2 of the mortgages you own a share in might default, but not all 1000 of them.
These pacakged-up mortgages were seen by the wider financial industry as extremely safe investments, and so many businesses started buying them up and using them as the core of their investment portfolio, complementing investments that were deemed more risky. However, this led to a problem. The banks that were handing out mortgages no longer cared if people were able to pay them back, because they were selling off the rights to all the repayments anyway. And these packaged-up mortgages were so lucrative that they were under a lot of pressure to create more of them. So, in the US, it became very easy to get a mortgage. Lots of people ended up with mortgages that they couldn't really afford - they were often given a period of cheaper repayments at the start of the mortgage to entice them into it.
As the economy started slowing down and house prices started falling, lots of people in the US started defaulting on their mortgages. The global financial industry suddenly discovered that many of the "safe" investments that formed the bedrock of its portfolios were plummeting in value. There was an expectation that many businesses that were especially exposed to these investments were going to fail, but at first nobody really knew which businesses were heavily exposed. This meant that financial institutions became very wary of lending to other businesses, making the problem worse - businesses that could have weathered the storm by taking on more debt found that they were unable to. And it also started to emerge that many financial institutions had been cutting corners during the good times, lying to their investors and regulators about how much risk they were exposing themselves to.
uwhdi t1_iychymq wrote
Reply to ELI5: How were a group of obscure companies the cause of the 2008 financial crisis? by WartimeHotTot
> All I thought at that time was "Who the fuck is Bear Stearns and Lehman brothers???"
They weren't really the "cause" of the crisis - they were just two companies that were especially badly hit by it. They were both "investment banks", which are essentially banks that provide services to large companies, super-wealthy individuals, governments, etc.
The primary cause of the crisis was a reshaping of the US mortgage sector which increased the risks of people defaulting on their mortgages and which most of the global finance industry failed to see coming. Essentially, mortgage providers started packaging up the mortgages they held into financial products, which they sold off to investors. For example, they might sell you an agreement for, say, $1 million dollars, which gives you the rights to 1% of the repayments on 1000 specific mortgages. Traditionally, mortgages are seen as safe - people rarely default on them because banks are unwilling to hand them out to people who aren't financially secure. And by packaging up a large number of mortgages and selling off small fractions of the whole thing, it seemingly becomes even safer - 1 or 2 of the mortgages you own a share in might default, but not all 1000 of them.
These pacakged-up mortgages were seen by the wider financial industry as extremely safe investments, and so many businesses started buying them up and using them as the core of their investment portfolio, complementing investments that were deemed more risky. However, this led to a problem. The banks that were handing out mortgages no longer cared if people were able to pay them back, because they were selling off the rights to all the repayments anyway. And these packaged-up mortgages were so lucrative that they were under a lot of pressure to create more of them. So, in the US, it became very easy to get a mortgage. Lots of people ended up with mortgages that they couldn't really afford - they were often given a period of cheaper repayments at the start of the mortgage to entice them into it.
As the economy started slowing down and house prices started falling, lots of people in the US started defaulting on their mortgages. The global financial industry suddenly discovered that many of the "safe" investments that formed the bedrock of its portfolios were plummeting in value. There was an expectation that many businesses that were especially exposed to these investments were going to fail, but at first nobody really knew which businesses were heavily exposed. This meant that financial institutions became very wary of lending to other businesses, making the problem worse - businesses that could have weathered the storm by taking on more debt found that they were unable to. And it also started to emerge that many financial institutions had been cutting corners during the good times, lying to their investors and regulators about how much risk they were exposing themselves to.