How did 2008 financial crisis happen ?

This is how the 2008 financial crisis happened. Investment banks were selling something known as mortgage-backed securities. These are basically a bunch of mortgages lumped together. However, investment banks were running out of good mortgages to put into these securities. So they decided to just loosen up their guidelines for what they qualify as a good mortgage so they could keep selling more and more and making more profit off these mortgage-backed securities. But these loans that they were selling that's good are terrible.

Why would someone want to invest in a Walmart cashier's $1,000,000 home loan? Surely they're not going to pay that. The big banks knew that, but they also knew that there was probably safety in numbers. The original mortgage-backed securities, the ones based on conforming loans or good loans that were actually good, are safe because if 20% of people default on their loans, investors in those securities still get a good return.

Not everyone will default the investment banks that were selling these securities thoughts, or at least publicly, said that if they Group A bunch of these terrible new loans together that there's still safety in the numbers. While one loan on its own might be at crazy high risk of default if you put 1000 terrible loans together, there's no way they're all going to defaults, right? Ultimately, while each of the loans might have been a pretty terrible investment on their own, the argument they were making is that if you put them all together, not everyone will default and you can in turn get some pretty high interest rates at the forefront in these banks were selling these securities like crazy.

Since the loans were risky, the banks could charge insanely high interest rates in the securities and make them incredibly attractive to investors. Lump all of these loans together into mortgage-backed securities with high returns and investors at the time were eating them up, but you're probably thinking if that was true and why would investors in mortgage-backed securities want to buy them if they knew the loans that they were made-up of were terrible? Couldn't they tell the investment banks were lying? Well, they could if they looked, but no one was looking because the agencies responsible for independently rating these securities on how good or bad they were.

We're rating them all as AAA, meaning the highest value and safest investment. Investors took the rating agencies word. Which were supposed to be independent companies and they bought up all of these mortgage-backed securities that were rated by them. The problem was the investment banks were in the pockets of the rating agencies. They needed the agencies to rate their mortgage-backed securities well so that they could sell their securities in their loans to investors and the agencies needed the banks to pay them so that they could make money. The banks refused to pay them if they didn't rate their securities AAA, knowing full well that the loans that they were actually rating were all. It's terrible. Long story short, investors like banks and hedge funds bought these MBS's thinking that they were a safe bet. Insane numbers of borrowers actually defaulted, as you'd expect a Walmart cashier to do on a $1,000,000 loan, and investments became worthless and the investors all lost their money. This collapse of the mortgage-backed security market had ripple effects through the entire U.S. economy with banks going bankrupt, the stock market collapsing into the USA neing thrown into a recession. All because a bunch of bankers got too greedy with the investment products they created and started selling lies. So that's in short how the crash of 2008 happened.

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