The Derivatives That Sunk Banks In The Global Crisis

Mortgage-backed securities played a significant role in the Global Financial Crisis of 2008. These securities had attractive interest rates and were given next to perfect ratings by credit rating agencies such as Moodys and Standard and Poor. Large amounts of funding were put into the housing market through the mortgage backed securities and this funding became a cycle. People were looking to buy homes so mortgage companies sold mortgages to banks, which led to banks packaging the mortgages with other investments, and the mortgage-backed securities were sold to investors. The investors’ money created more money for mortgage lenders to offer. 

Since lenders were contributing funds to subprime mortgages, people who have lower credit scores, many of these homeowners began to default on their mortgage payments. In April of 2007, New Century, a U.S. Financial Mortgage Corporation, filed for bankruptcy because of poor mortgage lending decisions. Soon after, Countrywide, the largest U.S. subprime mortgage lender, filed for bankruptcy. Following these two mortgage lenders filing for bankruptcy, U.S. banks’ balance sheets decreased.

While subprime mortgages and mortgage back securities were instruments that …

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