2007-2009 Global Financial Crisis Flashcards
What were mortgage backed securities, and why did they seem like a good idea?
Mortgage backed securities were a way for investors to take on less risk. Instead one investor taken on the risk of one mortgage, they could buy a security that was made up of fractions of multiple mortgages.
Why weren’t mortgage backed securities such a good idea after all?
The inherent risk of the securities were riskier than they appear. Each default seemed to be independent of one another, but that wasn’t the case.
What did asymmetrical information mean in this context?
Mortgage brokers lacked an incentive to report honest data on borrowers
What happened to BNP Paribas?
They reported that three of their investment funds were in serious trouble due to their investments in mortgage backed securities. Credit markets panicked, and the central bank poured money into the markets, preventing a run on the bank.
What happened to Bear Sterns?
Two of its subprime hedge funds lost value, and they started losing liquidity to pay bank its short-term loans
