The 2008 Financial Crisis

What Caused the 2008 Financial Crisis? – My Understanding

According to my research and understanding, the 2008 financial crisis happened banks gave too many home loans to borrowers — without properly checking their financial condition. These risky loans were known as subprime loans.

Once these loans were issued, banks didn’t want to wait 15–20 years to get their money back slowly through EMIs. So, they sold these loans to big investment banks by using a process called securitization.

In simple terms, banks grouped all those home loans together and converted them into financial products known as:

• Mortgage-Backed Securities (MBS)

• Asset-Backed Securities (ABS)

These were sold through a financial setup called a Special Purpose Vehicle (SPV) —

a structure used to hold and pass those loan assets to investors.

What Did the Investment Banks Do?

The investment banks believed that real estate prices would keep increasing forever, and that borrowers would continue paying their EMIs. But that didn’t happen.

Many borrowers defaulted on their loans (stopped paying), and the value of the homes started falling. Since the loans were already sold to global investors, the entire loss came on those investors — including major financial institutions.

Lehman Brothers Collapse – A Major Shock

One of the biggest turning points in the crisis was the collapse of Lehman Brothers, a 150-year-old investment bank. It was considered one of the most powerful institutions on Wall Street.

But due to its heavy exposure to these bad mortgage-backed assets, Lehman Brothers declared bankruptcy in September 2008. That collapse created a domino effect across global financial markets and shook the entire financial system.

What Happened After That?

After the collapse:

• Banks stopped trusting each other.

• Stock markets crashed.

• People lost their jobs, homes, and savings.

• The government had to step in to rescue major banks and companies (known as a bailout).

• Interest rates were reduced, and central banks took emergency actions to stabilize the economy.

Key Terms You Should Know:

1. Subprime Loans: Loans given to people with poor credit or low repayment ability.

2. Securitization: Converting loans into investment products (MBS or ABS).

3. SPV (Special Purpose Vehicle): A setup used to transfer loan assets to investors.

4. Lehman Brothers: A 150+ year-old bank that collapsed during the crisis.

5. Bailout: Government support to save companies from failure.

Summary (in 1 Line):

Too many risky loans + wrong assumptions + poor regulation = Global financial disaster.

Final Note:

This blog is based on my personal understanding and research. I have tried to explain the 2008 Financial Crisis in simple words for those who are new to finance or compliance.

If I’ve missed anything or if you want to share more insights, feel free to reach out — I’m always happy to learn!

⚠️ Disclaimer:

This blog is created for knowledge-sharing purposes only.