Subprime Crisis

During the 2008 financial crisis, there are several parties that are involved and are responsible for the causes of the subprime mortgage crisis that led to this financial crisis. The parties included financial institutions like investment banks and mortgage lenders, homebuyers, credit rating agencies, federal government and the regulators.

Traditionally, investors go to the US Federal Reserve where they buy treasury bills, which were rated as safe investments. But shortly after the DOT COM bubble burst in the early 2000s and adding the September 11 attacked to the situation, the economy was at a risk of deep recession. Thus the central banks around the world and the US Federal Reserve tried to stimulate the economy by reducing the treasury bills to as low as 1 percent. Due to low interest rates from the safe investments such as treasury bills, potential investors are looking for a way to profit more. Thus investment banks thought of a way to link up the housing markets with the hungry potential investors.

Investment bank borrow money to buy over mortgages from mortgages lenders, they would sell these mortgages as Collateral Debt Obligations (CDOs) to potential investors. These CDOs comprises of 3 categories, the safe, neutral and risky. Thus by creating these three different categories, they are able to leverage and attract all 3 different types of investors which allows them to make more profit even after repaying the loans.

As soon as the demand for these CDOs increases, and there are not many prime home buyers left that are willing to acquire a mortgage. Investment banks and mortgage lenders soon thought of a way to increase the supply of homebuyers acquiring mortgages.