History of Money & Markets · Modern crises
The 2008 financial crisis
Subprime mortgages, securitization, leverage and Lehman: how a housing slump nearly broke the system.
Step 1 of 4 · Overview15 min read ·
2000s
easy credit, subprime mortgages
Securitization
mortgages → MBS → CDOs, many rated AAA
2006–07
home prices fall; defaults rise
Mar 2008
Bear Stearns rescued
Sep 15, 2008
Lehman Brothers bankruptcy
Oct 2008
TARP; central bank rescues
Banks and shadow banks held huge leveraged positions in mortgage securities funded by short-term borrowing (repo, commercial paper). When values fell, funding vanished overnight, which is a run on the shadow banking system.
Key idea
Ops lesson: after Lehman, firms couldn't quickly tell which trades they had with whom. Clean trade data and fast reconciliation became regulatory priorities, which is part of why your ops job exists.Next: Practice