Facts About Financial Crisis Of 2008 [Note to self]

I recently listened to an interesting radio programme where Heikki Koskenkylä explained some facts that contributed to the financial crisis of 2008. The radio programme was a series produced by YLE and you find link to the programme here.

Here are some interesting points that I picked up from the programme:

1. Community Reinvestment Act = CRA Banks are obligated to issue loans to the area from which they receive deposits. Initially created to support housing industry and expand house ownership. 
2. Sub-prime loans where only 15% of the total number of mortgages in U.S. Only about 20% were left unattended, and the amount of bad debt was not that large.
3. Sub-prime loans where bundled together with other loans (student loans, car loans, credit cards) and sold to investors. On paper the profit from these bonds where higher than from normal mortgage loans.
4. The problem was that "bad" and "good" loans where mixed together and rating agencies gave these bonds AAA-rating. There was wide belief that housing market could not collapse and these mortgage and loan bundles were built on safe ground.
5. Already in 2007 there were couple of instances where banks where affected by the sub prime crisis (1 English bank winter of 2007, couple more in the summer.)
6. On 7th of September 2008 Fannie Mae and Freddie Mac were put under the control of federal government.
7. In Europe many thought that it would be the hedge funds that would start crumbling, not the institutions that issue mortgages. 
8. Basic problem in the U.S. was that people with know in come where allowed to purchase houses. Europe had it problems too. In Spain (circa 07/08) there were unsold apartments as much as in Germany and France combined. But unlike in U.S. in Spain no "bad" credit was given.
9. Week after the take over of Freddie and Fannie Bank of America purchased Merrill Lynch
10. On 15th of September  Lehman Brothers declared it was entering company reorganisation procedures (Chapter 11).
11. On 17th of September Federal Government issued a emergency credit of 85 billion dollars to American International Group and as collateral the government got 79,9% of stock and withheld a veto to all significant decisions in the company. AIG had large investment in credit default swaps (check next post for explanation) which led to it's down fall. The insurance part of AIG's business was healthy but it had issued credit risk insurance (hedging credit risks) amounting to hundreds of millions of dollars. The company failed totally in evaluating the risk and the price to be paid for these insurance were very low during the economic up turn.
12. The complexity of the system was a partial contributor to the crisis. It was very hard to comprehend the risks and due to how deeply the whole system is interconnected it was difficult to determine who would take the losses.