The Great Sub Prime Crisis of 2008

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The greatest recession of this century- The Lehman Brothers Crisis of 2008 or the Sub Prime Crisis of 2008 which led to a global recession and unemployed millions of people in the world was led by American Investment Banks majorly by Lehman Brothers. These banks provided sub-prime loans in the market.

What is sub-prime loans?

Generally, poor credit rating people are disqualified to apply for conventional mortgage applications. So banks in The US came out with a special type of loan which provided loan to those who doesn't qualify for regular home loans. These loans were provided on real estate collaterals.

Objective of providing sub-prime loans:

Expecting that the value of underlying property will go up in future and charging high interests helped banks to generate higher profits. If repayment is discontinued, banks could sell the property for a higher consideration due to appreciation in property pricers. Borrowers can rent out their houses with high value or can sell at higher value. This made  global financial investors around the world to get involved in the sub-prime mortgage. The real estate sector was enjoying a boom till 2007 and there was a high demand in property sector which lead to a win-win situation for both borrowers and lending banks. These all banks showed an unprecedented growth in revenues and profits in 2002-2007. So these banks in order to mint more profits took loans for funding sub-prime mortgaging.

What triggered the crisis:

Excess supply in subsequent years which resulted in real estate sector cooling down and housing prices began to fall. Banks further increased the mortgage interest which resulted in more defaults. Credit crisis erupted in 2007 and in 2008, Lehman Brothers declared bankruptcy.

This crisis led to a catastrophic situation in the world affecting every single economy. The Dow Jones Industrial Index saw its single day biggest lows due to the bankruptcy news. Everywhere in the world investors drew their money from money market and invested in Government bonds. This led to The US stock market plunging 50% of its all time high it made in 2007. Millions of jobs were affected and it took years for the world to recover from this deadly crisis.

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