2008 Lehman Crisis असली राज़ !
Summary
TLDRThis script explores the lead-up to the 2008 financial crisis, highlighting the roles of key financial figures and institutions. It details how low-interest rates fueled a borrowing boom, leading to risky lending practices like subprime mortgages. The script explains the creation and sale of CDOs, the role of credit default swaps, and the eventual collapse as defaults soared. It underscores the importance of caution, not betting beyond one's limit, and the wisdom of Warren Buffett's investment philosophy amidst market optimism and greed.
Takeaways
- 😲 The 2008 financial crisis had its roots in the late 90s, with the dotcom bubble and subsequent economic conservatism post-burst.
- 💼 Angelo Mozilo, nicknamed 'Golden Boy', and top officials at Lehman Brothers were earning enormous sums, reflecting the boom in the real estate and financial sectors.
- 🏦 Low-interest rates led to increased borrowing, with people taking out loans for various assets, including homes, which fueled the housing bubble.
- 🌐 The U.S. housing market's boom had a global impact, influencing economies worldwide due to interconnected financial markets.
- 📉 The crisis began with subprime loans, which were given to individuals with poor credit or no income, leading to a high default rate.
- 📈 The creation and sale of Collateralized Debt Obligations (CDOs) by banks transferred risk to investment banks and eventually to investors.
- 💸 Rating agencies like Moody's gave high AAA ratings to these CDOs, which were not reflective of their true risk, misleading investors.
- 📉 As housing prices fell and adjustable interest rates increased, defaults on subprime loans skyrocketed, leading to a cascade of effects throughout the financial system.
- 💡 Michael Burry and others made significant profits by betting against the housing market using credit default swaps, anticipating the crisis.
- 🏛️ The U.S. government's bailout of AIG and introduction of an $800 billion stimulus package were attempts to stabilize the economy after the crisis hit.
- 📚 Key lessons from the crisis include the importance of not betting beyond one's limit and being cautious in times of widespread optimism.
Q & A
Who was Angelo Mozilo and what was his significance during the period from 2005 to 2007?
-Angelo Mozilo was referred to as the 'Golden Boy' and was earning $100 million annually during 2005 to 2007. He was a significant figure in the real estate market boom and was widely covered by the media.
What was the role of Lehman Brothers in the financial landscape prior to the 2008 crisis?
-Lehman Brothers was a major investment bank with a history dating back to 1850. Its top 5 officials were earning $1 billion annually, highlighting the bank's significant role and influence in the world of investment banking before the 2008 financial crisis.
How did the dotcom bubble in the late 90s contribute to the 2008 financial crisis?
-The dotcom bubble in the late 90s led to a surge of interest in the stock market, which eventually burst in the early 2000s causing heavy losses. This led to a conservative economic shift and a move towards a saving-driven economy, setting the stage for the 2008 crisis.
What was the impact of the Federal Reserve's decision to lower interest rates on the economy?
-The Federal Reserve's decision to lower interest rates to 1.75% made loans cheaper, encouraging people to take out loans and spend, which fueled the economy but also led to excessive borrowing and the eventual housing bubble.
What was the 'American Dream' policy of Mr. Bush related to housing, and how did it affect the economy?
-Mr. Bush's 'American Dream' policy aimed to make home ownership accessible to every American. This policy, combined with global economic interconnectivity, led to a global housing boom but also contributed to the housing bubble that burst in 2008.
What was the role of Michael Burry in identifying the impending crisis?
-Michael Burry, a hedge fund manager, recognized the flawed housing market and the risky lending practices, which he believed would lead to a crisis. His insights were later depicted in the movie 'The Big Short'.
What were subprime loans, and how did they contribute to the financial crisis?
-Subprime loans were given to individuals with poor credit or no verifiable income. Banks assumed they could recover by selling the collateral if the loans defaulted. However, when many of these loans defaulted, it led to a massive wave of foreclosures and a collapse in the housing market.
What is a Collateralized Debt Obligation (CDO) and how did it play a role in the 2008 crisis?
-A CDO is a type of asset-backed security, a package of loans sold to investors. Banks packaged various types of loans, including subprime mortgages, into CDOs and sold them as safe investments. When the housing market collapsed, these CDOs lost value, leading to significant losses for investors.
How did credit default swaps (CDS) contribute to the financial crisis?
-Credit default swaps were essentially insurance policies on CDOs. AIG, the largest insurer at the time, sold CDS without fully understanding the risk. When the CDOs defaulted, AIG faced massive claims, leading to a bailout to prevent systemic collapse.
What were the key lessons learned from the 2008 financial crisis as highlighted in the script?
-The script highlights several lessons: never bet beyond your limit, be cautious when everyone else is greedy, and understand that institutions deemed 'too big to fail' may still fail, causing ordinary people to suffer the consequences.
Outlines
💰 The Golden Age of Finance and the Seeds of the 2008 Crisis
The paragraph discusses the booming financial sector from 2005 to 2007, highlighting the immense earnings of Angelo Mozilo and top officials at Lehman Brothers. It emphasizes the public's significant gains in the stock market and the role of top insurance companies and rating agencies like Moody's in profiting from the economic upswing. The narrative then shifts to the roots of the 2008 financial crisis, tracing it back to the late 90s and the dotcom bubble. It explains how the bursting of the IT bubble led to a conservative economic phase, which was followed by the Federal Reserve's decision to lower interest rates, making loans cheaper and encouraging spending. This policy shift fueled a global rally and set the stage for the housing market boom, which was a precursor to the crisis. The paragraph also introduces key figures like Michael Burry and Jared, who foresaw the impending disaster, and Raghuram Rajan, who warned of a scam in the system.
🌪 The Perfect Storm: Easy Credit and the Housing Bubble
This paragraph delves into the consequences of easy credit and the housing bubble. It describes how banks, facing liquidity issues due to the influx of loan demands, introduced subprime loans to individuals with poor credit scores. The banks' strategy was to capitalize on the collateral, primarily houses, in case of loan defaults. The paragraph outlines how banks packaged various loans into Collateralized Debt Obligations (CDOs) and sold them to investment banks, which were then rated AAA by rating agencies, indicating high safety. This process transferred the risk from banks to investment banks and eventually to High Net Worth Individuals (HNIs) who invested in these CDOs. The narrative also touches upon the role of deregulation in Iceland's economic boom and the subsequent crisis, as well as the appointment of Hank Paulson, a former Goldman Sachs executive, as the Treasury Secretary, which was met with controversy.
📉 The Downfall: Defaulting Loans and the Collapse of Financial Institutions
The paragraph discusses the domino effect that began with the defaulting of subprime loans. As adjustable interest rates rose, many borrowers could not afford their payments, leading to a surge in house auctions and a subsequent drop in housing prices. This mass default affected not only the housing market but also the banking and investment sectors, as the value of CDOs plummeted. The paragraph details the role of credit default swaps as a form of insurance against the failure of CDOs, which ultimately backfired when the housing market collapsed. It also highlights the plight of major financial institutions like Lehman Brothers and AIG, which faced bankruptcy, and the government's decision to bail out AIG using taxpayers' money. The paragraph concludes with the broader economic impact, including massive unemployment and the global outcry against the financial sector.
📚 Key Learnings from the 2008 Financial Crisis
In the final paragraph, the speaker summarizes the key lessons from the 2008 financial crisis. The main takeaways are the importance of not betting beyond one's limit, as exemplified by the overextension of banks, investment banks, and insurance companies. It also emphasizes the wisdom of Warren Buffett's advice to be cautious when others are greedy and greedy when others are cautious. The paragraph serves as a reminder that while institutions may be 'too big to fail' and receive bailouts, it is the ordinary people who ultimately bear the brunt of such crises. The speaker encourages viewers to learn from history, to invest wisely, and to remain vigilant in the face of economic optimism.
Mindmap
Keywords
💡Subprime Loans
💡Interest Rates
💡Credit Default Swaps (CDS)
💡Collateralized Debt Obligations (CDOs)
💡Housing Bubble
💡Lehman Brothers
💡Asset-Backed Securities
💡Rating Agencies
💡Liquidity Crisis
💡Bailout
💡Economic Interconnectivity
Highlights
Angelo Mozilo, nicknamed Golden Boy, earned $100 million annually from 2005 to 2007.
Lehman Brothers' top 5 officials were earning $1 billion annually.
The real estate market and share market were booming, with many IPOs having stellar listings.
Top insurance companies and Moody's, the largest rating agency, were making huge profits.
The 2008 financial crisis had its roots in the late 90s dotcom bubble.
After the IT bubble burst, the economy shifted to a saving-driven model.
The Federal Reserve lowered interest rates from over 6% to 1.75%, making loans cheaper.
The concept of 'every American should have a house' fueled the housing market boom.
The global economy was interconnected, and the US market significantly influenced other economies.
Michael Burry, a hedge fund manager, identified the impending crisis early on.
Subprime loans were given to people with poor credit or no income, leading to defaults.
Banks created and sold Collateralized Debt Obligations (CDOs), which were rated AAA by agencies.
Investment banks and HNI clients invested heavily in CDOs, unaware of the risks.
AIG provided insurance on CDOs, not anticipating the scale of defaults.
The housing market crash led to mass defaults and a loss of confidence in the financial system.
Lehman Brothers' failure marked a significant point in the crisis, as they were not bailed out.
The crisis resulted in 30 million people becoming unemployed and a global economic downturn.
Key lessons from the crisis include not betting beyond one's limit and being cautious in times of collective greed.
Transcripts
From 2005 to 2007, Angelo Mozilo who was also named as Golden Boy
is earning $100 million every year
every magazine is covering him, not only this
biggest name in the world of Investment Banking
Lehman Brothers, an investment bank running since 1850
their top 5 officials are earning $1 billion annually
remember each top 5 officials are earning $1 billions yearly
not only this whole real estate market is in boom
talking about the share market, many IPOs are announced and
everything is actually having a stellar listing which means
public is also making huge money from stock market because everything is going up
with this top insurance companies were also making huge profits
not only this Moody's which was the biggest rating agencies of that time
in the world
was earning in billions
in the midst of all this, why suddenly there was such a big storm in 2008
friends if you want to know what actually propelled
the 2008 crisis
so let's start
[Intro]
Many people think that the crisis of 2008 was started on 2005 or 2006
but it's totally wrong
it was started in late 90s
actually in late 90s when dotcom bubble was started
many people startd getting intrested in stock market
many people were making money from stock market at home & abroad
and when the the IT bubble brust in early 2000s
so at that time they suffered a heavy loss
after this, the entire economy went on conservative mode for the next 2-3 years.
in simple language they went to saving driven economy
instead of spending driven economy
if I explain economics to you simply, then here is a simple thing that
if the company of any country has to grow then obviously
people have to spend,
because unless people spend or don't buy commodities, goods & services
then how companies will earn and unless companies earn
how will they pay salaries and if they don't pay salaries then how will economy grow
this all was also happening
because interest rate was high at that time it was above 6%
when FED took a decision to change the rate of interest 11 times
and after changing it 11 times it became 1.75%
Now what does this means? this simply means
that the loan which was costing to a person earlier started getting cheaper
due to which the customers suddenly started feeling
that if I purchase any stuff on the basis of loan and credit cards
then I'm getting it in cheaper price because the rate of interest is very less
and this is where the root of all these riots started
people started buying different types of things like house, bungalow, car, etc
on credit as well as loan funds
not only this, Mr.Bush came with his dream
that every American should have a house of his own
and remember, what happens in US has a significant effect across the globe because
all other economies are export oriented and linked to the US market
the way market runs in abroad,
in the same way it runs in other countries due to interconnectivity
due to which huge rally begun globally
it was going well untill 2005 when Michael Burry.
Yes right, a hedge fund manager who used to run electric based hedge fund
he noted one thing that there is a big mess here
and later Jared who used to work at Deutsche Bank
used to check assets, when he followed this trail he found out
friends all this things is a movie "The Big Short"
if you want me to cover that then write "Big Short" in comment
now after this the Golden Age begins
Why Golden Age?
Because now people started to buy a lot of things by taking loans in easy installments
because of it many people buy land,
Why land?
because people were still afraid of stock market
because of the brust of 2000 bubble for 2-3 years
people used to think that nothing can happen here
in our country too, the year 2015 also went in the same way when people did not invest anything and there was fear
infact no one wanted to invest here until the start of 2016
so here's an important lesson
that everytime market doesn't move in a linear fashion
there are hickups as well as stops
the same way when in 2018 many people
who were enthuastic to small cap and mid cap still not able to recover their money
64% of the small cap companies
markets are not porting above their 2018 highs even after going so high
so that's why it is not a wise decision to take a lot of stuff at a very high level
here in our country we should be proud of Raghuram Rajan
Raghuram Rajan sir also told this things that there's a big scam going on here
the whole world is getting buried in debt due to easy credit
please work on this things
but all the investment bankers & hedge fund managers made fun of him
and the economist said that he does not know anything
the problem was that these people
started predicting from 2005 that everything would be wrong
and for 3 years these things continued.
because of which paeple made fun of him
one more intresting thing was going on same year
Professor & councillor had become the consultants of hedge fund manager
Yes right !!
they were taking huge money for speech
and they were given huge money for writing articles
and to publish in international publication
that everything is fine in economy
you will be surprised to know that Professor of Stanford, Harvard
who used to write this letters and articles
those people in the middle of 2005-2007 in 2 years
they had earned 60-70 crores rupees
just imagine professors earning this much just by writing articles
not only this Iceland was also changed dramitacally
their whole economy worth $13 billion
but banking operations were running worth $100 billions in whole economy
this specificially started when their PM in 2000s applied deregulation there
basically he privatised top 3 banks
because of which this banks started playing with leveraged bets
one more thing happened here Hank Paulson
who was a big officer of Goldman Sachs
he resigns from there because
Bush Administration now makes him head of treasury
there is a lot of debate going on in Wall Street
as well as in the normal public, who are the people of the stock market
why are you giving them such a big deal, they will remain based
they will help bankers and their corporates fellows
but Bush ji thought that it is necessary to bring this type of decentralization
and this is why they took this decision
so now we understand from where the issue started
in this the issue started with the liquidity of the bank.
see friends...
loans were very cheap, due to which many people started taking loans from banks
but banks will also have a limit, won't it?
means let's say a bank has 50 crores ruoees
if the loan becomes cheap then it is obvious that the whole public was cracking down on it
that could give collateral money
due to which now banks
do not have enough liquidity so that they can give loans to new people
people were taking loans from here and buying houses
banks so far
what they used to give was called prime loan
prime loan means those who have good credit score,
people who can afford loans to give credit and loans to such people
but now banks have started a new illusion which is called sub prime loans
means
started giving loans to those who could not even afford
because banks knew that if nothing else, there is a house in the collateral,
we will earn by selling the house
so they started giving housing loans specifically in sub prime basis
now what used to happen in this, for example someone is 70 years old
and has no active source of income
at 70s age also they were giving huge loans
no one was thinking how will they payback
in this way loan was given to any one
in 2006, it was found that 50% of the people
who had taken sub prime loans did not even have any source of income
just imagine in this way loans and credits were distributed
Now usually why do such things happen in the economy?
Ease of getting money
when the interest rate becomes low, money comes easily, so a lot of
money goes around in the stock market, credit market, loan market,etc
so now the problem here used to be that the banks were giving loans
but those who were taking sub prime loans they were unaware
that there is an adjusted rate of return
first month or first year maybe you will be charged 1% rate of interest
due to which people used to think EMI is very low, principal & EMI will be less
interest rate was flexible like next year 2% than 4% than 6%
now it has started happening like this
that as the interest rate started going up some people started defaulting it.
those people said man, now we do not have an active source of income,
we cannot pay off loans, we are going to leave the house,
do whatever has to be done
due to which banks started auctioning this houses
slowly their numbers started increasing due to which mass auction started
now the scene was such that with time the interest rate also went up
where interest rate was 1.75% it went above 5% due to which
now scene was like in market because of auctioning banks had huge supply
but demand in market was very less
one more intreting thing happened with this,
you might have heard name CDO many times
Collateralized Debt Obligation let me explain it to you simply
friends scene was like when banks give loans to you
then in return you give them Mortgage paper
so basically when you take loan you will
get a paper called Mortgage paper which banks have
this was very popular in US infact happened many times in our country
bank thought to sell this Mortgage paper
in the name of selling what they did
for example let's say you are a bank & you have given 100 types of loans to peoples
like vehicle loan, house loan, Iphone loan, watch loan, etc
they used to make package of all these loans and consolidated in one place
they used to sell this package to investment bankers
investment bankers were finding a new assets
so they thought this package is fully secured
Why?
because rating agenies gave AAA rating to this packages
AAA means most safe and secure
due to which they used to think that
it is very secure and they are giving all the loans together
if there's a default in loan then we will seize their properties,
we will make money by selling properties
due to which banks were transferring their risks to investment banker
now investment banker also had to make money
this people beautify and make it product and transfer to their HNI clients
HNI clients are those who had 15-30 crores for investment
When they used to tell them that it has AAA rating
then clients also thought it's secured
so they used to purchase
this transfer kept going untill when sub primes started defaulting
because of defaulting many houses were build in auction
after increasing the auction and the interest rate, people started losing interest in the housing market.
due to which housing prices that were inflated slowly were decreasing
due to which many people came to know realistic avenue that here it will not sustain
due to this many people started mass selling
with mass selling massive defaults occured because
of flexible rate of interest
now housing price was decreasing
1 crore worth houses were now 50 lakhs
but because interest rate is increased
due to this public thought that 1 crore house is now 50 lakhs
so why should I pay interest and make 80 lakhs
I will not take, Go to hell I will take any other house
so they also started defaulting
and then the cascading effect started
now it's cascading effect started in such a way
that banking industry started shaking because people started defaulting
due to which investment banker also started shaking because
their CDOs is a mixture of all mortgages
they were also reached in the stage of defaulting
with this HNI investors also started selling their things as soon as possible
and with this one more intresting thing happened in between 2005-2007
which you might have seen in Big Short movie
what were these people doing over there
there was no way to short in derivatives so they introduced credit swaps
in simple language insurance on that CDO
simply if tomorrow CDO sunk for that we are doing insurance
so here AIG which was biggest insurance company of that time
he thought it was AAA rated anyway
if nothing houses will be sold so they never thought of this adverse effect
that things could go this bad
so they started making this kind of insurance stuff
due to which Michael Burry made huge money after selling this things
which was our credit swaps
one simple scene happened that AIG who gave this much insurance
because CDOs and CDOs started to default
so AIG also left nothing to do they were also tensed
big investment banks of that time there bears turns,
their CEOs used to earn $1 billions yearly
and for time pass in their lunch time they used to fly above
Wall Street in chopper to see every thing is going good or not
allegations started appearing on him that your bank is sinking and you are
sometimes in the gulf court and sometimes you are
roaming in the chopper
earns $1 billion a year
and this I'm talking of 2006-2007 so just imagine as a
salary & bonus they were earning
then Lehman Brothers's CEO he was very agressive
he told my company will can't sink
my company is running since 1853 who will sink it now
but his company also got vat
basically the one who was our Fed's Treasury Head
Paulson, he called a meeting where top investment banker's were they called
from Citybank, JP Morgan, Morgan Stanley, etc
but there Lehman Brother's CEO was not called
because they knew that Lehman Brothers is already gone & we might not save them
altough they took a attempt
where they could be saved but unfortunately congress rejected it
at the end every where there was massacre
AIG had to be bailed out with a huge amount
which was tax payers money after that congress introuced
bail out & stimulus package of $800 billion
to improve the economy and the stock market
but the trust of the people was so much hurt that
30 million people were unemployed overnight
and it's cascading effect was seen in many other countries
because these companies were in US but their offices were everywhere
mass firing had to be done over there
and nearly 30-32 sub prime companies went bankrupt
and everywhere there was an outcry
I told you the things which you will get in 5-6 books in this video in very less time
if you loved this video than give a like but before leaving
I will tell some important learnings
that what we learned from this whole incident
should we be afraid?
no, we should be cautious
but what did we learn now that I tell you
first thing never bet beyond your limit
what banks did? they issued CDOs beyond their limit
what investment banks were doing? they were issuing CDOs more than limit
what AIG was doing? they were giving insurance beyond their limit
so this applies in our normal life too, never bet beyond your limit
second thing later when Warren Buffett sir was on interview
Buffett sir told nothing Wall Street and everyone were in a big illusion
with this we can understand one thing
Buffett sir says that if everyone is greedy then be cautious
and when everyone is cautious be greedy
because everyone was moving with positive optimism so nobody thought
that one devil will from corner and destroy everything
but at the end who had to face loss? normal people
because there are some institutions which are too big to fail
they will be bailed out at the end you have to suffer so you should be cautious
hope you loved this video
and if you loved than make sure to like it
so we remain motivated to put such kind of case studies
Till then keep learning, keep growing, keep investing and keep trading!
[Outro]
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