2008 Lehman Crisis असली राज़ !

Summary

This 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

00:00

💰 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.

05:02

🌪 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.

10:04

📉 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.

15:09

📚 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.

Keywords

💡Subprime Loans

Subprime loans refer to loans granted to borrowers who have a higher risk of defaulting due to factors like low credit scores or insufficient income. In the context of the video, these loans played a pivotal role in the 2008 financial crisis. The script mentions how banks started offering subprime loans to individuals who couldn't afford them, leading to a massive wave of defaults when adjustable interest rates increased, contributing to the housing market collapse.

💡Interest Rates

Interest rates are the cost of borrowing money, expressed as a percentage of the principal. The video discusses how the Federal Reserve's decision to lower interest rates to 1.75% made loans cheaper, encouraging borrowing and spending. However, when interest rates later increased, it led to defaults on loans, particularly subprime mortgages, exacerbating the financial crisis.

💡Credit Default Swaps (CDS)

A credit default swap is a financial derivative that allows an investor to 'insure' against the default of a credit asset, such as a bond or loan. In the video, it is mentioned that entities like AIG provided insurance on CDOs (Collateralized Debt Obligations) through CDS. When the housing market collapsed, and the CDOs defaulted, AIG faced massive losses, requiring a bailout.

💡Collateralized Debt Obligations (CDOs)

CDOs are complex financial instruments that pool together various types of debt, such as mortgages, and sell interests in those pools to investors. The video explains how banks packaged and sold these mortgage-backed securities to investment banks, who then sold them to investors, spreading the risk. The collapse of the housing market led to a high default rate in these CDOs, causing significant financial losses.

💡Housing Bubble

A housing bubble refers to a period of rapid increases in housing prices followed by a sharp and often simultaneous collapse. The video script describes the boom in the real estate market, fueled by easy credit and low-interest rates, which eventually burst, leading to a wave of foreclosures and a sharp decline in housing prices.

💡Lehman Brothers

Lehman Brothers was a global financial services firm whose bankruptcy in 2008 was a significant event in the financial crisis. The video mentions Lehman Brothers as an example of an institution that failed due to risky lending practices and the collapse of the housing market, leading to a loss of confidence in the financial sector.

💡Asset-Backed Securities

Asset-backed securities are financial securities collateralized by a pool of assets, such as loans or credit card debt. In the video, it is discussed how these securities, particularly mortgage-backed securities, were rated highly by agencies like Moody's, leading investors to believe they were safe investments. The defaults on the underlying mortgages caused these securities to lose value, contributing to the financial crisis.

💡Rating Agencies

Rating agencies are organizations that evaluate the creditworthiness of entities or financial securities. The video script highlights how rating agencies like Moody's gave high ratings to risky mortgage-backed securities, leading investors to believe they were safe investments. The subsequent defaults on these securities damaged the credibility of these agencies.

💡Liquidity Crisis

A liquidity crisis occurs when a bank or financial institution cannot meet its short-term obligations due to a lack of available cash. The video explains that the easy availability of loans led to a situation where banks had insufficient liquidity to continue lending, which was a contributing factor to the financial crisis.

💡Bailout

A bailout is a rescue of a failing business or economy by the government or other institution. The video mentions the government's bailout of AIG and the introduction of an $800 billion stimulus package to stabilize the economy during the crisis. Bailouts are controversial as they often involve using taxpayer money to save institutions deemed 'too big to fail.'

💡Economic Interconnectivity

Economic interconnectivity refers to the global economic system where the actions of one country or market can affect others. The video script discusses how the U.S. housing market's collapse had a ripple effect on economies worldwide, leading to job losses and financial instability in many countries.

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]