2008 Global Financial Crisis and Lehman Crisis in Hong Kong

Running head: GLOBAL FINANCIAL CRISIS 1
2008 Global Financial Crisis and Lehman Crisis in Hong Kong
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GLOBAL FINANCIAL CRISIS 2
2008 Global Financial Crisis and Lehman Crisis in Hong Kong
The financial crisis that took place in 2008 is considered the worst economic and
financial crisis after the World War triggered the Great Depression of the 1930s. The crisis
started in 2007 when the high value and prices of homes in the United States began to fall rapidly
caused destabilization among the financial institutions like banks that had invested heavily in the
lucrative mortgage sector (Faugère & Gergaud 2017). The homeowners found themselves not
able to pay for the mortgages and could not sell their homes at the prevailing prices leading to
many defaults in mortgage payments. The confusion spread rapidly to the entire United States
financial system than to other financial markets in most parts of the world. Some of the primary
victims of the financial crisis in the United States included the whole of investment banking
industry, some of the largest insurance companies in the country, the firms that had been
commissioned by the US government to oversee businesses in the booming mortgage industry
(Fannie Mae and Freddie Mac), and the largest mortgage lender in the country. Other casualties
were two of the largest commercial banks and some of the savings and loan institutions.
Cause of the 2008 Global Financial Crisis
Deregulation
The government of The United States reduced or eliminated some trade restrictions in the
financial industry, specifically the mortgage sector, to make the business process easier. The
primary goal was to do away with policies and regulations that restrict and reduce the ability of
US citizens to acquire homes through mortgages (Faugère & Gergaud 2017). The banks took
advantage and invested so much money in the mortgage sector and ended up giving mortgages to
some unqualified individuals without assessing their financial experience. Due to this

GLOBAL FINANCIAL CRISIS 3
uncontrolled business, banks invested so much in the industry that the supply of houses
surpassed the demand, the prices for the apartments started falling (Faugère & Gergaud 2017).
The business became so bad that banks stopped giving loans among themselves, the already
homeowners could not pay for the mortgages and were not able to release their homes due to the
reduced value as prices fell. The high defaulting rate triggered the financial crisis.
Securitization
This referred to the adoption of the business practice of putting together different
mortgage debts and selling the cash flows to a third party; this practice is referred to as
securitization. The third parties acquire the pooled debts as collateralized debt obligation and
receive their payments from the principles and interests obtained from the underlying liabilities.
In this type of financing, the securities backed by mortgage receivables are referred to as
mortgage-backed securities (Faugère & Gergaud 2017). In this scheme, securitization started
when hedge funds were sold to third parties as collateral. When an investor got a mortgage from
any financial institution like a bank, the institution sold the loan to hedge funds which later sold
to investors. Banks made money by selling the pooled loans hence giving mortgage loans even to
unqualified people.
Lehman Brothers
Lehman Brothers Company was one of the biggest investors in the United States that
dealt in global financial services before it filed for bankruptcy in the year 2008 (Johnson &
Mamun 2012). On 15th of September 2008, the company for bankruptcy protection as a result of
most of its clients quitting, sharp losses in the stock market and the reduction of asset value by
the credit rating agencies due to its involvement in the derivative businesses that lead to a