Financial Meltdown of 2007

The Financial Crisis of 2008 was an event not soon to be forgotten. Effects of it are still felt today in certain communities. Some assume that after the collapse of Lehman Brothers, nothing else could go wrong, and everything going forward will be fine. There are many more factors that contributed to the mess, some of which were quite eye-opening. Credit default swaps, credit derivatives, gambling, Wall Street executives, and how banks were operating in an unregulated manner will be discussed and dissected in this paper.

First of all, let us examine what the Financial Crisis consisted of. President Barak Obama himself referred to this as “the worst economic downturn since the Great Depression”. Stock markets took a nose dive everywhere. Multiple large-scale banks were bailed out by the government. The housing market was a nightmare: because such a vast amount of people were approved for mortgages, when the tables turned the people could not pay their dues, which resulted in foreclosures and evictions. An astonishing amount of 8.7 million jobs were recorded to have been lost due to this Financial Crisis. Many businesses failed, which added to the unemployment rate and the inability to pay for housing. The values of securities which were tied to the housing prices went down, and that in turn impaired financial institutions, not just in the United States, but in other countries of the world. Let’s take a closer look at what was happening in the financial institutions several years prior to the Crisis.

In fact, something very interesting was happening. Blythe Masters was a managing director at J.P. Morgan Chase, an American multinational banking and financial services holding company. It was in this company where Blythe created the credit default swap. The credit default swap is defined as “a financial contract where a buyer of corporate or sovereign debt in the form of bonds attempts to eliminate possible loss arising from default by the issuer of the bonds....