ABSTRACT
The case of financial markets of the 2000s is out of the realm of hypotheticals. The downfall of the financial system from 2006 to 2008 started with declining home prices and monoline subprime mortgage-originator bankruptcies, then spread to the government-sponsored enterprises (GSEs) and shadow banking vehicles. Higher mortgage-backed securities (MBS) and collateralized debt obligations (CDO) prices raised the value of bank assets, which could then be posted as additional collateral for further short-term borrowing. Banks and brokers had lost a total of $435b since the beginning of 2007 due to losses in the values of MBSs, CDOs, asset-backed securities (ABSs), and leveraged loans. The bank-stock-price index (KBW) declined by 25 percent between September 15 and October 9, 2008. After 2008 many financial institutions were taken to court by their investors and lenders, and investigated by agencies including the Department of Justice, the Securities and Exchange Commission (SEC), the Fed, the Department of Housing and Urban Development.
