ABSTRACT
The worldwide financial crisis that began in 2007 was set off by the collapse of the subprime mortgage market in the US, which caused widespread banking failures in the US and forced the federal government to provide a massive bailout to the financial sector. The crisis simultaneously reverberated to banks around the world, and eventually brought about a worldwide recession. This paper documents why other countries, especially in Western Europe, were so susceptible to the housing price downturn. We explore various mechanisms by which the financial crisis might have spread including the existence of similar regulatory schemes, government deficits and current account imbalances, trade linkages, and the presence of a housing bubble. We present a surprising result: European banks went down because they were pursuing the same strategies to make profit as the American banks in the same markets. They had joined the market in the US for mortgage-backed securities and funded them by borrowing in the asset-backed-commercialpaper market. When the housing market turned down, they suffered the same fate as their US counterparts. Our study makes a broader theoretical point suggesting that subsequent studies of global finance and financial markets need to consider the identities and strategies of the banks that structure the main markets for different products. This insight has implications for the literatures on financialization, globalization, and the sociology of finance.
