Abstract

In 2008, one of the worldwide biggest economic crises began due to the real-estate market in the United States of America (USA) as a result of the high-risk mortgage loans (sub-prime). The negative consequences of these assets were transferred to the financial activities of the developed countries, for instance, in Europe. The trigger of this fact was Lehman Brothers’ bankruptcy on the 15th of September of 2008 which caused the biggest economic crisis since the big crash of 1929 in the main industrialized countries as these countries owned these sub-prime loans. The main consequences of this bankruptcy were interbank illiquidity, credit crunch, and, a general lack of the main guarantees of the banks, among others. During the last decade it has been collected the main causes by the literature, from a laxer legal system with the operations of the banks, to the drop-in interest rates or a greater exposure to financial derivatives. Hence, the main purpose of this paper is to analyze the main reasons the literature recognizes as triggers of this crisis, the repeal of the Glass-Stegall Act, the introduction of the Gramm-Leach-Bliley Act and the Commodity Futures Modernization allowed banks for merging with a greater facility and for exposing to sub-prime mortgages due to greater ease of carrying out transactions with financial derivatives. Finally, we collect the consequences which it had for the economic system such as the intervention of a range of financial institutions or the financial support for the purpose of allowing greater solvency in the financial system. The immediate consequences were the collapse of the main economic indicators (such as the National Association of Home Builders Housing Market Index, the Case-Shiller United States Home Price Index or the ABX index), different fusions and acquisitions between banks, the purchase of the 80% of AIG´s assets by the FED, financial assistance to the GSEs (Fannie Mae and Freddie Mac), and, the introduction of the Troubled Asset Relief Program (TARP) so as to clean up the balances of the banks. Finally, the Government enacted the Dodd-Frank Act so that the consumed could be protected.

Keywords: Economic crisis; Sub-prime Mortgages; Bankruptcy; USA; Europe; Banks; Financial Derivatives; Glass-stegall act; Gramm-leach-bliley act; Commodity futures modernization; Fannie mae and Freddie mac