The 2008 Financial Crisis was triggered by the collapse of the US housing bubble that resulted from lax lending standards, subprime mortgages, low interest rates, and the growth of complex financial instruments like mortgage-backed securities. Treasury and the Fed arranged a takeover of Bear Stearns by JPMorgan Chase in the spring of 2008. At Lehman Brothers, this created expectations for similar help, but the help never came and the institution failed in the fall. Immediately thereafter, the Fed whipsawed and bailed out AIG, which had major exposure to credit default swaps insuring “toxic assets” at banks. These “toxic assets,” owing to their interplay with US bankruptcy law, risked a chain reaction of failures among many banks, leading to a 1930-style panic and complete freezing of credit in the United States.
Glossary Term