The term "global financial crisis" generally refers to the severe worldwide economic crisis that

occurred in 2007-2008, often called the Global Financial Crisis (GFC) or the Great Recession.
Here's a detailed overview of the crisis, including a real case:
Overview of the Global Financial Crisis
1. Causes of the Crisis:
• Subprime Mortgage Market: Banks in the U.S. extended loans to high-risk borrowers
(subprime mortgages) who had a higher chance of defaulting. These loans were bundled
into mortgage-backed securities (MBS) and sold to investors, including financial
institutions around the world.
• Housing Bubble: A significant rise in housing prices led many people to believe that
the real estate market would continuously grow. This bubble was fueled by easy credit
conditions, lax lending standards, and speculative investments.
• Financial Innovation and Risk Mismanagement: Complex financial instruments like
collateralized debt obligations (CDOs) and credit default swaps (CDS) were developed.
These instruments, while intended to manage and spread risk, actually concealed the
level of risk from investors and regulators.
• Lack of Regulation: There was insufficient oversight of the financial institutions and
markets involved in these high-risk financial products. This lack of regulation allowed
for excessive risk-taking.
2. Timeline of Key Events:
• 2007: Problems in the subprime mortgage market began to surface as homeowners
started defaulting on their loans, leading to significant losses for banks and investors
holding MBS.
• 2008: The crisis escalated. Key events include:
o March 2008: Investment bank Bear Stearns was acquired by JPMorgan Chase
in a fire sale, backed by the Federal Reserve.
o September 2008: Lehman Brothers, a major financial services firm, declared
bankruptcy. This event sent shockwaves through the global financial system,
causing panic and a severe credit crunch.
o September 2008: The U.S. government bailed out American International
Group (AIG), a giant insurer heavily involved in CDS.
o October 2008: Stock markets worldwide plummeted, and banks faced severe
liquidity crises, leading to government interventions and bailouts in multiple
countries.
3. Impact of the Crisis:
• Global Recession: The GFC led to the deepest global recession since the Great
Depression. Unemployment rates soared, GDP contracted, and millions of people lost
their jobs and homes.
 • Bank Failures and Bailouts: Several banks failed or required government bailouts to
survive. The financial sector experienced a significant shakeup.
• Impact on the Eurozone: Countries like Greece, Spain, and Ireland faced severe debt
crises, which later led to austerity measures and economic instability in the Eurozone.
• Long-term Effects: The crisis had lasting effects, including increased regulation of
financial markets (e.g., the Dodd-Frank Act in the U.S.), a reevaluation of risk
management, and changes in monetary policy.
Real Case: The Fall of Lehman Brothers
Lehman Brothers was a global financial services firm that played a pivotal role in the 2008
crisis. Here’s a closer look at its collapse:
Background:
• Lehman Brothers was founded in 1850 and grew to become the fourth-largest
investment bank in the U.S. by 2008. It was heavily involved in mortgage origination,
mortgage-backed securities, and real estate investments.
Crisis Unfolds:
• Exposure to Subprime Mortgages: Lehman Brothers had a significant exposure to
the subprime mortgage market. As defaults increased, the value of its mortgage-related
assets plummeted.
• Failed Rescue Attempts: In the weeks leading up to its collapse, Lehman tried to
secure a rescue package. Negotiations with potential buyers like Bank of America and
Barclays fell through, partly because the U.S. government refused to provide a bailout
similar to Bear Stearns.
• Bankruptcy Filing: On September 15, 2008, Lehman Brothers filed for bankruptcy,
marking the largest bankruptcy in U.S. history, with over $600 billion in assets. The
filing sent shockwaves through global financial markets, leading to a freeze in credit
markets and a massive sell-off in stock markets.
Consequences:
• The failure of Lehman Brothers amplified the panic and lack of trust among financial
institutions, causing a severe credit crunch.
• It led to significant financial losses for investors and other institutions that had exposure
to Lehman.
• The collapse highlighted the systemic risk in the financial system and the need for
greater oversight and regulation of financial institutions.
Lessons Learned from the Global Financial Crisis
1. Importance of Risk Management: The GFC showed the dangers of inadequate risk
management and the need for financial institutions to properly assess and manage the
risks of their investments.
 2. Need for Regulatory Oversight: The crisis led to the realization that stronger
regulatory oversight and transparency in financial markets are essential to prevent
excessive risk-taking and to protect consumers and investors.
3. Interconnectedness of Global Finance: The GFC highlighted how interconnected the
global financial system is. Problems in one market can quickly spread and affect
economies around the world.
4. Importance of Liquidity: The crisis underscored the importance of maintaining
liquidity in financial markets and the need for central banks to act as lenders of last
resort in times of crisis.
The Global Financial Crisis remains a key event for understanding modern financial markets,
economics, and regulatory policies. It serves as a stark reminder of the potential consequences
of financial instability and the importance of maintaining a balanced, well-regulated financial
system.