In Part 2: The Banking Crisis, we pick up where Part 1: The Housing Bubble leaves off—with financial institutions all over the world holding mortgage-backed securities as housing prices start to collapse at the end of 2006.
In this episode, we tell the story of a financial system that became addicted to mortgage products and complacent about their risk.
We cover the basics of banking—how short-term funding and long-term lending creates fragility in normal times, and outright panic in a crisis. We explore how credit default swaps, collateralized debt obligations, and the repo market works—and how they failed. We show how these complex, opaque instruments amplified risk, created false confidence, and turned mortgage losses into a global banking crisis.
It’s the story of how flawed incentives, complicated models, and unregulated derivatives brought down some of the most storied institutions in finance like Bear Stearns, Lehman Brothers, Merrill Lynch, AIG, Fannie Mae and Freddie Mac.
And we walk through the harrowing events of 2007-2009—from emergency bailouts to catastrophic bankruptcies—that left deep scars on the financial system, the economy, and public trust.
Part 1 was about the fuel. Part 2 is about the fire.
Chapters:
(01:09) The Housing Bubble
(08:57) Basics of Banking
(20:42) Innovation with Credit Default Swaps
(33:24) The Rise & Evolution of Collateralized Debt Obligations, CDOs
(49:59) CDO Manager Incentives
(52:09) Lack of Regulation
(58:27) First Round of Failures in 2007
(01:02:05) Repo Market Freezes
(01:07:23) More Failures in 2007
(01:14:13) Banking Crisis in 2008 & Bail Outs
(01:35:57) 2008 Presidential Election & The Crisis Aftermath
References:
The Great American Housing Bubble: What Went Wrong and How We Can Protect Ourselves in the Future by Adam J. Levitin, Susan M. Wachter
All the Devils Are Here: The Hidden History of the Financial Crisis by Bethany McLean and Joe Nocera
Panic: The Betrayal of Capitalism by Wall Street and Washington by Andrew Redleaf and Richard Vigilante
The Big Short: Inside the Doomsday Machine by Michael Lewis (book, movie)
On the Brink: Inside the Race to Stop the Collapse of the Global Financial System by Henry Paulson
Too Big to Fail by Andrew Ross Sorkin (book, movie)
Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze (Amazon)
Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe by Gillian Tett
The Courage to Act: A Memoir of a Crisis and Its Aftermath by Ben Bernanke
Firefighting: The Financial Crisis and Its Lessons by Ben Bernanke, Hank Paulson, and Timothy Geithner
The Rise and Fall of Bear Stearns by Alan Greenberg and Mark Singer
PBS Frontline Documentary: The Warning
PBS Frontline Documentary: Money, Power and Wall Street
Lectures by Ben Bernanke at Georgetown (link)
Warren Buffett on Derivatives (2002 Shareholder Letter)
Warren Buffett Interview with Andrew Ross Sorkin (Ten Year Anniversary Special from CNBC)
Reports by the Financial Crisis Inquiry Commission (main report, HHT dissent, Wallison dissent)
Tower of Basel: The Shadowy History of the Secret Bank That Runs the World by Adam LeBor
Greenspan, Snow Congressional Hearing in October 2008 (transcripts, video excerpt)
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