February 24, 2015 Articles

The Global Financial Crisis and Reinterpreting Lessons from History

Learn why the conventional wisdom that banks skirted the rules may not be accurate

By Sumon Mazumdar and Nikolai Caswell

“In the aftermath of the global financial crisis of 2007–2009, the world became all too familiar with the formerly obscure “alphabet soup” of structured finance and credit default swaps. Collateralized debt obligations (CDOs) backed by subprime mortgages and other “financial weapons of mass destruction” are widely seen to lie at the heart of the crisis. According to highly regarded academic economists, hundreds of billions of bank and insurance sector losses stemming from these complex financial positions led to a run on the “shadow” banking sector and helped drive the global financial system to the brink of collapse.  Gary B. Gorton & Andrew Metrick, “Securitized Banking and the Run on Repo” (Nat’l Bureau of Econ. Research, Working Paper No. 15223, Aug. 2009). Following the crisis, there was a wave of litigation and heated debate among academics, policy makers, and banking professionals about the role fair value accounting rules for CDOs and other structured finance products played in exacerbating and even primarily causing the financial crisis.

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