Reviewing the financial crisis: A descriptive analysis of the turmoil in financial markets 2007-2009

Abstract: The global financial crisis that originated in 2007 is commonly claimed to have been caused by subprime mortgages and a real-estate price bubble in the U.S. The aim of this descriptive thesis is to give an overview of the instruments and institutions that were in the centre of the financial turmoil that started in 2007, using previous research on the crisis as starting point. The reader is guided through the developments in the U.S. mortgage market, the securitization process where mortgages and other assets are transformed into financial instruments, and the institutional setting surrounding mortgage-related financial instruments. Following the structural overview of the mortgage-related financial market is a timeline of significant events during the crisis, and a case study on the near default of Bear Stearns, at the time one of the largest investment banks in the United States. The information presented is combined to provide an overview of the market interconnection, and a qualitative analysis of the gathered information is made to identify some of the major factors causing the crisis. The authors argue that the increase in mortgage origination, mortgage securitization, use of leverage by financial institutions and the institutional interconnectivity were some of the main factors behind the crisis.