How Merrill Lynch and AIG Failed & Triggered the Credit Crunch

November 14, 2008

Why did Merrill Lynch and AIG fail?  How did these huge financial companies run out of money? Gretchen Morgenson, financial writer for the New York Times, does a nice job explaining what happened in this radio interview.

Morgenson covers Merrill Lynch’s and Lehman Brothers heavy involvement in the mortgage industry and how the securitization of loans (pooling, repackaging, and selling loans to investors) of varying degrees of risk and interest rates were a cause for such a big mess.

If you’ve heard talk lately about collateralized debt obligations, synthetic CDO’’s, and credit default swaps but aren’t clear on what they are, Morgenson’s description does a good job explaining the financial instruments and how Wall Street was making so much money with them.

After hearing her describe the financial relationships, you’ll understand how a combination of factors led to the financial crisis:

  • Failures of the ratings agencies to do their job
  • Investment banks speculating and creating enormous risk by using financial instruments that were designed to be a hedge against risk
  • Insurance companies like AIG writing insurance policies that they were capitalized enough to cover

It almost seemed as though Wall Street was creating money out of thin air but once people started defaulting on the mortgages that the securities were based on the whole system started to fall apart in a chain reaction that we’ll all be feeling the effects of for years to come.

If you’re looking for an understandable explanation of how things fell apart this one does a pretty good job.

Ben

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Ben

Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn’t like the other kids… His addiction to personal finance has paid off for his family and now he’s helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.


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