Mortgage Crisis and Financial Fallout

Hedge fund refers to an investment fund that pools together its capital from either
accredited investors or institutional investors and thereafter invests in assets that have a
complicated portfolio and techniques that manage risk. Hedge funds are strictly availed to
accredited investors and not offered or sold to the general public. The 2008-09 financial crisis
often called the global financial crisis was according to economists the most severe since the
great depression of the early 20 th century. The subprime mortgage market crisis in 2007 marked
the beginning of the global financial crisis. The great financial crisis had not yet been
pronounced a banking crisis until September 15 th 2008 when Lehman Brothers; an investment
bank collapsed. The ability of banks such as Lehman Brothers to engage in excessive risk

Mortgage Crisis and Financial Fallout

By 2008, about 17% of homeowners had mortgages that exceeded the value of their homes. In an attempt to fix this, quasi-government agencies like Fannie Mae and Freddie Mac, along with Wall Street investors, began to package these mortgages. This process is known as securitization (Orhangazi p.28).

However, things escalated when Wall Street combined both prime and sub-prime mortgages into one investment, calling it “credit default swaps” (CDS). To worsen the situation, management decided to leverage these CDS. As a result, homeowners started to default on the mortgages underlying the CDS portfolio.

After the financial crisis, hedge fund managers had to agree on measures to help recover from the situation.