1. Financial Institutions and Markets
Market Failure, Crises, and Regulation

2. Financial Markets and Society
Financial exclusion
Household indebtedness
Fraud and scandals
Market bubbles, crashes, and financial crises

3. The Financial Crisis of 2008: What Happened?
Financial institutions created instruments they did not fully understand
Lenders made loans which borrowers could not pay
Individuals bought houses they could not afford
Insurance companies underestimated losses
Rating agencies accepted unrealistic projections

4. The Role of Financial Institutions
Securitization: a finance tool designed to increase liquidity and lower risk and cost in the debt markets
Motivation? Additional revenue for the investment bank
Accountability? Minimal; the investment bank does not have capital at risk

5. The Role of Lenders Traditional loan requirements
Verified employment
Good credit history
Meaningful down payment
New loan requirements
No employment verification
“Subprime” credit options
No down payment required
Interest rate structure – from fixed to variable

6. The Role of Individuals
Lack of personal financial accountability
Blind faith in the continued increase in real estate values
Borrowing against real estate for personal expenditures

7. The Role of Insurance Companies
Failure to realistically assess projected loan performance assumptions
Conflict of interest; no insurance, no income

8. Rating Agencies
Failure to realistically assess loan performance assumptions
Conflict of interest; no rating, no revenue
Overreliance on credit insurance without considering the insurers’ ability to pay

9. Why Did It All Come Crashing Down?
Spending was based on debt, not the fundamental economic concept of growth
Debt was based on increasing real estate values, not the fundamental economic concept of risk
Increasing real estate values were the result of increased availability of debt, not the fundamental economic concept of value

10. Financial Markets and Government Regulation
A free market economy
Allows individuals to make choices in their best interest
Provides opportunity for manipulation and excess
Government regulation
Limits individual choice
Limits the potential for manipulation and excess