Financial crisis of 2007–2008

This article is about the series of financial market events, starting in July 2007, which suggested a weakening in the world economies. For details on the stock market crashes and bank bailouts of late 2008, see Global financial crisis of 2008. For economic issues beyond the financial markets, see Late 2000s recession.

The financial crisis of 2007–2008, initially referred to in the media as a "credit crunch" or "credit crisis", began in July 2007[1][2] when a loss of confidence by investors in the value of securitized mortgages in the United States resulted in a liquidity crisis that prompted a substantial injection of capital into financial markets by the United States Federal Reserve and the European Central Bank.[3][4] The TED spread, an indicator of perceived credit risk in the general economy, spiked up in July 2007, remained volatile for a year, then spiked even higher in September 2008,[5] reaching a record 4.65% on October 10, 2008. In September 2008, the crisis deepened, as stock markets world-wide crashed and entered a period of high volatility, and a considerable number of banking, mortgage and insurance company failures in the following weeks
Although America's housing collapse is often cited as having caused the crisis, the financial system was vulnerable because of intricate and over-leveraged financial contracts and operations, a U.S. monetary policy making the cost of credit negligible therefore encouraging such over-leverage, and generally an "hypertrophy of the financial sector"[7] (financialization).

One example was credit derivatives - Credit Default Swaps (CDS), which insure debt holders against default. They are fashioned privately, traded over the counter outside the purview of regulators.[8] The U.S. government's seizure of the mortgage companies prompted an auction of their debt so that traders who bought and sold default protection (CDS) could settle contracts. The auctions are used to set a price by which investors can settle the contracts with cash rather than having to physically deliver a bond to their counter-parties. Sellers of protection pay the face value of the contracts minus the recovery value set on the bonds.