How Did We Get Here? The Story of the Credit Crisis

Thu Apr 30 16:24:38 EDT 2009
By Dr. Faten Sabry and Dr. Chudozie Okongwu

Since August 2007, approximately 40 banks, a major insurance company, government sponsored enterprises (Fannie Mae and Freddie Mac), and several investment banks have either failed or required substantial government assistance. Meanwhile, the financial crisis has yet to show signs of coming to an end. As housing prices continue to decline at the national level, delinquencies and defaults on subprime and prime mortgages, credit cards, auto loans, and others continue to increase. The flight to quality has led to a severe liquidity crisis that has extended to all sectors of the world economy.

How did problems that first manifested in a relatively small part of the mortgage market lead to a contagion affecting other types of credit including credit cards, student loans, and others, and then quickly spread to threaten the liquidity and possible solvency of many financial institutions around the world? In this paper, NERA Senior Vice Presidents Dr. Chudozie Okongwu and Dr. Faten Sabry examine the problems in the mortgage markets and the subsequent contagion that led to the current credit crisis, and provide a critical analysis of the possible contributing factors. The authors argue that, although there is no easy explanation for how the contagion spread so quickly, there are several possible explanatory factors that have become apparent as the crisis continues to unfold. However, even after the credit crisis is over, it is not clear that the financial markets will ever be the same again.

"How Did We Get Here? The Story of the Credit Crisis" has been published in the Spring 2009 issue of the Journal of Structured Finance.