Some banks loaned even more to have an excuse to securitize those loans

Running out of who to loan to, banks turned to the poor; the subprime, the riskier loans. Rising house prices led lenders to think it wasn’t too risky; bad loans meant repossessing high-valued property. Subprime and “self-certified” loans (sometimes dubbed “liar’s loans”) became popular, especially in the US.

Some banks evens started to buy securities from others.

Many banks were taking on huge risks increasing their exposure to problems. Perhaps it was ironic, as Evan Davies observed, that a financial instrument to reduce risk and help lend more—securities—would backfire so much.

The problem was so large, banks even with large capital reserves ran out, so they had to turn to governments for bail out.

As people became successful quickly, they used derivatives not to reduce their risk, but to take on more risk to make more money. Greed started to kick in. Businesses started to go into areas that was not necessarily part of their underlying business.In effect, people were making more bets — speculating. Or gambling.Hedge funds, credit default swaps, can be legitimate instruments when trying to insure against whether someone will default or not, but the problem came about when the market became more speculative in nature.

The market for credit default swaps market (a derivative on insurance on when a business defaults), for example, was enormous, exceeding the entire world economic output of $50 trillion by summer 2008. It was also poorly regulated. The world’s largest insurance and financial services company, AIG alone had credit default swaps of around $400 billion at that time. A lot of exposure with little regulation. Furthermore, many of AIGs credit default swaps were on mortgages, which of course went downhill, and so did AIG.

The trade in these swaps created a whole web of interlinked dependencies; a chain only as strong as the weakest link. Any problem, such as risk or actual significant loss could spread quickly. Hence the eventual bailout (now some $150bn) of AIG by the US government to prevent them failing.Derivatives didn’t cause this financial meltdown but they did accelerate it once the subprime mortgage collapsed, because of the interlinked investments. Derivatives revolutionized the financial markets and will likely be here to stay because there is such a demand for insurance and mitigating risk. The challenge now, Davis summarized, is to reign in the wilder excesses of derivatives to avoid those incredibly expensive disasters and prevent more AIGs happening.

Hank didn’t plan to leave when he left, so the normal transition when a CEO leaves that you hope happens when a CEO leaves didn’t happen.”

perations in more than 100 nations.

accusing him of improperly taking $4.3 billion in stock.

It wasn’t very tough,”