Colossal Bailouts, Monetary Policy, or Drug Money: What Saved the Global Economy in 2008?
What came to be known as the Great Recession started in 2006, when sales of new homes, having risen steeply since the turn of the millennium, began to weaken. The downturn accelerated in 2007 and, in March, it had ensnared two notable hedge funds that were heavily invested in complex securities linked to mortgages.
They were managed by Bear Stearns, one of Wall Street’s leading investment banks at the time. The bank tried to save the funds but was undermined by collapsing securities prices as fears about the fallout from a distressed US housing sector spread rapidly through both US and international markets.
While Bear Stearns was rescued and bought for a fraction of its pre-crisis value by J.P. Morgan in March 2008, Lehman Brothers, another big Wall Street firm, was not so lucky. Grossly over-exposed to the same mortgage-backed securities, Lehman Brothers declared bankruptcy in September 2008 owing USD 613 billion, the largest bankruptcy in US history to date. This, in turn, has sent a shockwave of terror through financial markets worldwide.
Lehman Brothers and Bear Stearns had trading relationships with leading banks around the world, but none of those counterparties knew which of their peers were exposed to the two failed institutions, nor to what degree. The worldwide financial system froze; banks became frightened of lending to each other and could no longer access the liquid assets that were the medium for such interbank funding.
What was the capital flowing from during the "Liquidity Crunch"?
In December 2009, Antonio Maria Costa, executive director of the United Nations Office on Drugs and Crime from 2002 to 2010, spoke to a British newspaper. In the interview, he claimed that some banks during the financial crisis had been saved by a surprising source: billions of dollars that ‘originated from the drugs trade and other illegal activities.’
Read the full article on our website to discover the intricate dynamics of how the financial crisis unfolded and the controversial role illicit funds may have played in stabilizing the global banking system.
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