Bmun's fall conference 2021 - the 2008 financial crisis - Berkeley Model United Nations
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bmun’s
fall conference
2021
the 2008 financial
crisis
BERKELEY MODEL UNITED NATIONS 1introductory Letter
Hello, delegates! My name is Megan Gramling and I will be your head chair for BMUN Fall
Conference’s Financial Crisis Committee. I am currently a third year at Berkeley, majoring in econom-
ics with a minor in public policy. I have always had a growing interest in international politics and
relations, which was what originally sparked my interest to join MUN. This will be my third year in
BMUN and my seventh year in MUN altogether. Outside of BMUN, I hold a position in my sorority,
Delta Gamma, and mentor students at a local elementary school through the Sage Mentorship
Program. Some of my favorite things to do are travel, go to the beach, run, and binge watch Crimi-
nal Minds. I can’t wait to meet you all in committee!
Our committee will be starting on September 29th, 2008, the official date of the stock market
crash which led to years of financial crisis globally. Everything that has occurred prior to this day is
set in stone, yet all events and decisions starting September 29th, 2008, are up to the delegates. So,
not only will delegate’s decisions impact their own jobs and the United States economy, but they will
also influence history worldwide, whether they develop a quick solution to the crisis or a multi-year
plan. We hope that through a rapid response within committee, delegates can mitigate the extreme
repercussions of the financial crisis on a national and global scale.
background on economics in the U.S.
Economics and Important Terms to Know
Housing Bubble: A “bubble” in the economy occurs when the price of an asset (something
which contains economic value) eventually exceeds the true intrinsic value (Team, T. I.). Essentially,
the price of an asset can grow so much that it is way beyond the typical price and does not corre-
spond with its fundamental value. Beginning in the 1990’s, the price of housing across the U.S. start-
ed increasing, leading to the formation of the housing bubble.
Subprime Mortgages: Subprime mortgages are housing loans that are granted to borrowers
that have low, impaired credit scores or even no credit score at all (Amadeo). This includes granting
loans to borrowers who have been bankrupt, have low income, or have low credit scores. Subprime
mortgage rates typically carry a higher interest rate than that of a primary mortgage. This occurs to
compensate for the higher risk which the lender is taking on (Amadeo).
Derivatives: Derivatives are secondary securities (a tradable asset) that derive their value from
primary securities. Even though they are based on assets, owning a derivative does not mean that
the investor also owns the underlying asset. Derivatives are often contracted due to its well-known
benefit of hedging risks (Fernando).
Credit Default Swaps: Credit default swaps are financial derivatives that allow investors to
offset their credit risk with that of another investor (Hayes).
BERKELEY MODEL UNITED NATIONS 2organizations involved
Within the United States, there’s a wide variety of companies and government organizations
that are involved with the financial system and markets. First off, the Federal Reserve, also known
as the Fed, is the central bank of the U.S. that controls the monetary policy for the country with the
main purpose of maintaining price stability and full employment (Ihrig). The Fed has the capabilities
to control short-term interest rates by manipulating the federal funds rate. Essentially, by fluctuating
this rate that determines the interest rates banks charge each other to borrow, the Fed controls the
nation’s money supply and monetary policy (Ihrig). Being an organization that can regulate banks,
the Fed essentially failed in this aspect leading up the financial crisis. They had the ability to crack-
down on the unsound lending practices in the subprime mortgage market but continued to ignore
the numerous warnings of the malpractice in the industry (Duca). Another government organization
heavily involved in the financial crisis is the Securities and Exchange Commission (SEC). The SEC is
yet another organization that had the power to monitor fraud in businesses selling credit derivatives
as well as surveillance investment banks to determine if they maintained the adequate capital to
trade. As the financial system became deregulated, the SEC disassembled parts of their organization
that regulated markets and protected investors. At the same time, the organization failed to detect
and prevent negligent and abusive securities firms from overlending in subprime markets. Moving
on, two more government sponsored organizations, the Treasury and the Federal Deposit Insurance
Corp. (FDIC), were heavily involved in the recovery process as the financial crisis occurred. The Trea-
sury has the responsibility of supervising national banks, controlling production of american currency,
and managing federal finances. On the other hand, the FDIC insures deposits and supervises finan-
cial institutions with the purpose of conserving the public’s confidence in the financial system and
developing stability within the system (Your Insured Deposits).
causes of the crisis
Although experts have yet to agree on the causes of the crisis, it is safe to assume that there
was a wide variety of issues that led to the downfall in the United States’ financial system in 2008.
Between the nation’s financial systems being deregulated to the housing market collapsing, there
were a multitude of factors which led to the financial crisis of 2008.
Deregulation of the U.S. Financial Systems
Beginning in the 1980’s, the U.S. fell into a period with low interest rates, low inflation, and
stable growth. Because of this, many investors and bankers felt comfortable accumulating more risk
in the financial market, especially by lending and borrowing more than usual. The size of the bank-
ing industry had been decreasing as larger banks acquired smaller, commercial banks (Chouliara).
Eventually, the U.S. government began deregulating the financial system that had been in place
since the Great Depression. At the same time, banks had increased debt securitization (converting
bad debt into market securities) to include mortgages, meaning that financial services could finance
residential mortgages through securities instead of commercial banks (Chouliara).
BERKELEY MODEL UNITED NATIONS 3One act which heavily deregulated the financial system within the United States was the
Financial Services Modernization Act of 1999. Essentially, this act repealed portions of the 1933
Glass-Steagall Act, which prohibited affiliations between bank and securities companies, and the
1956 Bank Holding Company Act, similarly prohibiting affiliations between banks with the insur-
ance industry. With this enacted, it led to the creation of Financial Holding Companies (FHC) and
allowed for mergers between commercial banks, stock brokerage companies, and even insurance
companies (Chouliara). The banking industry had been consolidating for years before this but when
congress passed this act, they sped up the process of financial integration.
Following the Financial Service Modernization Act, the Commodity Futures Modernization
Act (CFMA) was passed by Congress one year later, focusing on deregulating swaps and derivative
transactions, such as futures contracts or securities trades (Chen). In short, the CFMA excused all
derivatives from SEC or CFTC oversight and declared all financial derivatives legally enforceable.
Prior to this act being signed into law, not all derivatives were enforceable. By 2008, the derivatives
market was “estimated to be in excess of $600 trillion” (The Role of Derivatives, 11). At that time,
about $65 trillion of that excess was in credit default swaps (CDS); a swap in which 100% of the
sum guaranteed is at risk. However, the Fed estimated the total risk of the $600 trillion to only be
about 3% of the total, not considering the risk of CDS (The Role of Derivatives, 11).
The Housing Bubble and Subprime Mortgages:
Beginning in 2006, housing prices started falling drastically; something that has rarely oc-
curred in U.S. history. As the price of housing decreased and houses lost their original value, many
subprime borrowers started failing to pay back their loans. These subprime borrowers relied on
selling their homes after a few years to pay off their subprime mortgages before the interest rates
spiked on their mortgages. Soon, subprime borrowers couldn’t sell their home for the original val-
ue; something they relied on in order to pay off their loan before the interest rates rose above the
“teaser value” (Amadeo).
As subprime borrowers couldn’t refinance their assets or sell their house, many started de-
faulting on their loans. This led owners of mortgage-backed securities to recognize that their de-
rivatives were no longer worth the original price and were decreasing with time (McDonald). These
people then attempted to collect insurance on the mortgage-backed securities from their insurer,
American Investment Group (AIG). As thousands of people began calling for collateral on their
credit default swaps, AIG neared bankruptcy (McDonald).
Stock Market Crash:
When real estate prices began collapsing in 2006, investors started shorting the real estate market
and betting against the market. With that, the subprime credit market started declining rapidly
and billions of dollars of pending buyout deals collapsed. The federal government responded by
flooding the market with money, hoping to de-stigmatize the discount window for banks and make
emergency liquidity money available for large investment banks (Guynn). As the Fed drastically
increased the amount of money in the market, inflation of the U.S. dollar skyrocketed, while prices
of everyday items such as oil and agricultural products increased also. Many credit markets began
drying up as the market value of U.S. institutions crashed, including mortgage companies,
Freddie Mac and Fannie Mae. Although the government attempted to salvage these two
BERKELEY MODEL UNITED NATIONS 4companies through encouraging the treasury to write blank cheques, the market value continuously
decreased (Guynn). This attempt to save these two companies failed, leading the Treasury to try one
last solution; making Fannie Mae and Freddie Mac into conservatorship and promised to introduce
$200 billion of capital into the companies through stocks and warrants (Guynn). This caused a huge
drop in the junior preferred common stock for these two companies, but the senior stocks remained
highly valued (Guynn).
Then, on September 15, 2008 Lehman Brothers, one of the largest investment banks at the
time, filed for bankruptcy and collapsed. With the de-regulation of financial services, Lehman Broth-
ers was capable of purchasing mortgage backed securities and even acquired five mortgage lend-
ers (Guynn). However, as the housing market began declining and defaults on subprime mortgages
increased, Lehman’s stock dropped while their liabilities grew drastically. For almost all of 2008,
Lehman’s stock value continued to decline as many creditors and hedge fund clients initiated aban-
doning the company (Lioudis). The company eventually filed for bankruptcy after losing so many
creditors, as well as stock value. The following day, American Investment Group followed suit and
declared bankruptcy as well. Essentially, AIG had been accruing unpaid debt all year as investors
demanded collateral on their credit default swaps. With news of huge banks and investment firms
collapsing, American distrust in the financial system grew exponentially and many investors began
selling all of their stocks. The final tipping point of the crash occurred when Congress voted against
the Bank Bailout Bill, a bill which had potential to withhold the collapsing market a little longer. With
this veto, the DOW dropped 777 points within one trading day and many international markets fol-
lowed, leading to a financial crisis that would last for years.
questions to consider
1. How do your solutions impact the organization that your character works for and does this benefit
the financial situation within your organization?
2. In what ways can you mitigate the problem before it further impacts international markets any
more?
3. After the downfall of the financial system, how can you implement policies that will lead Ameri-
cans to trust the U.S. financial system again?
4. Is it more essential to focus on short-term recovery within the economy (such as unemployment
and high inflation) or long-term restructuring of the U.S. financial system? How can you create poli-
cies which take both of these situations into consideration?
Sources
Amadeo, K. (n.d.). How subprime mortgages helped cause a crisis. The Balance. https://www.
thebalance.com/what-is-a-subprime-mortgage-3305965.
Chen, J. (2021, May 19). Commodity futures Modernization Act (cfma) Definition. Investope-
dia. https://www.investopedia.com/terms/c/cfma.asp.
BERKELEY MODEL UNITED NATIONS 5Chouliara. (n.d.). The Financial Services Modernization Act of 1999. American predatory lend-
ing. https://predatorylending.duke.edu/legislation-deprecated/legislative-memos/the-financial-ser-
vices-modernization-act-of-1999/.
Duca, J. V. (n.d.). Subprime mortgage crisis. Federal Reserve History. https://www.federalre-
servehistory.org/essays/subprime-mortgage-crisis.
Fernando, J. (2021, August 23). Derivative definition. Investopedia. https://www.investopedia.
com/terms/d/derivative.asp.
Hayes, A. (2021, August 24). Credit default swap (cds) definition. Investopedia. https://www.
investopedia.com/terms/c/creditdefaultswap.asp.
Ihrig, J. E., & Wolla, S. A. (2020, September 14). How the Fed Influences interest rates using
its new TOOLS: St. Louis Fed. How the Fed Influences Interest Rates Using Its New Tools | St. Louis
Fed. https://www.stlouisfed.org/open-vault/2020/august/how-does-fed-influence-interest-rates-us-
ing-new-tools.
Guynn, R. (2010, November 20). The financial Panic of 2008 and financial regulatory re-
form. The Harvard Law School Forum on Corporate Governance. https://corpgov.law.harvard.
edu/2010/11/20/the-financial-panic-of-2008-and-financial-regulatory-reform/.
McDonald, Robert. Gaylord Freeman Distinguished Chair in Banking; Professor of Finance.
(n.d.). What went wrong at aig? Kellogg Insight. https://insight.kellogg.northwestern.edu/article/
what-went-wrong-at-aig.
Lioudis, N. (2021, May 19). The collapse of Lehman Brothers: A case study. Investopedia.
https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp.
The Role of Derivatives in the Financial Crisis. (2010).
Team, T. I. (2021, June 9). What is a housing bubble? Investopedia. https://www.investopedia.
com/terms/h/housing_bubble.asp.
Your insured deposits. FDIC. (n.d.). https://www.fdic.gov/resources/deposit-insurance/bro-
chures/insured-deposits/.
BERKELEY MODEL UNITED NATIONS 6You can also read
