The 2008 Financial Crisis Explained Like You’re 5 — Transcript

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1. 0:00September 2008, a 158-year-old bank
2. 0:04collapsed overnight. $600 billion gone.
3. 0:07Retirement accounts vanish. Millions
4. 0:10lose jobs. But what if I told you the
5. 0:13real cause started with a lie so simple
6. 0:15you could fit it on a billboard? Why
7. 0:18rent when you can own?
8. 0:23Cue the upbeat music. It's 2002. America
9. 0:26is still nursing a hangover from the do
10. 0:28crash. 911 just sucker punched the
11. 0:31economy and Wall Street kind of twitchy.
12. 0:34But don't worry, the Federal Reserve has
13. 0:36a plan. Slash interest rates to
14. 0:38basically zero. Boom. Money's cheap.
15. 0:42Borrowing is easy. And suddenly,
16. 0:44everyone's favorite national pastime
17. 0:46isn't baseball anymore. It's buying a
18. 0:49house.
19. 0:53Congratulations. You're approved for
20. 0:55$500,000,
21. 0:57but we make $40,000 a year. Not a
22. 1:00problem. Adjustable rate, balloon
23. 1:02payment, ninja loan. Wait, what's a
24. 1:05ninja loan? No income, no job, no
25. 1:08assets, no problem. See, back in the
26. 1:12early 2000s, home ownership wasn't just
27. 1:14a roof and four walls. It was the
28. 1:16American dream. It meant stability,
29. 1:19status, suburban bliss, and the message
30. 1:22being pumped through every ad,
31. 1:24billboard, and mortgage seminar was loud
32. 1:26and clear. Why rent when you can own?
33. 1:30Banks agreed. In fact, they agreed so
34. 1:32hard they started throwing money at
35. 1:34people like it was a game show, and
36. 1:35everyone was winning. Enter the subprime
37. 1:39mortgage. Translation: loans for people
38. 1:43with bad credit, unstable income, or a
39. 1:45vague idea of what money even is. Bad
40. 1:48credit, no credit, living in a van. You,
41. 1:52sir, qualify for a luxury condo. Should
42. 1:55I be worried about paying this back? Not
43. 1:58your problem. If you default, we just
44. 2:00sell the house for more. It was a
45. 2:02housing gold rush, a frenzy. Everyone
46. 2:05was buying. Prices skyrocketed. Your
47. 2:08neighbor's house doubled in value in 6
48. 2:10months. Normal. Even McDonald's
49. 2:13part-timers and baristas with $5 in
50. 2:15savings are approved for mortgages. Just
51. 2:17a normal day in the 2000s. And the
52. 2:20rules, oh, those got launched straight
53. 2:22out the window.
54. 2:25Traditional lending standards too slow.
55. 2:27Risk assessments too boring. Down
56. 2:30payments optional. If you had a pulse,
57. 2:33you had a mortgage. People bought houses
58. 2:36like ramen noodles. Lenders printed
59. 2:38loans like monopoly money. Mortgage
60. 2:40brokers made commissions faster than
61. 2:42they could say bubble. Behind all the
62. 2:44buzz was a blind faith that housing
63. 2:46prices would always go up because they
64. 2:48always had until now. But beneath the
65. 2:52open houses and granite countertops, a
66. 2:54question lingered. What could possibly
67. 2:56go wrong? Spoiler. Everything. But we're
68. 3:01just getting started. By 2005, buying a
69. 3:04house wasn't about stability anymore. It
70. 3:07was about flipping it like a pancake and
71. 3:09hoping the next buyer paid double. Real
72. 3:11estate wasn't shelter. It was a lottery
73. 3:14ticket. I teach phonics during the day
74. 3:16and buy condos at night. I just bought
75. 3:19my third house with zero down. I don't
76. 3:21even live in any of them. Here's your
77. 3:24latte. Sorry it took a minute. My bank
78. 3:26just called and offered me another
79. 3:27penthouse in Miami. This wasn't
80. 3:30investing. It was a national obsession.
81. 3:33Buy, flip, profit, repeat. And the more
82. 3:35people joined in, the higher prices
83. 3:37soared. The higher they soared, the more
84. 3:39people rushed in. It was like trying to
85. 3:41put out a fire by throwing gasoline at
86. 3:43it. And everyone had a match. But
87. 3:46beneath the red-hot exterior, rot. Those
88. 3:49subprime mortgages everyone was gorging
89. 3:51on, they were bad. Like actually bad.
90. 3:55High risk, low dock, barely verified
91. 3:58debt. But Wall Street had a magic trick.
92. 4:01They bundled all that junk together,
93. 4:03slapped a label on it, and sold it to
94. 4:05investors as safe. Introducing
95. 4:09mortgagebacked securities, now with 80%
96. 4:12more lies. How do you make toxic loans
97. 4:15look like gold? Easy. You get the
98. 4:17ratings agencies to call them AAA. This
99. 4:21one's got bankrupt baristas and
100. 4:22unemployed gym bros. Ah, seems all
101. 4:25right. Here's the part they don't put on
102. 4:28the brochure. The ratings agencies were
103. 4:30getting paid by the banks they were
104. 4:31rating. It's like hiring a food critic,
105. 4:34then telling them they won't get paid
106. 4:35unless they call your raw chicken
107. 4:37Michelin starred. Behind closed doors,
108. 4:40the Raiders knew this bundle is a sack
109. 4:43of
110. 4:47But Wall Street wasn't done cooking.
111. 4:49They took those shaky mortgage bundles
112. 4:51and blended them into something even
113. 4:53more complicated. Collateralized debt
114. 4:56obligations, CDOS.
115. 4:58Through financial alchemy, garbage loans
116. 5:01became investment grade assets.
117. 5:03Actually, not everyone was fooled. A
118. 5:06handful of investors, oddballs,
119. 5:08skeptics, troublemakers, read the fine
120. 5:10print. They saw the rot inside the boom.
121. 5:13And instead of buying in, they asked a
122. 5:16bold question. What if we bet against
123. 5:18it? The problem? There was no product
124. 5:21that let you do that. So they marched
125. 5:24into Wall Street's marble fortresses and
126. 5:26said, "These loans are garbage. We want
127. 5:29to short them. Can you build something
128. 5:30that pays us if they go bust?
129. 5:33You want to bet against the housing
130. 5:35market? That's adorable."
131. 5:39Fine. You want insurance? We'll write
132. 5:41it. You pay us monthly. And when nothing
133. 5:43happens, we pocket the premium. Everyone
134. 5:46wins, especially us. I mean, it's not
135. 5:50like the whole system's going to
136. 5:51collapse, right?
137. 5:52[Music]
138. 5:54Wall Street smelled easy money. They
139. 5:56didn't believe the investors, but they
140. 5:58loved the idea of collecting steady fees
141. 6:00on something they thought could never
142. 6:02fail. So, they got to work and cooked up
143. 6:05the thing that would eventually blow up
144. 6:06the world economy.
145. 6:09Credit default swaps. Insurance
146. 6:11contracts that paid out if those
147. 6:12mortgagebacked investments went bad. The
148. 6:15weird thing is, you didn't have to own
149. 6:17the investment to buy the insurance. It
150. 6:19was like buying life insurance on your
151. 6:20neighbor's grandma. and rooting for her
152. 6:22to slip from the stairs tomorrow. The
153. 6:25whole system was a Jenga tower made of
154. 6:26lies and leverage. Every block, a bad
155. 6:29mortgage, every layer, a bigger, riskier
156. 6:32bet. And at the very top, cheers to
157. 6:36another record bonus. Who needs ethics
158. 6:38when easy money is flowing.
159. 6:40Whistleblowers were ignored. Regulators
160. 6:42were dozing off. And the people in
161. 6:44charge, too rich to care, too greedy to
162. 6:47stop. The party raged on while the floor
163. 6:50quietly cracked beneath them.
164. 6:56At first, it was a whisper. A missed
165. 6:58mortgage here, a foreclosure there, a
166. 7:01condo in Vegas sitting empty. But then
167. 7:04came the wave. And suddenly, the
168. 7:06unthinkable became the headline. Home
169. 7:08prices are falling. Housing always goes
170. 7:11up. It's basic economics.
171. 7:14That's not supposed to happen. For
172. 7:17years, the housing market had been a
173. 7:18Jenga tower made of lies, leverage, and
174. 7:21wild optimism. But in 2007, someone
175. 7:25pulled the wrong block. The subprime
176. 7:27loans, those risky rotten deals wrapped
177. 7:29in financial tinsel, started to implode.
178. 7:32And the mortgagebacked securities built
179. 7:34on them. Yeah, they were ticking time
180. 7:36bombs and they exploded. Banks that had
181. 7:39stuffed their portfolios with safe
182. 7:41assets suddenly realized they were
183. 7:43holding radioactive garbage. the AAA
184. 7:45rated bundles. Actually, financial
185. 7:48plutonium. We can't sell this junk then
186. 7:52market to zero. But that means, yeah,
187. 7:56we're screwed. Panic spread like
188. 7:58wildfire. Hedge funds bleeding.
189. 8:01Investment banks slashing billions in
190. 8:04losses. And then boom. Leman Brothers, a
191. 8:09158-year-old institution, gone. No
192. 8:12bailout, no hero. just a $600 billion
193. 8:16crater in the middle of Wall Street. The
194. 8:18message was clear. If Lehman can die,
195. 8:21anyone can. Overnight, banks stopped
196. 8:24lending to each other. Credit markets
197. 8:26froze solid. It was like someone yanked
198. 8:28the power cord on the global economy. I
199. 8:31need a loan to make payroll. Sorry, no
200. 8:34liquidity. What does that even mean? It
201. 8:38means we're closed. Good luck.
202. 8:41Everything jammed. Families couldn't get
203. 8:43mortgages. Businesses couldn't make
204. 8:45payroll. Investors couldn't cash out.
205. 8:48Retirees watched their pensions
206. 8:50evaporate in real time. 401ks
207. 8:53toast. Life savings gone. Job market
208. 8:57vaporized. By late 2008, it was full
209. 9:01collapse mode. Millions unemployed.
210. 9:03Foreclosures through the roof. Eviction
211. 9:06notices stacked like junk mail. Soup
212. 9:09kitchens, a place where food is offered
213. 9:10to hungry and homeless people, couldn't
214. 9:12keep up. Unemployment offices looked
215. 9:15like disaster relief camps. This wasn't
216. 9:17just Wall Street burning. This was Main
217. 9:20Street in freef fall. And it didn't stop
218. 9:22at the US border. Iceland's major banks
219. 9:25collapse. Tokyo stocks plummet. European
220. 9:29leaders scrambled to respond. From
221. 9:31London to Reik, Tokyo to S. Paulo.
222. 9:34Markets crashed. Banks buckled. Global
223. 9:37economies spiraled. The question was no
224. 9:39longer who's next. It was is the entire
225. 9:43system broken. The Great Recession had
226. 9:45officially begun.
227. 9:48The US government had one impossible
228. 9:50choice. Let it all burn or throw
229. 9:53billions of taxpayer dollars to the very
230. 9:55guys who lit the match.
231. 9:57October 2008, they picked the latter
232. 10:00one. I need $700 billion
233. 10:03for what? to shovel into burning banks
234. 10:06before the whole thing explodes. Enter
235. 10:08TP, the troubled asset relief program.
236. 10:12Basically, they were giving Wall Street
237. 10:14a $700 billion pillow to fall on. Why?
238. 10:18Because the banks weren't too big to
239. 10:19fail. Let them collapse and they'd take
240. 10:22down the global economy. So, the
241. 10:24government did what it had to do. They
242. 10:26started chucking money out of
243. 10:27helicopters. Seriously, loans, bailouts,
244. 10:31stock purchases. It didn't matter what
245. 10:33form it took. If your balance sheet had
246. 10:36smoke coming out of it, Uncle Sam
247. 10:37brought the fire hose. But it wasn't
248. 10:39just banks getting the golden treatment.
249. 10:42AIG, the insurance giant that bet
250. 10:44trillions on garbage, got over $180
251. 10:46billion in aid. Even GM and Chrysler,
252. 10:49car companies, got $80 billion. It was
253. 10:53triage on a scale no one had seen since
254. 10:55the Great Depression. Meanwhile, over at
255. 10:58the Fed, Ben Bernanki was busy rewriting
256. 11:01the rules of economics with a money
257. 11:02cannon. Interest rates sliced to near
258. 11:05zero. Borrowing basically free. And then
259. 11:09came the big one, quantitative easing,
260. 11:12which means the Fed started printing
261. 11:14money out of thin air to buy bonds and
262. 11:16mortgage junk. Think of it as patching
263. 11:18the Titanic with $100 bills. Don't
264. 11:21worry, let me cook. And guess what? It
265. 11:25kind of worked. Markets calmed down.
266. 11:29Banks unclenched. The stock market
267. 11:31bottomed out in March 2009 and started
268. 11:33crawling back. Wall Street exhaled. But
269. 11:37Main Street still choking on smoke. The
270. 11:40aftermath was brutal. Unemployment hit
271. 11:4210%. 8 million jobs gone. 4 million
272. 11:47homes forclosed. $19 trillion in
273. 11:50household wealth vanished. Families that
274. 11:52had never missed a payment suddenly owed
275. 11:54more on their homes than the homes were
276. 11:56worth. And people were pissed. Wall
277. 11:59Street bonuses are back. I just got
278. 12:02evicted and they get a bonus. The people
279. 12:05who caused the collapse got bailed out.
280. 12:08The people who lived through it got pink
281. 12:10slips and food stamps. Wall Street
282. 12:12popped champagne. Main Street stood in
283. 12:15line for soup. And then came the rage.
284. 12:182011 Zucati Park, New York City.
285. 12:22Thousands gather, tents, drums,
286. 12:24cardboard signs. One reads, "We are the
287. 12:2799%."
288. 12:29It wasn't just about bailouts anymore.
289. 12:31It was about a system rigged to protect
290. 12:33the powerful. Privatized profits,
291. 12:35socialized losses, and a total absence
292. 12:38of justice. No major Wall Street CEO
293. 12:40went to jail. No handcuffs, no perw
294. 12:42walks, just golden parachutes and quiet
295. 12:45retirements. The system survived, but
296. 12:48trust burned to the ground. A generation
297. 12:51grew up knowing when the banks mess up,
298. 12:53they get rescued. When you mess up, you
299. 12:56get wrecked. Because if 2008 taught us
300. 12:58anything, it's that the next crisis
301. 13:01doesn't look like the last one. It looks
302. 13:03harmless, profitable, inevitable until
303. 13:07it isn't.
304. 13:09[Music]
305. 13:15[Music]