Abstract
This paper challenges the conventional narrative that government-sponsored enterprises (GSEs) and affordable housing policies caused the 2008 financial crisis. Through detailed analysis of the origination, securitization, and distribution chain, I demonstrate that private-label mortgage-backed securities and the unregulated credit default swap market were the primary drivers of the crisis. The evidence shows that toxic loan products—including no-documentation loans and hybrid adjustable-rate mortgages with payment shocks exceeding 70%—were deliberately engineered by private originators operating under perverse fee-based incentive structures. Investment banks securitized these loans while conducting inadequate due diligence, creating complex collateralized debt obligations that amplified systemic risk. The $62 trillion credit default swap market, particularly AIG’s $500 billion in mortgage-related exposure, transformed a housing bubble into a global financial catastrophe through counterparty contagion. GSE participation in risky lending came late (2005-2007) and remained modest compared to private-sector dominance. Analysis of the 2023 Silicon Valley Bank and Credit Suisse failures reveals that fundamental vulnerabilities—liquidity mismatches, concentration risk, regulatory forbearance, and moral hazard—persist fifteen years later, suggesting regulatory reforms have addressed symptoms while leaving causal mechanisms largely intact.
Keywords: Financial Crisis, Securitization, Credit Default Swaps, Private-Label MBS, Shadow Banking, Subprime Mortgages, Collateralized Debt Obligations, Fannie Mae, Freddie Mac, Government-Sponsored Enterprises, Moral Hazard, Systemic Risk, AIG, Banking Regulation, Silicon Valley Bank
JEL Classification Codes: G01 (Financial Crises), G21 (Banks; Depository Institutions; Micro Finance Institutions; Mortgages), G23 (Non-bank Financial Institutions; Financial Instruments; Institutional Investors), G28 (Government Policy and Regulation), G32 (Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure), E44 (Financial Markets and the Macroeconomy)