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Briefly explain how if the default of mortgage-backed

securities began the crisis, credit default swaps made things much
worse .

User Rushikesh
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1 Answer

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Final answer:

The 2008-2009 financial crisis was aggravated by the failure of mortgage-backed securities and the insurance-like credit default swaps, which were unable to cover the widespread defaults, leading to a systemic financial breakdown.

Step-by-step explanation:

The 2008-2009 financial crisis was exacerbated by the collapse of mortgage-backed securities (MBS) and the use of credit default swaps (CDSs). MBS are financial products backed by the promise of mortgage payments, whereas CDSs are insurance-like contracts that were supposed to provide a safety net by paying out if the MBS defaulted. However, this safety net failed when the sheer volume of defaults on high-risk subprime mortgages led to a systemic crisis, as the insurers (such as AIG) did not have enough capital to cover all the defaults.

The CDS market, largely unregulated, had grown to a massive scale, and as defaults increased, these supposedly safe financial instruments contributed to the crisis through a domino effect, as each default impacted numerous stakeholders due to the interconnectedness of financial institutions.

User Genti
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