Final answer:
Financial institutions that heavily invested in subprime mortgage-backed securities contributed to the Great Recession of 2008. When the housing market collapsed, these securities lost value, causing a banking crisis and subsequent economic downturn. The resulting fallout included global trade impacts, high unemployment, and controversial government bailouts.
Step-by-step explanation:
The type of financial institution most directly contributing to the Great Recession of 2008 were investment banks and commercial banks engaged in the securitization of subprime mortgages. These institutions created and sold mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) which they believed to be extremely secure. However, the underlying mortgages were risky, and when the housing market collapsed, these financial instruments were devalued, leading to significant losses for banks. The banks had only protected themselves against small to moderate losses, not the severe depreciation of assets that occurred. As housing prices dropped and the recession made it more difficult for homeowners to make payments, the true risk of these securities was revealed, resulting in a banking crisis where 318 banks failed from 2008 to 2011.
The consequences of the recession were felt worldwide, as global trade diminished and unemployment surged in the U.S., with one million job losses in the last four months of 2008, and another three million in 2009. Exacerbating the issue, many criticized the government's costly bailouts of banks and financial institutions, arguing that it rewarded imprudent and sometimes corrupt practices at the expense of taxpayers.