The 2008 Financial Crisis and Beyond

• Author: Anita Indira Anand
• Pages: 1-11

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The 2008 Financial Crisis and Beyond

The Global Financial Crisis

As early as the summer of 2007, something was amiss. BNP Paribas,

a large international bank based in France, refused investors’ requests

to redeem their securities for cash because it did not know the worth

of their assets. The bank proclaimed somewhat ominously that“[t]he

complete evaporation of liquidity in certain market segments of the

US securitization market has made it impossible to value certain

assets fairly, regardless of their quality or credit rating.”In other

words, something was rotten at the core of the economy, but the

source of the problem was not yet clear.

The episode at BNP Paribas highlighted a problem that loomed

large for other banks, and which was a major factor contributing to

the crisis that followed: many investors had little or no understand-

ing of the complex securities in which they were invested. Only the

dealers, bankers, and managers involved in selling these products

understood the elaborate chain of transactions that connected the

securities to high-risk subprime mortgages. Experts call this dif-

ference in the level of knowledge between buyers and sellers an

“information asymmetry.” In this case, the information asymmetry

1 Simon Kennedy, “BNP Suspends Funds Amid Credit-Market Turmoil” Market-

Watch (9 August 2007), online: www.marketwatch.com/story/bnp-suspends-fund-

valuations-amid-credit-market-turmoil.