Effect of the 2008 Global Financial Crisis on Commodity and Investment Markets

What started as the bursting of the real estate bubble in the United States caused a chain reaction disrupting commodity prices and threatening the very foundations of the global economic system.

The bursting of the real estate bubble had disastrous consequences in the U.S. because many consumers and households depended on stable and high real estate prices for their well-being. However, as prices dropped, so did consumer confidence and, more important, credit availability to the economy. What should have been a nasty but contained event spilled over into the capital markets in ways very few people could foresee.

A lethal combination of Wall Street’s securitization machine — bundling mortgages into tradable derivative instruments — and the dissemination of such products across the world’s financial institutions made this situation one of the first and worst global crises in the modern world.

When real estate prices began to drop and consumers were no longer able to afford their mortgage payments, banks holding this paper became dangerously exposed to this falling market. As prices continued to drop and bank losses continued to rise, credit availability and liquidity dried up. Banks with the worst exposure to the real estate sector were writing off assets in the tens of billions of dollars.

At the height of the crisis, Citigroup alone had written off more than $60 billion in bad loans related to the real estate sector and subprime exposure.

Financial Institution Value of Writedown and Loss
Citigroup $60.8 billion
Wachovia $52.7 billion
Merrill Lynch $52.2 billion
Washington Mutual $45.6 billion
UBS $44.2 billion
HSBC $27.4 billion
Bank of America $21.2 billion
JPMorgan Chase $18.8 billion
Morgan Stanley $15.7 billion
IKB Deutsche Industriebank $14.8 billion

Source: Bloomberg, data up to Q4 2008

All told, total bank losses related to the subprime mess may have exceeded $2 trillion! And this figure is more likely much higher because many of these loan portfolios were leveraged through the use of derivatives.

Indeed, the collateralized debt obligation (CDO) was a major instrument that helped spread this risk throughout the global financial system. It polluted and clogged the arteries through which global commerce takes place, with disastrous consequences for the economy.

The crisis permanently altered the banking landscape in the United States and beyond. Lehman Brothers was forced into bankruptcy on September 15, 2008, the largest bankruptcy ever recorded. JPMorgan swallowed up Bear Stearns, Bank of America gobbled up Merrill Lynch, and Goldman Sachs and Morgan Stanley were forced into becoming bank holding companies.

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