The financial typhoon
There has been a lot of talk about bankruptcy and stock market crashes recently. The newspapers have focused on the global financial crisis, but the articles are not always easy to read because they contain so much jargon.
The crisis has been building for some time, as banks lent money (mortgage) to almost anyone who wanted to buy a house. The banks even provided money to people who had a history of not paying back loans.
A lot of people borrowed too much money, and as interest on the loans went up, they were unable to meet the payments on adjustable rates, or sub-prime mortgages. The only way the banks could get their money back was to sell the houses (foreclosure).
However, when a lot of houses go onto the market at the same time and banks are no longer freely lending money - a credit crunch - very few people are willing to buy.
In other words, the banks are not getting their money back.
This was always a risk, and many banks had insured their loans. This meant both banks and insurance companies were at risk if the value of the real estate fell dramatically.
In mid-September a big bank, Lehman Brothers, went bankrupt, and a very big insurance company, AIG, had to be rescued by the US government.
