BlackRock Interview Question: Explain the cause of the fina... | Glassdoor

Interview Question

Portfolio Analyst Interview

Explain the cause of the financial crisis.


Interview Answer

2 Answers


Quite a broad subject, and lots of good places to read about them online.

Interview Candidate on Apr 23, 2010

People figured out that repackaging mortgages lowers risk. (take mortgages 1, 2, ... , 100 and repackage them into securities S1, S2, ... S100. S1 pays out as long as one mortgage pays out, S2 pays out second, etc. turns out S1-S30 are extremely safe bets).

Investors love these securities (CDOs). banks take it one step further, repeating the same step with CDO-squardes.

The crowd goes wild. Everyone wants these securities because they're safe and have higher yield than treasury bonds. There aren't enough mortgages to go around. Banks start loosening their requirements for people to take mortgages. Eventually, people with no money and no income are taking out massive loans. Housing market goes up because people are buying houses.

At some point, some of these sub prime mortgages begin to default. House prices stop going up, leading to more defaults (nobody wants to pay a 600k loan for a house that's worth 500k). As houses default, housing market goes downhill, and more defaults. Securities begin to go bad, and investors lose tons of money. Institutions go underwater, people lose jobs, leads to more mortgages defaulting, and the vicious cycle continues.

SHuang on Mar 3, 2016

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