The 2008 Financial Crisis

Resources for ESL Business Teachers

My school was struggling to hire ESL Business teachers, so I volunteered. I’m not trained in business or economics, but I found that a few hours’ research equipped me sufficiently to guide ESL students through the most important topics. Ultimately, it’s just another subject area, like the weather, or sports, or family life, and if you’re looking for a fresh challenge, I encourage you to give it a try.

The 2007-8 Crisis: A Good Starting Point

A great place to begin, both for your studies and as an initial course module, is the 2007-8 financial crisis. This may sound like a weighty and complex issue, but it can broken down and understood in sections, and it’s highly suitable for our students, because:

• It was a huge event, the biggest economic upheaval since the 1930s, and has great historical significance
• It directly impacted the lives our students and their families
• It illustrates the most interesting and controversial issues of modern capitalism, from government regulation and corporate greed, to inequality and the social impact of our economic system
• Such a crisis is almost certain to happen again; when it does, your students will much better understand why.

The Crisis in a Nutshell

I’m not an economist, but I’ve researched the crisis, discussed it with those more knowledgeable than myself, and watched numerous documentaries about it. Here’s the broad strokes of what happened:

1. Demand for housing in the US peaked in 2006. To ensure continued homeowner borrowing, and to expand their loan portfolios, banks took the risk of offering mortgages to families who could barely afford them. These are called ‘sub-prime’ mortgages because the borrowers were not very secure financially. The banks often required no down-payment and offered very attractive initial repayment conditions (0% interest, repayment ‘holidays’ etc).
2. Once the mortgages were agreed with the new homeowners, the banks packaged together thousands of the mortgages and re-sold them to other banks.
3. Those packages were given very high grades by the ratings agencies. They were seen as safe, dependable investments, and so banks and financial institutions invested billions in acquiring them.
4. This success encouraged banks to sell yet more ‘sub-prime’ mortgages to poorer families. But when repackaging them and selling them to other banks, they also passed on the risk.
5. Continuous repackaging of these much sought-after investments resulted in the less dependable mortgages being mixed with others; soon, it was very unclear how safe an investment truly was, but the ratings agencies continued to assess the products at AAA, their highest rating.
6. Once the initial, favorable repayment conditions expired, many poor families were unable to pay their high monthly mortgage premiums. They defaulted on their mortgages, often leading to foreclosure and eviction.
7. The lending bank was therefore left with only a repossessed home of questionable value, and not the long-term security of a monthly mortgage payment receipts.
8. This destroyed the value of the repackaged mortgage investments the banks had made, leaving them with billions of dollars in useless, toxic assets.
9. With so much red on their ledger, the banks quickly ran out of cash and were unable to pay their own debts; this is the very definition of bankruptcy. Several major banks collapsed.
10. The US and other governments stepped in and bailed out the failing banks to avoid a worsening of the financial catastrophe.

5 Main Concepts and How to Teach Them

1. When teaching the background of the crisis, several topics emerged as central to an understanding both of the crisis itself, and of the financial system generally. I separated each concept into a mini-module, spending around half an hour teaching and practicing the relevant vocabulary and reading about the topic as a class. We began with:

2. 1

   Mortgages

   Although many of your younger students’ parents will have a mortgage, they may never have discussed this as a family. Ask them to find examples of mortgage rates for homes in your area, or their home country. Do some math together to see how much more they would pay for a local house, over the thirty-year period of a mortgage, than if they were able to buy it in cash, outright. Ask them to consider the monthly mortgage payments as a portion of local average income in different parts of the world. Look at rates of eviction and foreclosure, and perhaps read about families who have gone through this difficult period, and how they dealt with it.

3. 2

   Securitization

   This is the reorganizing of a financial product (a loan or investment) so that it can be sold to someone else. Mortgages are a good example; they were bundled together and sold as a single financial instrument known as a Mortgage-Backed Security (MBS). Once homeowners began defaulting on their mortgage payments, it was the falling value of these products which was a major cause of the crisis.

   Have your students search for securities they could buy, if they had money to invest. Ask them to list different types of securities and to note down today’s prices. They might read reviews of the different brokerage firms which could help them buy securities, and note the differences between a full-service broker and a discount broker.

   This might also be a good time to consider what kind of investor your students would like to be. Would they choose the route of the trader, making quick and incisive buy-and-sell decisions based on small fluctuations in the market price, or would they play the waiting game as a buy-and-hold investor, waiting for months and years to make their moves? What are the impacts of each behavior on the market?

4. 3

   Credit Ratings

   Several for-profit companies provide assessments of the health and viability of financial products. This is an important service for investors, who use this data to decide their business strategies. However, the agencies’ opinions are often influenced by the large fees they gain from rating these investments, and in the 2008 crisis, they were found to have knowingly given their highest rating to unreliable, poor-quality investments.

   Ask your students to find examples of ratings agencies (Moodys, Standard and Poor, etc) and learn a little about the work they do. What is required for an investment to receive an AAA rating? What are the implications if it receives a lower rating? At the time of writing (February 2016), the US presidential race is in full swing, and Democrat candidate Bernie Sanders has proposed making the ratings agencies non-profit; what might this mean?

5. 4

   Toxic Assets

   An investment which initially looks favorable, but then collapses in value, is said to have become ‘toxic’. It cannot reasonably be sold because it has a value dramatically less than its initial purchase price. An example – and an important side note – is the issue of positive and negative equity.

   I explain it to my students like this, accompanied by a graph on the board:

   Imagine that you buy an apartment for $200,000. You’re able to put together $20,000 as a down-payment, so you borrow $180,000 from the bank. You work hard every day and are able to meet the mortgage payments each month. Your neighborhood is green and pleasant, with excellent schools, and so local house prices rise, year on year. After ten years, you’ve managed to pay down $140,000 of your mortgage, and your apartment is worth $100,000 more than you paid for it.

   This is all great news! To find out how great it is, take the value of your apartment ($300,000) and subtract the value of your remaining debt ($40,000 of the mortgage, plus interest of $54,000 (3% APR over ten years), so $94,000 in total) and you have a wonderful and reassuring $206,000 in positive equity. It’s another way of saying that your house is worth much more than the value of the debt relating to it. Feel free to buy a new Mercedes, hire a tutor for the kids, and take a vacation.

   Now, imagine that you bought the same apartment, with the same down-payment, but things don’t go so well. You lose your job and have to restructure your mortgage payments. You’re barely able to keep up with the 3% interest, so the value of your debt remains almost the same. Your neighborhood suffers a crime wave, and then a nuclear power station is built next door. The value of your apartment drops, while the value of your debt does not. This is called negative equity. If you sold your house tomorrow, the sale price wouldn’t even be enough to pay off your mortgage, and anyway it would be next-to-impossible to sell your apartment because of its terrible location. Your apartment has become a toxic asset.

   I’ve found that it’s sufficient to have my students prepare to teach the issue of positive and negative equity to the uninitiated; being able to concisely explain a complex topic to someone is my main criteria when deciding whether I fully understand it.

6. 5

   Bailouts

   In the 19^th century, British Prime Minister William Pitt practiced “laissez faire economics”. His government created a framework within which business could thrive, but Pitt would never tinker in the day-to-day running of the economy. This proved popular and successful, but today, governments are more closely linked than ever before to business communities and to the economic issues of the day.

   One of the best examples of this is the bailouts which followed the 2008 crisis. Through acts of Congress, billions of dollars of public money (much of it borrowed, incidentally, from the Federal Reserve, thereby increasing the US national debt) were funneled into failing financial institutions so that they could keep the lights on, pay their employees and, most importantly, meet their own debt obligations; without this last element, they would have been forced to declare bankruptcy, with potentially catastrophic knock-on effects.

   Have your students research these massive investments of public money. How much was invested? Where did it go? What was the public reaction? What could have happened if the bailout had not been approved by congress? Would your students have consented to a bank bailout, in the same situation, or would they have simply let the struggling banks fail?

   Discussions on this point can reveal much about your students’ attitudes to economics, and particularly the notion of ‘economic Darwinism’. Should private companies receive expensive public support when their problems are of their own making? By bailing out large, previously successful banks, is government undermining one of the chief tenets of capitalism? What returns on this investment should the public demand? I’ve had some truly fascinating discussions with my upper-intermediate and advanced business students on these topics.

Lesson Structures and Practice Recommendations

I spent a whole week on this one topic with my afternoon ESL business class, so we dedicated over ten hours of class time to understanding the 2008 crisis. We all agreed that this was time well spent. The topics raised have general application in understanding economics, and the moral issues are well worth extended discussion, particularly the behavior of the ratings agencies, the willful mis-selling of mortgages, the paucity of government regulation, and the use of public money to bail out failing banks.

To consolidate your students’ understanding of this material, I’d recommend one or more of these follow-up exercises:

• Produce a fact sheet, boiling down the causes of the crisis as concisely as possible.
• Write a mortgage advertisement leaflet aimed at the sub-prime market (“0% APR! Nothing to pay for two years! Immediate approval! Own your own home tomorrow!”)
• Write a fake Investopedia.com entry on securities. Go into detail if needed, and discuss mortgage-backed securities (MBSs) and the surreal financial netherworld of the Collateralized Debt Obligation (CDO).
• Have your students write the personal journal of a bank CEO during the peak days of the crisis. The CEO understands perfectly well that the writing is on the wall, but is trying to delay the inevitable. What’s going through their mind during these heady few days? I particularly enjoyed this one, as it brings in a creative element found all too seldom in ESL business lessons.
• Write the script (either in sketch or more fully) for a BBC Hardtalk interview in which a business journalist grills a bank representative, a congressman, or a CEO from one of the ratings agencies about their behavior during the crisis.
• Have your students draft new regulation to ensure that the 2008 crisis cannot be repeated. They’ll want to refer to the US Banking Act of 1933 (referred to as the Glass-Steagall act), the overturning of which in 1999 led directly to the practice of banks irresponsibly gambling with their customers’ money.

Resources

There’s a lot to cover, and you’ll probably need reinforcements. Happily, there are numerous high-quality documentaries available, often online and for free. Inside Job (2010) is excellent, and features the familiar tones of Matt Damon as its narrator; there’s a good summary of some other films here.

Investopedia and Wikipedia present the relevant information on each concept at just about the right level for a layman. If you have friends in the financial industry, they may be able to offer additional insight.

With surprisingly little research, plenty of notes, and some careful planning, you’ll be able to pull together this information into an engaging mini-course.

It might sound like there’s a lot of preparatory work, but I’m living proof that you don’t need to be a business professional to teach useful and enjoyable ESL business classes. I really enjoyed the process of learning about these phenomena, and teaching this topic has informed my own view of economics and politics in ways I wouldn’t be without.