...Introduction 4 CHAPTER 3 – Body Paragraphs 4 CHAPTER 4 – Discussion 5 CHAPTER 5 – Conclusion 8 REFERENCES 8 Sub-Prime Mortgage Crisis: What Went Wrong? Abstract: The crisis of subprime mortgages has become a huge problem in the U.S. financial industry in the last few years and has affected the global financial market too. The smaller mortgage companies fell one by one until Bear Stearns also fell; then the “Titanic” of the mortgage world – Lehman Brothers – also fell. The ripple effect of the fall of Lehman Brothers coupled with the near death of AIG, nearly crashed the financial market and sent shock waves through the global markets. The effect of the crisis is still being felt in the housing market with no clear resolution in sight. This essay emphasizes the caution of this crisis to our economy. I. Introduction The mortgage crisis in 2008 didn’t have to happen but it did. Why did it happen? At a first glance, it seems it came out of nowhere but a deeper analysis shows that a series of events such as the explosion of sub-prime mortgages on the market and the easy accessibility of credit set the stage for the meltdown. II. Body Paragraphs A. In 2000 when President Clinton was in office, he signed the Commodity Futures Modernization Act which led to the unregulated trading of the Credit Default Swaps (CDS). B. Sub-prime originators invented the mortgage to sell them. C. Buyers of sub-prime MBS (and related CDOs) over-relied on ratings agencies-...
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...The sub-prime crisis has led to a financial crisis in 2008 to 2009 that impacted many countries around the world. Discuss the causes of the sub-prime crisis and the major parties responsible. Many parties were responsible for the sub-prime crisis during the period of 2008 to 2009. This essay will be discussing the parties responsible for the sub-prime crisis and how the different party’s action causes others to go deeper into the bad situation. Sub-prime is a course of action of borrowers with a defamation or deficient record. Moneylenders will utilize a prestige scoring framework to close which credits a borrower may fit the bill for. Sub-prime credits convey more credit danger, and in that capacity, will convey much higher investment rates also. The US sub-prime home loan emergency was the catalysis of the discriminating emergency and later cause the subsidence that started in 2008. The reason for sub-prime emergency rise up out of sub-prime credits or otherwise called sub-prime home loan, the improvement of this credit began broadening amid the 1990s and such weight is ordinarily seen in programmed auto advances, home value which are lodging credits and home loan giving. Sub-prime credits are higher-danger advances named B to D credits, where D credit being the most noticeably awful credit which brings about a higher investment rate, which additionally mean a higher danger to the banks. Anyhow it appear to be not to be a load issue, from the notion of the finical organization...
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...Why did China fare much better than the United States and the United Kingdom during the 2007-2009 financial crisis ? 1. Global financial crisis 2007 to 2009 1.1 Background The 2007-2009 financial crisis started as a sub-prime crisis in the United States (US). The Wall Street, driven for higher profits and low federal fund rate in home ownership began lending to sub-primes (Whalley et al, 2009). The mortgage loans were then re-packaged into financial instruments and sold to investors globally. When the housing prices declined in 2006, sub-primes defaulted on their mortgage loans as the values of their houses depreciated. These non-performing loans grew in sizes and led to the collapse of the mortgage loan market and collateralised debt obligations, leaving banks and financial institutions with lower net worth (Bianco, 2008). Due to the interconnected economies, the impact of the crisis spread beyond the US and resulted in a global financial crisis. | | | 1. | | | 2. | | | 3. | | | 4. | | | 5. | | | | | | | | | | 1. | | | | | | | 1. | | | 2. | | | 3. | | | | | | GDP: GDP growth (%): Considering that China’s GDP was only a third of the USA’s, its fiscal stimulus package size was significant in comparison to USA and UK, where the stimulus package were only 6% and 1.4% of their respective GDP (Fleet, 2010).. Hu Jintao committed at the G20...
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...Report on Global Financial Crisis Discussions on psychological factors affecting People’s behaviors in the crisis and their motivations Qiang Sheng 9th May 2011 Financial Risk Management Lecturer: Bernd P. Leudecke Macquarie University Melbourne 4.1 Three areas of applications were reviewed and investigated: 1. The pricing of financial assets; 2. The portfolio choice and trading decisions of investors; 3. The behavior of firm managers; 4.2 A “Bubble” is an episode in which irrational thinking or a friction causes the price of an asset to rise to a level that is higher than it would be in the absence of the friction or the irrationality; and, moreover, the price level is such that a rational observer, armed with all available information, would forecast a low long-term return on the asset (Barberis, 2010). 4.3 Two categories of theories explaining “Bubble Formation” (Why an asset class might become overvalued): 1. “Investor Beliefs Based” theories; 2. “Investor Preferences Based” theories; 4.4 Three “Belief-Based” theories of “Bubble Formation” (Barberis, 2010): First theory argues that a bubble forms when investors disagree sharply about an asset’s future prospects and there are short-sale constraints. Second theory argues that bubbles arise because investors extrapolate past outcomes – returns, earnings growth, or default rates – too far into the future. Third theory is based on overconfidence – specifically, on the idea that people overestimate the precision...
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...weeks of research and many enthusiastic discussions among our group members, it has helped me understand a lot more about FMS as well as the financial crisis, specifically sub-prime crisis. To begin, from doing this project I have come to know that financial markets in the world are interconnected. When US financial system collapsed, with the demise of some of the biggest financial institutions in US, it jeopardised the whole world’s economy. Inflation soars, credit crunch were one of the few horrible effects that the breakdown of US financial system affected financial system worldwide. At the same time, the crisis shook investors’ confidence across the world, which led to low liquidity in financial market and subsequently a devastating global economy meltdown. Furthermore, I have learnt that risk management is indispensable in a financial system, a “make or break” factor. Though taking risk may provide us with a higher return, we can never be overly greedy and take too much risk without handling them probably as they may back-fire. What happened in US is an exact example of what we call “lesson learnt the hard way”. It has definitely shown the world’s investors how immensely vital risk management is in a financial system, proving its undeniable influence on financial market and services. In addition, by doing this project, it has taught me the importance of regulations. One of many reasons contributed to the shocking financial crisis in US is the lack of regulations. It allowed...
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...2009). In 2007, a global financial predicament rapidly metamorphosed from the bursting of the property bubble in the United States to the most horrible recession ever witnessed on the planet. This paper will research on the causes of the 2008-2009 economic predicament and the policies executed by various key people liable for saving the U.S. economy. It will also explain the task, constitutional authority, and the policy view of some current holders of key positions that set policies for saving the U.S. economy. In 2007, a worldwide economic predicament spread its gloom on the financial outcomes of several nations (Simon, 2001). It ended with what was often termed as the worst recession (Simon, 2001). Its source that originated from the sub-prime segment of the United State real estate field as an isolated turmoil matured into a complete recession in 2007. The old well-known fact that the whole world sneezes when the United States seizes flu seemed to be justified (Baker, 2007). This is because vital economies like Japan and nations in the European Union also went...
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...2008 financial crisis In 2008, a series of bank and insurance company failures triggered a financial crisis that effectively halted global credit markets and required unprecedented government intervention.Fannie Mae (FNM) and Freddie Mac (FRE) were both taken over by the government. Lehman Brothers declared bankruptcy on September 14th after failing to find a buyer. Bank of Americaagreed to purchase Merrill Lynch (MER), and American International Group (AIG) was saved by an $85 billion capital injection by the federal government.[1] Shortly after, on September 25th, J P Morgan Chase (JPM) agreed to purchase the assets of Washington Mutual (WM) in what was the biggest bank failure in history.[2] In fact, by September 17, 2008, more public corporations had filed for bankruptcy in the U.S. than in all of 2007.[3]These failures caused a crisis of confidence that made banks reluctant to lend money amongst themselves, or for that matter, to anyone. The crisis has its roots in real estate and the subprime lending crisis. Commercial and residential properties saw their values increase precipitously in a real estate boom that began in the 1990s and increased uninterrupted for nearly a decade. Increases in housing prices coincided with the investment and banking industry lowering lending standards to market mortgages to unqualified buyers allowing them to take out mortgages while at the same time government deregulation blended the lines between traditional investment banks and mortgage...
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...Credit Crunch and Recent Global Financial Crisis International Finance 6BUS0226 Lecturer: Arjuna Kanakaratnam Submission Date: 9th April 2012 Level 6 Business Administration Zhaoju Liu | 11722622 | Word Count: 1885 I. Introduction The global financial crisis brings the whole world negative consequences. According to many scholars, it is the worst economic recession since The Great Depression in 1930s. The world economy confronts meltdown. Numerous enterprises have been affected seriously. So do the global financial markets. This essay is to discuss the reasons and impacts of the crisis as well as demonstrate the government responses. Furthermore, some lessons from the recession will be delivered at the end of the essay. It is very important to make clear of the crisis and integrate the financial theories with practice. II. Discussion The probable reason of the current financial crisis is recognised as the sub-prime mortgage segment of the USA for which were the results of long times of exceptionally loose monetary policy of some developed economies during the early period of last ten years (Mohan, 2009). After the internet bubble broken in the US more than ten years ago, most of the developed economies especially the US extremely eased the monetary policy. Only one percent of the Policy Rate had been announced in the summer of 2003 in the US (Mohan, 2009). This policy lasted for a long period and consequently stimulated the housing bubble of the America...
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...DEEP FREEZE International Trade Assignment Case Study of Iceland FinancIal Collapse MBA in Marketing&Communication “The most spectacular bankruptcy of the 2008 financial crisis was the collapse of Iceland's financial system. This collapse is especially intriguing as Iceland is not an underdeveloped country!” ---EHMAN BROTHERS Introduction Iceland is an independent Nordic European island country situated at the confluence of the North Atlantic and Arctic Oceans, on the Mid-Atlantic Ridge. Its traditional industries are fishing, processing of fish, aluminum, and strong energy industry. During several years of economic boom, the Icelandic financial system expanded considerably. A nation with a slight population erected a banking system whose total assets were 10 times the size of the country's GDP. Greedy bankers, inexperienced upstairs, corrupt political elite, the deregulation of the financial system, make the banking sector grew faster than any other sector of the Icelandic economy. Following the global financial crisis in 2008, Iceland became the most dramatic economic meltdown. The key problem with the banks essentially owning all the bankrupt highly leveraged business (that were and are essentially good ocean harvesting fishing business) and the downgrade in sovereign debt rating led to capital flight. With the collapse of exchange rate of Krona, 3 main banks (Landsbanki, Kaupthing and Glitnir) are nationalized because of the serious liquidity problems of banks...
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...CHAPTER ONE INTRODUCTION 1.1 BACKGROUND OF STUDY Nigeria banking sector has experienced a boom-and-burst cycle in the past 20-25 years. After the implementation of the structural adjustment programme (SAP) in 1986 and de-regulation of the financial sector, new banks proliferated mainly driven by attractive arbitrage opportunities in the foreign exchange market (Heiko 2007), but prior to the de-regulation period, financial intermediation never took off and even declined in the1980’s and 1990’s (Capirio and Kligbiel). The sector was highly oligopolistic with remarkable features of market concentration and leadership. Lemo noted that there are ten banks that control more than 50% of the aggregate assets of the banking sector, more than 51% of the aggregate deposits liabilities and more than 45%of the aggregate credits. The sector was characterized by small scale banks with high overheads; low capital base averaging less than $10 million; heavy reliance on the government patronage and loss making. Nigeria‘s banking sector was still characterized by a high degree of fragmentation and low level of financial intermediation up to 2004. This research work is motivated by the need to look into the Central bank (CBN)’s recent reform (consolidation) that employed certain measures to strengthen the Nigeria banking system by drastically increasing the minimum capital requirement from N2 million to N25 billion ($190 million-US). Through review of relevant literatures, analysis...
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...Table of contents Table of contents 2 Executive Summary 3 I: Key financial trends 4 Global Financial Crisis 4 European Sovereign Debt Crisis 6 Tighter financial regulation 8 II: Impact on entrepreneurial start-ups 9 Investment and valuation decisions 9 References 15 Appendix A: Effects of recession on entrepreneurial start-ups 17 Appendix B: New trend – business incubators 23 Appendix C: Valuation methodology 25 Executive Summary The Global Financial Crisis (GFC) is widely seen as the worst financial crisis since the great depression in the 1930’s. It negatively impacted global financial markets, led to the collapse of major financial institutions, the nationalisation of banks and caused a deep global recession. From its beginnings in the United States, networked financial institutions quickly led to international contagion and the European sovereign debt crisis. In response, the G20 officially endorsed Basel III – a new global standard to reduce systemic risk through stronger capital bases designed to act as a buffer during periods of financial instability and avoid bailouts. Sustained European government efforts to reduce debt through austerity have largely failed, and focus is now shifting to growth strategies. Entrepreneurial start-ups are a key route to driving long-term sustainable growth, but have been hit hard by sluggish consumer demand, tightening credit and scarce, expensive capital. This report discussed some of the implications for both...
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...Week one notes Note: These notes are not a substitute to the textbook. They merely highlight important points and add some needed information to the assigned text. The title of this course is Management of Financial Institutions. This is a very broad and a far reaching topic. To make it possible, the course will concentrate on Bank management. Many of the concepts we will learn in course are transferable to other financial institutions. To begin the discussion, let us define banks. What is a bank? What do Banks do? A bank is a chartered financial institution that accepts savings deposits and makes commercial loans. This is the most basic definition of a bank. However, if you look at banks, you will see that they take many types of deposits and make many types of loans. In addition, if you are familiar with banks, you will notice that they act as intermediaries in many financial transactions. The banking is a vital function of the economy; without banks, the economy will not function properly. Why? The answer is that banks provide the link between savers and borrowers. In the US, people are net savers and businesses are net borrowers. Without banks and some other financial institutions, the borrowers, businesses, will not be able to raise finds by borrowing from people, the savers. This function takes many forms. We will look at some if these forms in this course and in other courses in the finance concentration in the MBA program. The Nature of Banking in the US ...
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...Week I: Discussion Question What role did the Accounting profession play in the recent sub prime mortgage crisis? What could they have done differently? In the beginning of this decade, the US interest rates were at record lows, subprime lending accounted for 80% of loans being issued (Senator Dodd: Create, Sustain, Preserve, and Protect the American Dream of Home Ownership, 2007). In order to lore new borrowers, banks more often than not offered adjustable rate mortgages to their clients which provided them with lower payments compared to those offered by traditional mortgages. As subprime lending grew exponentially, investment firms and banks saw an opportunity to take advantage of the boom by securitizing the loans into new investment vehicles called Collateralized Debt Obligations (CDO)(Evans & Jain, 2010). As organizations grew their investments in CDOs, accounting professionals at these institutions played a role in misleading investors about their organization’s risks and financial health. As a way to minimize risk to their organizations, accounting professionals at a number of banks and investment firms used creative accounting maneuvers to move CDOs to Qualified Special Purpose Entities (QSPE). In doing so, they removed the liability of these assets from their organization’s books misleading investors about their organization’s health (Chasan, 2008). This kind of practice was used by several organizations including Citigroup Inc. which settled...
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...sometimes disagree. An example is, the proposal of AV to be used in a general election, but the Conservatives disagreed. However in the end the two coalition partners agreed that they will hold a referendum. 2) One problem that might arise if the cabinet contained both Conservatives and Lib.Dems is that the government is not stable. It is very possible that the two partners may disagree on their policies and proposals. For example the Liberals opposed the further use of nuclear energy, but it was agreed between the leaderships of the two coalition partners that more nuclear power plants can be build. This can build conflicts between the two parties and result in government failure. Furthermore in the UK coalitions are formed in a time of crisis and the country may be seen by other international countries as weak and this can damage their international competitiveness and foreign investment, which are very important in order to keep the economy running. Furthermore coalition government is actually less democratic as the balance of power is inevitably held by the small parties who can barter their support for concessions from the main groups within the coalition.One possible example is the demand of constitutional reforms by the Liberal Democrats in the UK as their price of coalition support in a future hung parliament. 3) In the essay I shall discus for what reason and to what extent has the cabinet government declined in the UK. A cabinet government is a government in which...
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...implications on UK small and medium enterprises. One of the key issues which will be discussed as to the implication of the credit crunch, is the availability of finance to SMEs. More so other non direct aspects which have which act as implications will too be discussed. The credit crunch has been defined as a shortage of money or loans as well as other types of credit given by banks. In short the BBC defined the credit crunch as “a severe shortage of money or credit” BBC: Timeline: Credit crunch to downturn (2009) It describes the economic condition of an economy. In most situations, when an economy has been in a credit crunch, the economic condition of a country is unstable or also known as a financial crisis. As the Guardian states, “the current global financial crisis is commonly known as the credit crunch.” Kollewe (2008) Credit crunch’s can occur mostly when an economy is in a recession, a time when the economy is declining during which the there is fall in gross domestic product (GDP). More importantly, the term credit crunch emphasises the state the economy is currently in. Recently the UK has faced a credit crunch which started in 2007-2008. The credit crunch of 2007 developed due to certain reasons. But firstly according Khandker (2011) it developed over time due to a number of events in the past. The first was due to the 1997 subside of currencies in East Asia, which...
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