...The sub-prime crisis of has led to a financial crisis in 2008-2009 that impacted many countries around the world. Discuss the cause of the sub-prime crisis and the major parties responsible. A number of 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 individual party’s action causes the others to step deeper into the problem. As define by investopedia, sub-prime is “a classification of borrowers with a tarnished or limited credit history. Lenders will use a credit scoring system to determine which loans a borrower may qualify for. Subprime loans carry more credit risk, and as such, will carry higher interest rates as well.” The US subprime mortgage crisis was the catalysis of the finical crisis and subsequently cause the recession that began in 2008. The cause of sub-prime crisis arise from sub-prime loans or also know as sub-prime mortgage, the growth of this loan started expanding during the 1990s and such load is popularly seen in auto (car) loans, home equity (housing loans) and mortgage lending. Sub-prime loans are higher-risk loans labeled “B”, “C” and D credits, where “D” being the “worst”, resulting in a higher interest rate, which also mean a higher risk to the lenders. But it seem not to be a hindering problem, from the point of view of the finical institute who lend out the money, which will be explained later in this essay. In...
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...The Sub-Prime Crisis of Has Led to a Financial Crisis in 2008-2009 That Impacted Many Countries Around the World. Discuss the Cause of the Sub-Prime Crisis and the Major Parties Responsible. The sub-prime crisis of has led to a financial crisis in 2008-2009 that impacted many countries around the world. Discuss the cause of the sub-prime crisis and the major parties responsible. A number of 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 individual party’s action causes the others to step deeper into the problem. As define by investopedia, sub-prime is “a classification of borrowers with a tarnished or limited credit history. Lenders will use a credit scoring system to determine which loans a borrower may qualify for. Subprime loans carry more credit risk, and as such, will carry higher interest rates as well.” The US subprime mortgage crisis was the catalysis of the finical crisis and subsequently cause the recession that began in 2008. The cause of sub-prime crisis arise from sub-prime loans or also know as sub-prime mortgage, the growth of this loan started expanding during the 1990s and such load is popularly seen in auto (car) loans, home equity (housing loans) and mortgage lending. Sub-prime loans are higher-risk loans labeled “B”, “C” and D credits, where “D” being the “worst”, resulting in a higher interest rate, which also mean a...
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...foreign investments and movement of wealth in trade. From past many years the U.S economy is emerged more as service based and industrial base economy than farming based. This result the banking system to be more complex to deal with the government and currency , instituting the regulations and a centralized bank to regulate and from a policies which could limitize the negative effect on the general economic health on the country. In this paper I will analyze the Federal Reserve Banking System in U.S.A and the Federal Reserve’s assessment of the current economic activity and financial markets. its current view about increasing inflations . Current economic activity : Recently the whole USA economy is suffering from the Sub Prime Mortgage...
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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. As defined by investopedia, sub-prime is “a classification of borrowers with a tarnished or limited credit history. Lenders will use a credit scoring system to determine which loans a borrower may qualify for. Subprime loans carry more credit risk, and as such, will carry year of 2008 and 2009. The market instability was contributed by many factors, which hurt individuals, businesses, and financial institutions hard. Many financial institutions were left holding mortgage backed assets that had dropped greatly in value. The crisis was a result of too much higher interest rates as well.” The subprime crisis was a nationwide banking emergency that caused recession due to the borrowers being approved for loans that they could not afford – resulting in a large amount of default and foreclosures. The loans were largely based on the assumption that the value of home prices would continue to increase. There are a number of theories as to what led to the sub-prime crisis. It is believed it to have been caused through several factors. The crisis began with the bursting of the U.S. housing “bubble” that occurred in 2001. A housing bubble is defined as a temporary condition caused by unjustified speculation in the housing market that leads to a rapid increase in real estate prices. In the wake...
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...The current mortgage crisis can be simply explained as homeowner’s failure to meet their mortgage payments on time. Mortgage can be defined as a type of collateral agreement when a property owner who borrows money from a creditor may use his real property as collateral for the repayment of a loan. Some of the factors that lead to the current mortgage situation are sub-prime lending and the increase of interest rate for low income borrowers. These are some of the factors that lead to the mortgage crisis which cause homeowner’s to walk away. One of the reasons for the rise of the housing market was because of low interest rates and the fact the US is a credit economy. Having low interest rates, more people took out loans, and the lower income borrowers were encouraged to take out a loan for a house because they could afford the payments with low interest rates. Then when the interest rate rose, those lower income borrowers couldn’t afford to make payments. Another key contributor to the crisis of the housing market is due to sub-prime lending. Sub-prime lending is basically lending money to non-qualified borrowers, which means that those borrowers would not be approved of loans from other creditors because of their poor credit rating or low-income. Mortgage lenders continued to lend money out in order to maintain sales. A legal implication that might arise from debtors defaulting on a mortgage can be a foreclosure sale. A foreclosure sale is a legal procedure in which...
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...financial crisis. There is a scene in the movie that explained the reasons behind the crisis, which attracts my interest. Then I found and watched another short video, “Credit Crisis”. It takes only 11 minutes to visually illustrate the reasons behind the credit crisis in the United States. After watching it, I have gotten the answers of these questions. What is credit crisis? How did it happen? And who is affected? This credit crisis is also called the subprime crisis. The reason of the subprime crisis can generally be described as follows. In 2001, Federal Reserve lowered the interest rate to keep the economy strong, which not only made the treasury bill became uninteresting to investors but also lower the cost of borrowing money. So investors borrowed a huge amount of money and used “leverage” to make more money. They created a “novel” way to make money by purchasing and selling CDO (collateralized debt obligation). At the beginning, the mortgages were only given to people with good credit records and strong ability of repayment. Everything was good until the occurrence of sub-prime. Include house owners, lenders, bankers and other financial institutes, everybody gained in the process of selling CDOs. In order to sell as many mortgages as possible and make more money, the mortgages were started to give to people who actually don’t have the ability to buy a house. The time bombs were buried here. Actually, the lenders and investors had realized the default risk of sub-prime...
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...worst global financial crisis of the 2l century, which traced its origins to the sub-prime mortgage disaster that began to unravel in 2007. The shocks of global crisis are devastating: homeowners filed for bankruptcies and faced foreclosures in record high numbers, leading Wall Street firms such as Bear Sterns and Merrill Lynch crumbled under their massive exposure to sub-prime mortgage holdings that turned into toxic had assets and over $50 trillion in wealth had been wiped out within the last two years. No financial crisis since the Great Depression prompted many policy reactions as governments scrambled to map out rescue plans to restore stability and revive economic growth. The after effects of the sub-prime mortgage meltdown have left policymakers both in the United States and around the world struggling to restore growth and confidence in their economies. What are the causes behind the U.S. sub-prime mortgage crisis? Is one cause more responsible than another? Why of why not? The principal cause of the economic slowdown was the collapse of the global credit boom and the ensuing financial crisis, which has affected asset values, credit conditions, and consumer and business confidence around the world. The immediate trigger of the crisis was the end of housing booms in the United States and other countries and the associated problems in mortgage markets, notably the collapse of the U.S. sub-prime mortgage market. Conditions in housing and mortgage markets have proved a...
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...Northern Rock Bank: an english exemple of the sub-prime mortgage crisis Brief introduction: The Northern Rock-one of the UK's largest mortgage lenders has become the highest profile UK-based victim of the fallout from the global credit crunch, which stemmed from the sub-prime mortgage crisis in the US. The Bank of England has agreed to give emergency financial support to the Northern Rock and it avoided from going bust. I. History of the bank Northern Rock Building Society was formed in 1965 as a result of the merger of Northern Counties Permanent Building Society (established in 1850) and Rock Building Society (established in 1865). During the 30 years that followed, Northern Rock expanded by acquiring 53 smaller building societies, most notably the North of England Building Society in 1994. Along with many other UK building societies in the 1990s, Northern Rock chose to demutualize and float on the stock exchange in order to better expand their business. Demutualization is the process by which a customerowned mutual organisation changes legal form to a shareholder-owned public company. Throughout this period a concern against demutualisation was that the assets of a mutual society was built up by its members throughout its history not just the present members who would benefit, and that demutualisation was a betrayal of the community that the societies were created to serve. Northern Rock chose to address these concerns by founding the Northern Rock Foundation. From...
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...Too Big To Fail: The Rise and Fall of Lehman Brothers and its effects on the Market Failure of Lehman Brothers was due to aggressive leveraging and poor regulation. Led to re evaluating credit default swaps and how large companies look at risk. The 15th of September in 2008 the United States 4th largest investment bank filed for bankruptcy with devastating consequences for the financial market. After a period of impudent investments and poor oversight both internally and externally this paper will look at the many causes and subsequent effects Lehman’s failure had on the U.S. financial system. Lehman Brothers A Versitile Company Henry Lehman Immigrated from Rimpar, Germany, to Montgomery, Alabama in 1944 where he established a small hardware store that sold groceries, dry goods, and cotton related tools and equipment to the local farmers. Six years later his brothers Emanuel and Mayer joined him in his endeavor and Lehman Brothers was born. Not too long after it’s inception Lehman Brothers branched out from general merchandising and involved themselves in commodities brokerage. Lehman’s became the major brokers for the purchase and sale of cotton in Montgomery and it’s surrounding areas. By 1858 Lehman Brothers had opened up an office in New York and expanded it’s commodities trading in addition to obtaining a foothold into the powerful New York financial community. After the Civil War passed Lehman Brothers drew most of their attention to their New York office...
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...the greatest financial crisis of our time took place in front of our very own eyes. While some of us may have not seen this crisis upon us, but downfalls such as the one we experienced aren't built in a day. So we may ask, what could have caused this financial meltdown. According to frontline, "It all started one sunny afternoon in Florida while the employees of JPMorgan conducted meetings on how they can manage and lower risk. They concluded that separating the risk from the loan by credit default swaps would ultimately make the financial system safer for not only them but for everyone involved ("Money, Power and Wall Street")." JPMorgan was the first to execute this plan when the infamous Exxon crisis took place a few short years back. They decided to take Exxon under their wing and help them out of the crisis but instead of setting aside the capital needed they went and found a company in London to take on the risk of Exxon's loan. This event allowed companies to create more credit and allowed them to give out more and more loans. This marks only the beginning of the downfall to our financial system that occurred in 2008. While JPMorgan was the spark and brains behind the start of our crisis, who is really to blame in this situation? The bankers and regulators who lent out subprime mortgages to the American people are to blame. They knew that certain homeowner's credit and financial stability wasn't up to par for a usual loan. "Sub-prime mortgages were lent out to people...
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...opinion regarding the likelihood of another financial crisis Introduction: The current financial crisis started in the US housing market in 2007. The crisis spread across the whole world and brutally hurt the economies of numerous countries, including the US, and reached a new level in September 2008 as a number of well-known US-based financial institutions, including AIG and Lehman Brothers, warped. It is considered by many economists to be the most terrible financial crisis since the immense Depression of the 1930s .Many causes have been anticipated, with varying weight assigned by experts. Both market based and regulatory solutions have been implemented or are under consideration, while significant risks remain for the world economy over the 2010–2011 periods. Causes and factors: A: The US housing market 1: creation of a housing bubble US house prices increase significantly from 1998 to 2005, more than doubling over this period and extreme faster than average wages. Further support for the existence of a bubble came from the ratio of house prices to renting costs which rocketed upwards around 1999. The rise in house prices reflected large increases in demand for housing and a rise in the supply of housing. The significant increase in the demand for housing is endorsed to a number of factors. a. Low interest rates Continues low interest rates from 1999 to 2004 made adjustable-rate mortgages appear very eye-catching to possible buyers. Low...
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...from December 2007 through June 2009. The collapse of the housing market in America, which is known as the Sub-prime mortgage crisis was determined to be the main cause of the great recession of 2007. This sub-prime mortgage crisis drastically affected millions of Americans as it increased unemployment, which led to an increase in poverty, thus prompting the government to respond. Mr. Claude Gerald, Retired Economics Lecturer at the Montserrat Community College, stated “The Financial Crisis of 2007 and 2008 in North America was the main cause of the recession.” He further mentioned that the year 2007 initiated an era of turmoil as the financial crisis in the United States housing market began, which led to one of the worse financial meltdowns since the great depression in 1929. Mr. Gerald explained that In the housing market, persons who wished to purchase a house but unfortunately have a credit score typically below 620 would have been issued Sub-prime mortgage loans, as they may not have been able to acquire finance otherwise considering that sufficient collateral and a healthy credit history is required. These mortgages however were affiliate with high interest rates due to the likelihood of lenders being unable to acquire repayments in full as these persons have a history of making late payments or dishonouring credit requirements. The issue of these mortgages ultimately backfired on financial institutions as homeowners defaulted their repayments (Gerald). Dr. David...
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...The Global Financial Crisis Introduction The global financial crisis which started in early 2007 has proven to be perhaps the great financial catastrophe in history. Although it traces its roots back to the starting of the millennia, the subsequent meltdown was most gruesome over the past 3 years. What began as a crisis of the sub-prime mortgage market in the United States quickly transcended national borders and developed into a upheaval of epic proportions. What ensued was a systematic debacle of stock exchanges, investment banking, derivatives etc. all financial markets ranging from equity, currency, real estate, futures etc. In order to fully understand the devastation caused by this dilemma, we have to take focus on the core issues and identify the stream of events as they occurred and how they subsequently collapsed global financial markets. Housing Bubble Burst The global financial crisis began through the US sub-prime mortgage market. The past two decades leading up to the year 2005 had experienced phenomenal growth in terms of increases in housing prices. There was an abundance of capital flowing into the country and this translated into excess liquidity available for banks to lend out. The Sub-Prime Mortgage Market refers to a market where people with bad credit history can obtain house loans at relatively better rates. It doesn’t imply that the interest rates are low, but rather they don’t have to go through the rigors they would face due to their poor credit...
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... recession, but the main cause was sub-prime lending by banks. Basically banks were lending money to people to buy homes that they couldn't afford. Due to the sub-prime mortgages going belly-up, along with the spiraling effects of bank failures such as the automotive industry needing to borrow billions of dollars, the U.S. Economy experienced is worst economic situations since the Great Depression. The causes of the recession date back many years, and as far back as 1980. This is when bank deregulation begins (Crash of 2008, 2010), which means less qualifications are needed to give out a loan. This recession could have been foreseen by some since in 1987, there was a stock market crash that occurred after the banking deregulation began (Crash of 2008, 2010). As we get closer to the Crash of 2008, we find that there are more and more subtle signs. One of the biggest early signs was in 2001 when the annual issue of US mortgage backed bonds increased from $500- $2,000 billion (Crash of 2008, 2010). Also, with the U.S. Backing more bonds at such a high rate and causing the interest rates at an all time low, from 2001 to the third quarter in 2006, the average house value was raised by 80% (Crash of 2008, 2010). After this time, the housing market experienced a slight drop in the gains that they had been experiencing. Then the big signs started to show up that the housing market was in trouble, and in turn would lead to the financial crisis that we are in. According to (Crash...
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...Role of Structured Credit Products in the Recent Financial Crisis Abstract In 2008, the world faced the most serious financial crisis since the Great Depression of 1930s. The collapse of the housing bubble and the increasing default rates on subprime mortgages in 2006 triggered liquidity constraints and the insolvency of firms which were priorly considered “too big to fail”, set off a domino effect across the US and global financial markets. Although it has been suggested that the causes of the crisis in the big picture are attributable to the fundamental properties of capitalist system, today it is beyond any doubt that the structured financial instruments and the prevalent risks they revealed were at the center of the turmoil. In this paper, we look at the development of financial innovation and the advent of the structured products. The major risks they possess, how they have led to the financial crisis. Keywords: structured credit products, global financial crisis, CDO, CDS, structured finance 2 TABLE OF CONTENTS Structured products …………………..…………………………………………………..……4 Risks involved with structured products ………………………………………………………7 Role of structured products in the global financial crisis …………………………………….10 Measures taken and post-crisis situation .……………………..……………………………...12 References ……………………………………………………………………………………14 3 1 Structured Products Structured products have changed the way the banks manage and mitigate the risk in their portfolios...
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