...2008 FINANCIAL CRISIS Name Course Date 1. Background The financial crisis commenced in August 2007 after the preceding inflation. The crisis became more defined throughout 2007 and gained momentum in 2008. This took place even after the financial regulators and the central banks’ tireless attempts to tame the situation. It is alleged that the main factors that influenced its manifestation include corruption, fraud, speculation, greed, bankers and bankers’ bonuses. However, the academic discourse, politics or media has been unable to solve the mystery surrounding the main causes of the crisis[1]. The mystery is academically relevant to the world of research just like the Great Depression, whose causes are still being discussed. Other sources believe that the crisis might have been as a cause of human failures especially following the refusal to bail out the Investment Bank Lehman Brothers. The housing bubble was the immediate trigger of the 2008 financial crisis. The following were the triggers under the housing bubble. I. Subprime lending A subprime mortgage is the mortgage that is readily acceptable without imposing strict measures of standard on it. Before the 2008 financial crisis, there existed a fierce competition between mortgage lenders. The competition between the mortgage lenders ensued from the struggle for market share and revenue. It also took place in tandem with limited supply of creditworthy borrowers which put unconditional......
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...Banking Academy | City University of Seattle | CORPORATE FINANCE THE GLOBAL FINANCIAL CRISIS 2008 Group’s member:Nguyễn Như Nam (C)Phan Thu AnNguyễn Thùy DungHoàng Bá SơnNgô Thị Ánh TuyếtDate: 28/11/2014 | AbstractIn 2008 the world was fell into the worst financial crisis since the Great Depression of 1929-1933. Although this crisis has gone, however, its consequences for the economy of many countries is very serious, even now many nations are still struggling to escape difficulty. Just in a short period, the crisis originating from America has spread to all continents. It led to a series of serious consequences such as the falling in stock markets, increasing in unemployment rates, large financial institutions had been collapsed or bought out, and governments in many strong countries had to come up with rescue packages to bail out their financial systems. So why does it have tremendous destructive power? What are its causes and its development? What are the consequence it bring to the world? And what are the lessons drawn from this terrible event? Derived from these questions above, this paper will generalize about the global financial crisis 2008. | Table of Contents Abstract i 1. Background 1 2. Reasons 2 2.1 The housing bubble 2 2.2 Fed had lower interest rates for a long time. 2 2.3 The subprime boom 3 2.4 Securitization (MBS, CDO) and Credit default swaps (CDSs) 3 2.5 The credit rating companies. 5 2.6 Structured investment......
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...Eco 101.01 9:45 AM Class 30 November 2010 Special Topic 5- The Crisis of 2008: Causes and Lessons for the Future 1.) Why did housing prices rise rapidly during 2001-2005 and then fall in the years immediately following? Did regulation and monetary policy play a role in this housing boom and bust cycle? “During the years of 2001-2005 housing prices rose due to the fact that the mortgage default rate and the foreclosure rate was at an all time low” (pg.671). The government was making new standards for housing loans and mortgages, which made them more affordable and easier to get, even if you didn’t actually meet the old standards you could still be eligible for loans and mortgages. Immediately after this housing boom, a bust arisen in the housing prices. The bust was caused because many of the monthly mortgage payments stopped coming in. This was because mortgage loans were made to more people whose chances of repaying them were less than in the past. These mistakes can simply be blamed on misjudgments by the banks and other leaders. When millions of these payments stopped coming in, there was no amount of financial expertise on Wall Street or government help that could save the whole investment structure built on the foundation of those mortgage payments. Government regulation and monetary policy played a significant role in the housing boom and bust cycle because government regulations and interventions are precisely what pushed lending institutions to reduce the......
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...Financial crisis of 2008 Student’s Name University Affiliation Financial crisis of 2008 The financial crisis of 2008 resulted to the greatest recession. This was after the great depression that had happened in 1929. This happened even after the treasury department and the Federal Reserve aggressively trying to prevent the United States system of banking from collapsing. The first suspicion of what caused the financial crisis was when the housing prices started to drop from 2006. This was a red light that the economy was in trouble. Nevertheless, realtors were relieved at the time. There was hope that the housing market that was overheated would securely go back to a level that is more sustainable. The realtors did not realize is that the number of people who owned homes with credit that was questionable had loans for 100 percent or even more of the value of their homes. What banks had done is that they had resold the mortgages in packages as a part of mortgage backed securities. Primarily, the Federal Reserve was thinking that the damage from the crisis of subprime mortgage will remain secluded to housing. However, prevaricate funds and other financial institutions all over the world had ownership over them. They were in pension funds, corporate assets and mutual funds. Given that the initial mortgages had been cut and sold again in parts, then the actual derivatives became......
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...Financial crisis 2008. What is it? The Great Recession was a period of general economic decline observed in world markets beginning around the end of the first decade of the 21st century. The exact scale and timing of the recession, and whether it has ended, is debated and varied from country to country. In terms of overall impact, the International Monetary Fund concluded that it was the worst global recession since World War II. According to the US National Bureau of Economic Research (the official arbiter of US recessions) the US recession began in December 2007 and ended in June 2009, and thus extended over 19 months. The Great Recession was related to the financial crisis of 2007–08 and U.S. subprime mortgage crisis of 2007–09. Why it happened? Exist four main reasons for financial crisis 2008: 1) Sub-prime mortgages 2) Collateralized debt obligations 3) Frozen credit markets 4) Credit default swamp What led to this? Once upon a time, investors in the United States bought Government bonds, which were very reliable investment, but after unrest in the Government rate reduced to 1% that did not like investors and they refused. But banks were just glad now they could borrow nearly free loans and earn money using financial leverage, and then return the borrowed money. Soon this game banks hooked investment banks by selling them mortgage loans for real estate. Because real estate is always grew up in price, and fast, then won it all. Further, the Bank takes many......
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...Stephanie King Professor William Badley Eng 1020-058 1 May 2013 The US Economic Crisis In the course of my research I have found that there are vastly different views of the crisis, its causes, and the solutions. The starting point of the financial crisis began when brokers from the firm J.P. Morgan met at the Boca Raton Resort in Florida to discuss ways that they could increase their capital and reduce risks. In so doing enabling them to avoid the federal laws that limited the amount of money they could invest by forcing them to keeping millions of dollars of funds in reserve in case the debts turned bad. They came up with the idea of inventing a device to protect these loans and free up capital. They conceived a kind of insurance where a third party would assume the risk of the debts going sour in exchange for a monthly premium, thereby separating the risks from the loans, and leaving them free to invest larger amounts of capital, and so credit default swops were born. The first negative was that these were agreements between two private entities that were not regulated by the federal government, and soon no entity that was guaranteeing these debts realized how big the market had grown, who was guaranteeing these debts, and how much these debts were worth. These debts created huge profits for investors and investment companies causing a worldwide economic boom. The original idea created by JP Morgan mutated so many times, allowing every......
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...Time: Monday / 2pm Table of Contents Abstract The Tech Bubble Introduction Lowering of Interest Rates Adjustable Rate Mortgage Securitization Mortgage Backed Securities Collateralized Debt Obligation Credit Default Swap Government Reaction and Policies Emergency TARP Repercussions Basel Disadvantages Future Policy Requirements Controversy Conclusion Reference List Review of the causes of the 2008 Financial Crisis in US. Abstract This paper seeks to summarize a stream of research that has delved into the major causes of the financial crisis in 2008. More precisely, we will be looking at a combination of causes such as the sub-prime mortgage crisis, the mortgage backed security, the collateralized debt obligation as well as how the incidental credit-default swap contributed to the incident. This paper will begin from analyzing the past, when it happened and how it built up and resulted in the financial crisis. The significance of this literature review seeks to give a simplified explanation of the financial crisis of 2008 and will be useful for the people unversed in economics or finance but wish to have a basic understanding of its causes and history. The Tech Bubble During the early 2000, numerous companies and individuals bought new operating systems that were Y2K-ready in fear that the “Y2K” problem would cause computer systems to malfunction. This had allowed technology companies to generate obscene amounts of revenue. At one......
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...were many factors that lead to the financial crisis of 2008. In 2001 America was facing the possibility of a recession, in part due to the terrorism attack. Fearing this recession the Federal Reserve decided to cut interest rates drastically with the plan to slowly increase it over time. Banks and other financial institutions saw this as an opportunity to make money and used the low interest rate to capitalize in real estate. Banks began the spiral of offering no money down mortgages with the cheap money interest rates to subprime borrowers, many which had little money and no assets. As the real estate business began to boom the prices of houses increased. Many people felt a false sense of security in the value and asset of owning a home could offset the failing stock market. Banks began to repackage these loans into collateralized debt obligations and sold them out to other financial institutions creating complex chains of debts. As the interest rates increased as planed the risks began to unravel. By 2006 many borrowers were defaulting on mortgages they could no longer afford to sustain and the housing market began to decline. In 2007 feeling the financial effects of the bad loans; many institutions were showing hundreds of millions in losses and expecting more each day as more people defaulted on their loans. It was at that point the public panicked realizing that the economy was spiraling with no hope of recovery. Banks came to a financial halt and many began filing for......
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...Genetic Engineering is considered as a dominant and quite dangerous set of tool. It is the process in which the DNA (deoxyribonucleic acid which makes up the genes for all living things) is extracted from one organism to put it in another organism’s DNA, therefore it introduces in hereditary traits into the receiver organism (“How Stuff Works”). The nature and characteristics of all living things are determined by special combinations of genes that are carried in their cells, therefore the least changes or alteration can bring a major amount of changes in an organism and its offspring (“How Stuff Works”). Genetic Engineering does not only consist in plants, animal breeding and fertilization of crops it also includes polyploidy (organism which two sets of homologous chromosomes), mutagenesis (process in which the organisms genetic material is changed in sable manner that causes mutation), and cell fusion techniques which does not involve recombinant nucleic acid or genetically modified organism in the process (Wikipedia). Cloning and stem cells also do take a part in Genetic Engineering (Wikipedia). Advances in Genetic Engineering are also playing an important role for agricultural and economic welfare. GMO (Genetically Modified Organisms), the prospect of Genetic engineering amongst agricultural brought some benefits like increasing crop yields, reduction cost for food and drug manufacturing, moderates the needs for pesticides, improved the configuration of......
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...India’s potential rate of output growth by removing the binding constraints. We have also estimated the potential growth rate for India during the last decade based on HP filter technique (Hodrick and Prescott, 1997) and found that in the last three years, India had been growing above its potential growth rate. Figure 6: Potential GDP Growth and Output Gap (1997-08 to 2007-08) Note: Based on HP filter technique as proposed by Hodrick and Prescott (1997). Fears of over-heating of the economy prompted the Reserve Bank of India (RBI) to begin monetary tightening as early as September 2004 when the cash-reserve ratio(CRR) for commercial banks was raised. The sharp increase in global fuel and food prices in the first quarter of 2008 aggravated inflationary concerns and resulted in further monetary tightening that saw interest rates being hiked until August...
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...were the cause of the financial crisis of 2008 and 2009” The 2008 financial crisis led to a sharp increase in mortgage foreclosures primarily subprime leading to a collapse in several mortgage lenders. Recurrent foreclosures and the harms of subprime mortgages were caused by loose lending practices, housing bubble, low interest rates and extreme risk taking. Additionally, expert analysis on the 2008 financial crisis asserts that the cause was also due to erroneous monetary policy moves and poor housing policies. The federal government encouraged the expansion of risky mortgages to under-qualified borrowers. Congress pushed for the support of affordable housing through extended procurement of non-prime loans for applicants with low income (Zandi, 2008). The cutting down of interest rates to low levels to supplement for technology bubble of early twentieth century and the effects of Sept 11, a housing bubble was created. This move facilitated individuals with poor credit to obtain mortgages in high percentage when lenders created non-conventional mortgages by offering mortgages with extensive amortization periods, loans with interest and payment alternatives such as ARMs. Ultimately, interest rates rose again and many subprime borrowers stopped paying for their mortgages when their interest rate were reset to higher monthly payments. Subprime mortgage is simply defined as loan offered to someone with a weak credit history. Since the 2008 financial crisis had its source in......
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...“Critically evaluate the role of credit rating agencies such as Standard and Poor’s and Moody’s in promoting well-functioning capital markets. How well are the agencies performing their roles?” – December 2013 past paper Credit rating agencies are private profit oriented entities that earn revenues for issuing opinions on the credit worthiness of sovereign governments, corporations and a variety of specific debt issues and issuers. They enjoy a high level of credibility in the investment community and their opinions are extremely influential. Credit rating agencies first emerged in the United States in 1909. They initially issued ratings solely for the debt obligations of the railroad, which had catalysed the development of a global bond market to finance their expansion. The advent of credit rating agencies in the early 20th Century reflected the emergence of highly capital intensive industries in the USA and the corresponding expansion of capital markers to finance them. Over recent decades, global capital flows have accelerated as sovereign borrowers, notably in the developing world, turn to private capital markets for financing needs previously met by commercial and development banks, as well as multilateral agencies. The two major credit rating agencies are Standard and Poor’s and Moody’s Corporation. Standard and Poor’s is now a wholly owned subsidiary of the McGraw Hill Group of companies,, while Moody’s Corporation is the parent company of Moody’s......
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...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. By the end of 2008 rate of price......
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...The global financial crisis of 2007 – 2008 impacted every nation in the world, but the timing and severity of the impact varied greatly depending on various factors such as the sovereign debt as a percentage of Gross Domestic Product (GDP) prior to the financial crisis, as well as the level of exposure to the Collateralized Debt Obligation (CDO) sub-prime mortgagebacked securities of the different countries. Where governments and banks had significant exposure to CDOs, which became known as toxic debt instruments in the wake of the financial crisis, the impact was experienced more speedily and more severely. South Africa had very limited exposure to these debt instruments, so the impact on their economy lagged other economies such as the USA. a) South Africa’s macroeconomic performance before, during and after the global financial crisis of 2007-2008 As indicated by the figures in Table 1 below, production and the utilisation of production capacity began tapering down in 2008 as the financial crisis took hold. The figures for 2009 clearly describe the impact of the crisis on South Africa at the bottom of the cycle with reductions of 13.9% in production, 16.2% in sales, and 6.8% in the utilisation of production capacity from 2008. It should be noted that production, sales and utilisation of production capacity had by the end of 2012 still not recovered to the levels recorded for 2008. Table 1: South Africa’s production, sales and utilisation of......
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...LEADERSHIP AND ETHICAL DECISIONS PERFORMED BY KENNETH LEWIS AND THE FED DURRING THE FINANCIAL CRISIS OF 2007-2008 November 29, 2010 Introduction The robust leadership decisions of both the Fed and Kenneth Lewis, CEO of Bank of America (B of A), were not only ethical and accurate, but could have simply saved our financial system as we know it. During the weekend of September 13-14, 2008 Kenneth Lewis met with CEO of Merrill Lynch (Merrill), John Thain, in order to try and rescue Merrill from a hasty bankruptcy that lurked around the corner. Lewis was thinking that it was the perfect opportunity to add the only thing that B of A lacked after recent acquisitions, a “Wall Street investment bank that underwrote and sold securities” (Pozen and Beresford, 2010). On December 5, 2008 B of A’s shareholders voted to approve the merger between the two (Pozen and Beresford, 2010). It wasn’t until days later that Lewis became progressively more concerned about the growing fourth quarter losses on Merrill’s books, from $5.38 billion on November 12 to $12 billion on December 14, one month later. By mid December Lewis began looking for a way out of the deal before the scheduled closing date in late January. Both the Fed and the U.S. Treasury Secretary, resisting that Lewis walk away, threatened to fire Lewis and replace the board at B of A if the merger didn’t take place. Lewis, afraid of legalities from not disclosing the losses to their shareholders before the vote, and the drop......
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