...Fatima Sobh 200903216 By early 2007, the crisis started in the U.S. with the collapse of the subprime mortgage market and by reaching the end of a major booming housing era. It occurred just after two years of raising the interest rates policy. Not only had it affected mortgages, it reached the banking sector in the U.S. and across the world as well. It had spilled over into the real economy through a dangerous credit clash and collapsing equities’ market which more likely produced a significant recession. The Fed and other central banks have responded in a classical way by flooding the financial markets with liquidity. As for the fiscal authorities, they dealt with the decline in solvency in the banking system by following the template of earlier bailouts like the Reconstruction Finance Corporation in the 1930s, Sweden in 1992 and Japan in the late 1990s. In August 2007, to be specific, the financial system started to crack. Banks realized that they held considerable amounts of mortgage-backed securities that were difficult to rate. Sadly, after experiencing large losses, banks’ balance sheets could not put up with additional lending. (Cecchetti, 2008) As a result, some financial intermediaries began to face difficulties in finding the short-term financing that was necessary for them to carry on their daily business. Seeing this, policymakers tried to figure out what to do. They started by pursuing some traditional interest rate instruments but they proved to be unsuccessful....
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...Running Head: CLEAN UP THE HOUSE 1 Clean Up the House: An Analysis of the Housing Crisis and the Endeavor to Lift the US Housing Market Neil Smith Wilmington University MBA 6400 Economic and Financial Environment of Business CLEAN UP THE HOUSE 2 ABSTRACT This is an inquiry of the Housing Crisis that culminated to the Great Recession of 2007-2009. A review of the aspects that led to the Housing Crisis will be considered. The causes that contributed to the Housing Crisis will range from the Community Reinvestment Act of 1977 to the greed and voracity that engulfed the Financial Markets. Such greed maligned the financial markets causing eventual bailouts and measures that the US Federal Government employed to avert a major financial depression. This paper will discuss definite recommendations that will improve the US Housing Market. CLEAN UP THE HOUSE 3 Clean Up the House: An Analysis of the Housing Crisis and the Endeavor to Lift the US Housing Market In today’s world it is generally accepted that a home is the most expensive thing that any American can buy. The idea of home ownership - a chance to own a home - is a dream fulfilled for many. To have a piece of property and call it your own is reflected...
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...Example of Financial Illusion Introduction The emergence of an increasing number of ‘financial illusions’ in the current state of financial markets around the world casts doubts over the famous and widely accepted efficient market hypothesis. The efficient market hypothesis (EMH) indicates that, at any time, prices fully and instantaneously reflect all available relevant information on a particular stock or market (Fama, 1970). EMH also suggests that it is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. Thus, according to the EMH, it is impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices because stocks are always traded at their fair value on stock exchanges. Another reason is because no one has access to information that is not already available to everyone else. One important characteristic of the EMH is its assumption that agents are rational. Rational agents is agents which has a clear preferences, models uncertainty via expected values, and always chooses to perform the action that results in the optimal outcome from all the feasible actions. Their actions depend on their preferences, their information of the current situation; which may come from past experiences, the actions, duties and obligations available and the estimated or actual benefits that the agents can get after the actions. In reality, however, agents are...
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...__________________________________________________________ of M.Com (Banking and Finance) Semester I (academic year 2013-2014) has successfully completed the project on ______________________________________________________under the Guidance of Ms. __________________________________________. _________________ ___________________ (Project Guide) (Course Co-ordinator) ___________________ ___________________ (External Examiner) (Principal) Place: _____________ Date: ___________ DECLARATION I, __________________________________________________ Student M.Com (Banking and Finance) Semester I (academic year 2013-2014) hereby declare that, I have completed the project on ______________________________________________________________. The information presented in this project is true and original to the best of my knowledge. ___________________ PILLAI ANUJA SURESH Roll No.: 42 | Place: _____________ Date:_____________ ACKNOWLEDGEMENT I would like to thank the University of Mumbai, for introducing M.Com( Banking and Finance) course, thereby giving its students a platform to be abreast with changing business scenario, with the help of theory as a base and practical as a solution. I am indebted to the reviewer of the project Ms.Bhavika Dave ,my project guide for her support and guidance. I would sincerely like to thank...
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... MEMBERS: AYUSH KUMAR-030 NIPEKSH I MAHAJAN-082 PRABHAV MISHRA-0 PRATEEK KUMAR-096 VAIBHAV JAIN-164 “Why should a financial engineer be paid four, four times... to a hundred times more than the real engineer? A real engineer build bridges, a financial engineer build, build dreams. And when those dream turn out to be nightmares, other people pay for it.” - Andrew Sheng “Contrary to the vulgar belief that men are motivated primarily by materialistic considerations, we now see the capitalist system being discredited and destroyed all over the world, even though the system has given men the greatest material comforts” - Ayn Rand “In fact, there is ultimately a limit to how much regulation can do. In the final analysis, you could write all the rules you want, but there has to be a philosophy of ethical behaviour that comes from human beings operating in a professional way” – William H. Donaldson, CFA “The global crisis was caused by “the over-50s not knowing what the under-30’s were doing” – Johann Rupert, Remgro Chairman “The first casualty of a downturn is truth” - Financial Times Columnist 30 Sept 2008 Introduction- The banking crisis was triggered by largely unregulated trading of complex financial instruments, including mortgaged-backed securities, which dragged down some of the USA’s largest banks and brokerages as the housing bubble of the mid-2000s collapsed and foreclosures soared. In addition, generous pay and bonuses on Wall Street...
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...Th Fi ncial Cris he inan sis: 2007 2 7-2009 gar N g A. Norton, Jr. Illin nois Sta Uni ate iversity y Cover page im mage ©2010 Pho otoDisc, Inc. Copyright © 2010 by John Wiley & Sons, Inc W c. All rights rese erved. No part of thi publication ma be reproduced stored in a ret is ay d, trieval system or transmitted r in any form o by any means, electronic, mec or , chanical, photoco opying, recordin scanning ng, or otherwise, except as permi itted under Sections 107 or 108 o the 1976 Unit States of ted Copyright Ac without either the prior writte permission of the Publisher, o authorization t ct, r en f or through payment of th appropriate pe he er-copy fee to th Copyright Cle he earance Center, I Inc., 222 Rosewo Drive, ood Danvers, MA 01923, website www.copyright A e t.com. Requests to the Publisher for permission should be r addressed to t Permissions Department, Joh Wiley & Son Inc., 111 Rive Street, Hobok NJ 07030the hn ns, er ken, 5774, (201)74 48-6011, fax (20 01)748-6008, we ebsite http://www w.wiley.com/go/ /permissions. To order book or for custom service, pleas call 1(800)-CA ks mer se ALL-WILEY (2 225-5945). Printed in the United States of America. e o ISBN 978- 0-470-56516-2 The Financial Crisis: 2007-2009 Objectives Understand the major influences that led to the 2007 2009 Financial Crises Describe the role that agency cost issues played in the financing of mortgages to developing...
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...______________________________________________________under the Guidance of Ms. __________________________________________. _________________ ___________________ (Project Guide) (Course Co-ordinator) ___________________ ___________________ (External Examiner) (Principal) Place: _____________ Date: ___________ DECLARATION I, __________________________________________________ Student M.Com (Banking and Finance) Semester I (academic year 2013-2014) hereby declare that, I have completed the project on ______________________________________________________________. The information presented in this project is true and original to the best of my knowledge. ___________________ PILLAI ANUJA SURESH Roll No.: 42 | Place: _____________ Date:_____________ ACKNOWLEDGEMENT I would like to thank the University of Mumbai, for introducing M.Com( Banking and Finance) course, thereby giving its...
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...According to Wikipedia a housing bubble is a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels and then decline. Four years into the housing bubble downturn, much of the country remains hopelessly confused about what happened, why it happened and who is to blame. In my research paper I will try and demonstrate what a housing bubble is, some of the reasons for the bubble, was it preventable, how it kept growing, how it burst and how it has affected our economy. By definition a housing bubble is a temporary condition caused by unjustified speculation in the housing market that leads to a rapid increase in real estate prices. As with most economic bubbles, it eventually bursts, resulting in a quick decline in prices. The end of a housing bubble is hard to predict given the fact that economic conditions can change without warning. If a housing bubble swells to an extremely high level, the aftermath of a burst may set the housing market back years. There is little consensus as to the cause of the housing bubble that precipitated the financial crisis of 2008. Numerous explanations exist: misguided monetary policy; a global savings surplus; government policies encouraging affordable homeownership; irrational consumer expectations of rising housing prices; inelastic housing supply. Some explanations...
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...it’s ever been before since the 1940s. Unemployment is at a record high as well as companies that are continuing to close down due to financial issues. The housing markets, auto industry, banking industry, & loss of jobs are all major things that are being affected by the way the US is spending money. The housing market and banking industry are both some of the main things that are having a major affect on the U.S. and to how this affects all other aspects of daily living. Some people may ask, “How did we get this way”? Over the past 180 years the United States grew to a huge, integrated, industrialized economy that makes up over a quarter of the world economy. The main causes were a large unified market, a supportive political-legal system, vast areas of highly productive farmlands, vast natural resources (especially timber, coal and oil), an entrepreneurial spirit, a commitment to investing in material and human capital, and at times a willingness to exploit labor. In addition, the U.S. was able to utilize these resources due to a unique set of institutions designed to encourage utilization and extraction. The economy has maintained high wages, attracting immigrants by the millions from all over the world. In the 19th century, recessions frequently coincided with financial crises. Because of the great changes in the economy over the centuries, it is difficult to compare past recessions to early recessions. After the Great Depression, ideas about the best tools for...
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...hit the nation that is creating a strangle-hold on our economy and preventing economic recovery. While the entire nation has been stunned, the crisis has disproportionately affected the states of Florida, Nevada, Arizona, California and Georgia; these states were hit with an unprecedented loss of value in residential real estate. According to the leading provider of real estate industry statistics, Realtytrac.com (2011), one in every 611 United States housing units had a foreclosure filing during the month of July 2011 and it appears that the foreclosure processing delays, combined with the smorgasbord of national and state-level foreclosure prevention efforts such as loan modifications, lender-borrower mediations and mortgage payment assistance for the unemployed may be allowing more distressed homeowners to stave off foreclosure.. A CNBC report said that the falloff in foreclosures is not based on a “robust recovery in the housing market but on short-term interventions and delays that will extend the current housing market woes into 2012 and beyond” (“States with the highest foreclosure rates,”2011). A summary of active foreclosures by State as of July 2012 for the top five states is shown below (Realtytrac.com). |Nevada |1 in every 115 homes | |California |1 in every 239 | |Arizona |1 in every 273...
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...miscalculated badly in betting on American subprime mortgages when the very name of these securities should have alerted them to their risks. If an economist suggests that the matter might be more complicated, he is denounced as a homo exculpans, a person who will excuse anything that managers do.2 If we look at the numbers, however, we see that there is something more to be explained. According to the Global Financial Stability Report of the International Monetary Fund (IMF) of October 2008, losses on non-prime mortgage-backed securities in US residential real-estate amount to some 500 billion dollars. This figure is both too small and too large. The figure is too small in the sense that losses of 500 billion dollars by themselves cannot explain why the financial system worldwide has been so devastated by the crisis. Around 1990, losses of savings and loans institutions in the United States were said to amount to some 600 to 800 billion dollars. A decade later, losses on NASDAQ and on the New York Stock Exchange amounted to 1.6 trillion dollars in the calendar year 2000, 1.4 trillion dollars in the calendar year 2001, and again 2.7 trillion dollars in the calendar year 2002. Neither episode caused a worldwide financial crisis. At the same time, the figure of 500 billion dollars of losses on non-prime mortgage-backed securities is * Max-Planck Institute for Research on Collective Goods, Bonn. 1 The following text is based on the Jelle Zijlstra Lecture which I gave in Amsterdam on May...
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...the Global Financial Crisis (GFC), late-2000s financial crisis or the second "Great Recession", is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s.[1] It resulted in the collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets around the world. In many areas, the housing market also suffered, resulting in numerous evictions, foreclosures and prolonged unemployment. It contributed to the failure of key businesses, declines in consumer wealth estimated in trillions of US dollars, and a significant decline in economic activity, leading to a severeglobal economic recession in 2008.[2] The financial crisis was triggered by a complex interplay of valuation and liquidity problems in the United States banking system in 2008.[3][4] The bursting of the U.S. housing bubble, which peaked in 2007, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally.[5][6] Questions regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined.[7] Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts. Although there have been aftershocks...
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...framework for understanding the genesis of the crisis. December, 2008: IN ITS LEADER of October 13, 2008, the Financial Times characterized the western world’s banking system as suffering “the equivalent of a cardiac arrest.” The collapse of confidence in the system means that “it is now virtually impossible for any institution to finance itself in the markets longer than overnight.” This occurred less than a month after Lehman Brothers (LB) collapsed, without bailout. Six months earlier Bear Stearns (BS) had been bailed out after JP Morgan Chase (JPM Chase) had bought it for $10 a share, at the regulator’s urging. After LB fell, who would be next? And if LB, who was not at risk? Despite the earlier U.S. government bailouts of the erstwhile government mortgage originators (and still seen as government-sponsored enterprises, or GSEs), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), and the later bailout of the world’s largest insurer, American International Group (AIG), everything changed with the demise of LB. The FT was describing the freezing of the interbank credit market. After LB’s fall, so-called counterparty risk was seen as prohibitive to prospective lenders, at any price. This was revealed in the TED spread, the difference between the cost of interbank lending, the London Inter Bank Offered...
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...status of the borrower, which is being less than ideal. Subprime lending is a general term that refers to the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history. According to the U.S. Department of Treasury guidelines issued in 2001, "Subprime borrowers typically have weakened credit histories that include payment delinquencies i.e. non-payment of the mortgage, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories." This is when the borrowers have a poor credit history that is they are bad borrowers. Subprime lending is also called B-Paper, near-prime, or second chance lending, as the borrowing is done to customers with a poor credit history or no credit history without any security in return of the money lending. Subprime lending encompasses a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards, among others. A subprime loan is offered at a rate higher than A-paper loans due to the increased risk. Subprime lenders To access this increasing market, lenders often take on risks associated with lending to people with poor credit ratings or limited credit histories. Subprime loans are considered to carry a far greater risk for...
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... Acharya1 , Thomas Cooley2 , Matthew Richardson3 and Ingo Walter4 1 2 3 4 Stern USA, Stern USA Stern USA Stern USA School of Business, New York University, New York, NY 10012, vacharya@stern.nyu.edu School of Business, New York University, New York, NY 10012, School of Business, New York University, New York, NY 10012, School of Business, New York University, New York, NY 10012, Abstract We argue that the fundamental cause of the financial crisis of 2007–2009 was that large, complex financial institutions (“LCFIs”) took excessive leverage in the form of manufacturing tail risks that were systemic in nature and inadequately capitalized. We employ a set of headline facts about the build-up of such risk exposures to explain how and why LCFIs adopted this new banking model during 2003–2Q 2007, relative to earlier models. We compare the crisis with other episodes in the United...
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