Considering The Us Situation More Deeply, It’S Also Needed

Big banks had a practice of loaning more money for the stock market, and real estate

After the optimistic forecast from the realstate that the houses value were going to increase, many institutions started to make adjustments to take profit from this trend. In some cases, prime mortgages were allowed for subprime borrowers to take. This might look like a great idea to financial institutions because the house values were rising: if a people (who in the first place couldn’t afford a house) stop paying their mortgages then the bank could sell the house for a value greater than the one at the moment of default. Everything was going well, so how is it that the crisis unfolded? Well, these institutions wanted to make more profit

Real estate values further rose, luring lenders into taking more risks in their financial transactions. All this was done in the hope of raking in huge sums of dollars since the prices of the mortgages had gone up. Consequently, a large number of people, including those who would not have qualified under normal conditions, were able to secure mortgages. They soon realized that they had blundered but it was too late. Due to increased supply of homes being disposed off by lenders and other financial institutions, the demand went down sharply. There was no more money flowing in the economy as many people now stopped taking the mortgages. This could have resulted into the mortgage crisis.

Debt this high drove all crediting to collapse because people could not make payments on their loans, due to the fact that they simply did not have the income to pay. This then created instability within the banks because the revenue necessary to continue was no longer there. All of things added together equated to the largest market crash since the great depression and governments intervention.

A few years later the market took a turn for the worse, where interest rates were on the rise, and homes were losing their value quickly. Now borrowers that were in these interest only ARM’s needed to refinance these loans because the rates were going up, to a point where the homeowner was not be able to afford the payment. The Federal Reserve tried to stimulate the economy by lowering interest rates during the recession in early 2001, from over 6% in 2000, to a rate just above 1.25% in 2002. These low rates encouraged many Americans to apply for loans for homes that a few years ago they would have not been able to. To encourage the homeownership boom, the Bush administration urged Fannie Mae and Freddie Mac to allot more money for low-income borrowers so they could buy their own homes. This resulted in the subprime mortgage

Ultimately these lenders mortgages to people with poor credit and a high risk to default. Lenders were willing to make give out these subprime mortgages for countless reasons. Firstly these lenders had large amounts of funds to lend because strong economy leading up to recession. With this abundant capital lenders were willing to make riskier loans to help increase their investment returns. Lenders also thought these subprime mortgages were less risky than usual because rates were low, the economy was healthy and in general individuals were making their payments. The amount of subprime mortgages went from 173 billion in 2001 to 665 billion in 2005. A second reason for why lenders were giving out these subprime loans is due to personal greed and selfishness. Many heads of banks made huge bonuses based on high volumes and fraudulent appraisals. One way these lenders were able to do more volume was through mortgage fraud for profit. Mortgage fraud for profit is a illegal practice committed by industry professional who misrepresent or omit important information about their client’s employment, income, credit or property value with the goal of maximizing their own profits. The FBI found 63,713 cases of mortgage fraud during the year of 2008 alone and 46,717 during the year of 2007. They found out that in many low-credit, low income ZIP codes buyer income was overstated

In Matt Taibbi’s article “The Great American Bubble” Matt talks about the financial crisis that occurred on Wall Street. He starts his article off by giving us a little information about the highest members on Wall Street. He goes on to talk about how smart and manipulative the bank is in making money. Then he discuses the five major bubbles followed by the people of Wall Street. The bubbles were “The Great Depression, Tech Stocks, The Housing Craze, $4 a Gallon, and Rigging the Bail out” Overall the bubbles were a scheme template for Goldman employees to sell bad investments to citizens leading them broke, homeless, and in starvation. This caused the price of homes and gas to go up but people were so worried about loosing their homes, the

Jumbo loans also played an important part in the housing bubble. As home values skyrocketed, so did the amount of people seeking jumbo mortgages. In order to afford a modest home, whose prices had significantly increased in the housing bubble, applicants had to secure these non-conforming loans in large metro areas (Bay Area, Los Angeles, NYC, etc.) Several of these new jumbo loans were similar to subprime mortgages or had a concern-only option so that you can attract borrowers who'd then be forced to pay the loan back much longer of your energy, or allow a borrower to defer making payments about the principal balance for years, though and also this increased the quantity of income which needed to be paid back. Speculate the housing bubble

The system had been rigged, it was clear, but even with attempts to keep the values of subprime mortgage bonds artificially high, values collapsed. The government allowed the Brothers to go bankrupt, which triggered more panic in the markets. Commercial lending froze, paralyzing businesses in American and across the globe. Many Americans lost their jobs, savings and retirement

The problem was everyone who qualified for a mortgage already had one. Lenders knew if they sold a mortgage to a person that defaults the lender gets the house, and houses were always increasing in value in that market, that would be a valuable asset to sell. To keep up with the demand from investors, lenders started selling mortgages to borrowers who wouldn’t have qualified before because of the risk for default. These mortgages are called sub-prime mortgages and lenders started creating tons of them. In the unregulated market, lenders employed predatory tactics to get more borrowers with attractive offers such as no money down, no credit history required, even no proof of income. People never would have qualified before were now buying large houses, and the lenders sold their mortgages to Investment bankers. The investors packed subprime mortgages in with prime mortgages so credit agencies would still give a AAA rating. The rating Agencies who had a conflict of interest by receiving payments from the investment banks, had no liability if their credit ratings were correct or not. They turned a blind eye to the risky CDOs and kept giving AAA ratings. This worked for a while and everyone was happy including the new homeowners. The housing market became hyper inflated with more homeowners than ever. Wall Street continued to sell their CDO’s which were ticking time bombs. The subprime mortgages began

In the early 1990s derivatives were put in place, these instruments are basically speculation or betting on stock prices, bankruptcy of companies, interest rates etc. In the early 2000 they passed a law that made derivatives unregulated so the market boomed in 2001. All these laws passed were rational choices being made by individuals they realized they can make money. They were acting out of their own self-interest and no one else. Millions of Americans lost their homes in the crash due to these subprime loans that were put in place by these big banks.

Later, Robert Rubin made 126 million as Vice Chairman of Citigroup. In 1990s, there were $5 trillion investment losses Eliot Spitzer revealed that investment banks made Internet companies they will fail. In 2002, there were 10 investment banks settled the case for $1.4 billion. In 1998, CFTC made a proposal to regulate derivatives. Phil Gramm left eh Senate, he became the Vice-Chairman of UBS. Later, Larry Summers made $20 million as a consultant to relied on derivatives. In 2000, the Congress passed the Commodity Futures Modernization Act, it banned the regulation of derivatives. Between 2001 and 2003, mortgage loans increased. In 2000, there were increase of risky loans called subprime. The U.S housing prices increased and doubled. The Securities and Exchange Commission had no major investigations of investment banks. More the banks borrowed, the leverage gets higher. In 2004, leverage limited on the investment banks. The world’s largest insurance company, AIG, sold huge quantities of derivatives called credit default swaps. Raghuram Rajan made article about global meltdown and said more profits, more risk. Jonathan Alpert was a therapist for clients who have high-level Wall Street executive. Kristin Davis had prostitution ring, it was located near New York Stock Exchange. Borrowers had to borrow. 99.3 percent of prices of the house. Goldman Sachs sold about $3.1 billion worth of CDOs. Paulson had sold his

Another key event described in “The Big Short,” was when American International Group found a way to insure subprime mortgage loans while being able to bury these risks on its balance sheet. This was made possible by the fact that AIG was a triple-A-rated corporation with an enormous

To understand how this debacle came about, one must have a basic understanding of the nature of a derivative and what they are designed to do. Initially, derivatives were designed to provide an investor/trader with a type of insurance against unexpected movements in prices which could devastate an investment portfolio. These derivatives take the form of futures and options:

In 1994, Richard S. Fuld took control of Lehman Brothers as its Chief Executive Officer (CEO). Under Fuld’s aggressive leadership, the company flourished and became one of the largest investment banks in the United States. （Crossley-Holland 2009) reported that in 1994, each Lehman Brothers stock was averaging at $4 and by 2007 it catapulted to $82 creating a 20 fold increase. From 1994, Lehman Brothers gradually adopted an aggressive growth business strategy by expanding into highly complex and risky products such as Credit Default Swaps (CDS) and Mortgage-Backed Securities (MBS). By 2007, Lehman Brothers was the biggest underwriter of mortgage-backed securities of the U.S. real estate market.