Global Financial Crisis 2008

3250 Words Aug 31st, 2012 13 Pages
1. Introduction

Shah (2010) stated that the global financial crisis which has been brewing for a while has really started to show its effects in the middle of 2007 and into 2008. It started with the default of the subprime housing loans in the United States when its housing bubble burst. It caused a great impact across the globe that first struck down major financial institutions, first in United States and then in Europe, that were directly exposed to the mortgage default risk.

After the turbulent years of the 1990s and early 2000s characterized by recurrent financial crises in emerging economies, financial instability and sluggish and erratic growth in Japan and the dot.com boom-bust cycle in the United States, the world economy
…show more content…
As regards credit default swaps, which have received a substantial amount of attention in recent months, greater transparency can be achieved by requiring the clearing and setting of these derivations through clearing houses or on exchanges. This also provides for greater monitoring of exposures and posting necessary collateral.

2.2 Shah (2010) The subprime crisis came about in large part because of financial instruments such as securitization where banks would pool their various loans into sellable assets, thus off-loading risky loans onto others. (For banks, millions can be made in money-earning loans, but they are tied up for decades. So they were turned into securities. The security buyer gets regular payments from all those mortgages; the banker off load the risk. Securitization was seen as perhaps the greatest financial innovation in the 20th century)

2.3 The board industry shift to an originate-to-distribute model relies on the ability to sell mortgage-backed securities (MBS) to investors. Rating agencies play a crucial role in providing information about the quality of such securities – but in the wake of the mortgage market meltdown, their performance has been called into question. The rating process for securities backed by subprime loans was marked by a fundamental conflict:
Open Document