The Problem Of Global Financial Crisis

I plan to explain the actual causes that led to the Subprime Mortgage Crisis, as well as, the role shadow banking played in the whole matter before and after the total collapse of the entire financial system. Moreover, I will be discussing five economic concept issues that were included in this subprime crisis, along

Securitization Food Chain is the chain of loan payments for mortgage loans. The chain started with home buyers taking out a mortgage loan from lenders. After home buyers would take out a loan the lenders would then sell the mortgage to investment banks. The investment banks combined thousands such as car loans, student loans, credit card debt, and ect. The combination of all the loans was called Collateralized Debt Obligation. Investment banks take the Collateralized Debt Obligation and sell them to investors often misleading the investors to believe the investments where low risk. Risky investments were then made with the depositors money. They did not care about the quality of the mortgage, only maximizing their volume and getting a fee out of

The financial crisis from2007 to 2008 is considered the worst financial crisis since the Great Depression of the 1920s and destroyed the U.S. economy severely. It led the housing prices fell 31.8%, the unemployment rate rose a peak of 10% in the United States. Especially the subprime market, began defaulting on their mortgage. Housing industry had collapsed. This crisis was not an accident, it caused by varies of factors. The unregulated securitization system, the US government deregulation, poor monetary policies, the irresponsibility of 3 rating agencies, the massed shadow banking system and so on. From my view, the unregulated private label mortgages securitization is the main contribute factor which led the global financial crisis in 2008.

Financial Crisis of 2007-2008 originated in the United States spread to the financial systems of many other countries, including CIS countries, by means of the domino effect. Bankruptcy of one of the largest Americans Bank, Lehman Brothers Holdings PLC, in someway was a launcher of this global crisis the scope of that can be compared with the Great Depression of the 30s of the last century. No one could have even believed that a crisis in the local market of subprime mortgage loans in the USA would have such enormous affect on the financial systems over the world and crash banking sectors of many countries one by one.

Mortgage-backed securities were bonds that were secured by home and other real estate loans. They were created when a number of these loans, usually with similar characteristics, were pooled together. As part of the housing and credit booms, the amount of financial agreements called mortgage-backed securities, which derive their value from mortgage payments and housing prices, greatly increased (Subprime mortgage crisis). Pools of loans were sold to federal government agencies like Ginnie Mae or a government sponsored-enterprise such as Fannie Mae or Freddie Mac. Securitization was the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security. A typical example of securitization

Securitized mortgages, also known as mortgage-backed securities, is not a twenty-first century concept. Since the 1980s, securitized mortgages have transformed the financial sector “By transforming illiquid [mortgages] into tradable securities, [which] has helped channel cash flow to borrowers and

You now know why people do securitization and why people risk getting their hands and clothes stained with soot. The benefits are too good to be true, it’s as low risk as you want it to be, you can share the blame with your friends and co-workers, and lastly, it is all recorded on one neat, clean, and organized Balance sheet. The cons are also easily summarized by the pros, the reward is as big as you want it to be so the more money you put in the bigger the risk and the bigger the loss if it all goes under, this was the main tone of the financial crisis of 2007 big risk big

The Global Financial Crisis, also known as The Great Recession, broke out in the United States of America in the middle of 2007 and continued on until 2008. There were many factors that contributed to the cause of The Global Financial Crisis and many effects that emerged, because the impact it had on the financial system. The Global Financial Crisis started because of house market crash in 2007. There were many factors that contributed to the housing market crash in 2007. These factors included: subprime mortgages, the housing bubble, and government policies and regulations. The factors were a result of poor financial investments and high risk gambling, which slumped down interest rates and price of many assets. Government policies and regulations were made in order to attempt to solve the crises that emerged; instead the government policies made backfired and escalated the problem even further.

In this essay I am going to discuss the effects of shadow banking on the recent financial crisis of 2007-8. Shadow banking was one of the major causes of the financial crisis since it was the subprime mortgages which was the first trigger of the collapse in the banking system. Through this essay I am to achieve a detailed analysis of why the shadow banking was one of the causes in the financial crisis and why was it not prevented by any regulation enforced. The basis of shadow banking system is that it occurs when financial intermediaries conduct transformation of maturity, credit and liquidity without having access to the central bank liquidity guarantees or even public sector credit. Maturity transformation: obtaining short-term funds to

Housing prices in the United States rose steadily after the World War II. Although some research indicated that the financial crisis started in the US housing market, the main cause of the financial crisis between 2007 and 2009 was actually the combination of housing bubble and credit boom. The banks created so much loan that pushed the housing price to the peak. As the bank lend out a huge amount of money, the level of individual debt also rose along with the housing price. Since the debt rose faster than people’s income, people were unable to repay their loan and bank found themselves were in danger. As this showed a signal for people, people withdrew money from the banks they considered as “safe” before, and increased the “haircuts” on repos and difficulties experienced by commercial paper issuers. This caused the short term funding market in the shadow banking system appeared a

In relation to the increase in house’s price, the rise of financial agreements such as mortgage-backed securities (MBS) and collateralized debt obligations (CDO) encouraged investors to invest in the U.S housing market (Krugman, 2009). When housing price declined in the U.S, many financial institutions that borrowed and invested in subprime mortgage reported losses. In addition, the fall of housing price resulted in default and foreclosure and that began to exhaust consumer’s wealth and

By securitising assets and removing them from their balance sheet, banks can use the cash proceeds for a number of reasons such as to reduce deposit levels, retire a debt, and buy back share capital (Wolfe, 2000). Twinn (1994 in Wolfe, 2000) shows that as capital requirements of bank increases, so does the absolute quantity of assets securitized. Banks willing to expand their loan provision business without increasing their capital or liabilities resort to securitization. Corporate issuers securitize to efficiently access capital markets in lieu of intermediated debt finance at a cost of capital, which would not be possible on issuer’s own credit rating more efficiently (Jobst, 2006).

Securitisation is one of the most fundamental and complex concepts in the world of finance. The non-existing industry began in the 1970s when home mortgages were pooled by U.S. government-backed agencies. Ten years later, financial institutions and businesses from all different aspects used

In this essay, we are trying to look at the factors responsible for the global financial crisis in 2008-09 which started in US and later spread across the world. By now, a lot of studies have been done on the global financial crisis of 2008. We explain briefly the role of the financial engineering which leads to combination of various financial securities, the actual risk of which is not clearly assessed and hence leading to the financial crisis. There were also some serious lapses in regulation and failure of the rating agencies in assessing the risks assumed by the financial products which accentuated the crisis.

Therefore securitization is the process by which illiquid assets (such as a pool of loans) are transformed into liquid instruments to be sold on capital markets (debt securities).