Jpmorgan's Collapse Of The Global Financial Crisis

America is today. John Pierpont Morgan once said, “If you have to ask how much it costs, you can’t afford it.” It is assumed amongst most people that John never had to ask the price of anything because he had so much money. J.P. Morgan was a significant figure in America’s 20th Century because of his role in saving the economy, funding huge companies and creating a wealthy bank that is still around today.

So what exactly happened to the subprime mortgage market that caused all of this? It actually goes back to 1998 with the Glass-Steagall legislation, which separated regular banks and investment banks was repealed in 1998. This allowed banks, whose deposits were guaranteed by the FDIC to engage in highly risky business because they were guaranteed their deposits up to $250,000 per depositor. Following the dot-com bust in 2000, the Federal Reserve dropped rates to 1 percent and kept them there for an extended period. This drop in rates caused bank managers to have to go after higher-yielding bonds because they could no longer make decent yields off of municipal bonds or treasury bonds. They, like Wall Street, got creative with lending, and went after high-yield mortgage-backed securities like subprime mortgages which were mostly dominated by non-bank originators but because of the demand, many banks and private sector lenders jumped on board to increase profits.

In the lead up to the current recession, when the real estate market began to fall, there were so many investors shorting stocks and securitized mortgage packages that were already falling, that the market simply fell further. There were no buyers at the bottom, and the professional investors made millions off of the losses of others. Beyond this, there was no real federal regulation for securitized mortgages, since there was no real way to gauge the mathematical risk of any given package. This allowed the investors to take advantage of the system and to short loans on real people’s homes. Once these securities were worthless, many of the homebuyer’s defaulted on their mortgages and were left penniless. No matter from which angle this crisis is looked at, the blame rests squarely with the managers who began the entire cycle, the ones who pursued the securitization of mortgages. Their incompetence not only led to the losses of Americans who have never invested in the stock market, but to losses for their shareholders.

The beginning of the crisis: From the early to the mid-2000’s, high-risk mortgages became available from lenders who funded mortgages by repackaging them into pools that were sold to investors. New financial products were used to apportion these risks, with private-label mortgage-backed securities providing most of the funding of subprime mortgages. The less

The financial crisis that put our economy on a downhill rocky road is known as the Great Recession of 2008. The U.S. Governments resolution to one the biggest panics was revolved around multiple bailout and fiscal measures. The fight to pull our weakening economy out of a dark hole left the American people with hope of advancing what gets thrown their way. The many bailout programs implemented by the U.S. Government can only hold the economy together for so long until were up to our knees in debt.

Loans that have been securitized by banks were readily sold to Fannie Mae and Freddie Mac in large pools where it has become obvious that Freddie Mac and Fannie Mae were turning a blind eye as to the quality of the mortgages they were purchasing. This became evident with the complete breakdown of the mortgage industry even though regulations were in place to serve the public Fannie Mae and Freddie Mac was supposed to be watchdogs for the industry but any and played a vital role in contributing to what is become known as the great recession. It is important to mention that very little has still been done to these institutions and they are still buying the same low quality paper that got them into trouble in the first place.

Asset backed - securities, which is the name for securitization of mortgages, is where sub-prime mortgages and securitization had a major role in the 2008 financial crisis. After the year 2000 banks became a lot less strict on who they would grant loans to mainly because they wanted to make more money. Banks standards decrease a lot so if someone wanted to apply for a loan and buy a house they would not even have to document their incomes one hundred percent, the client could just state it without full verification. Subprime loans, where banks mortgage loans to people with good or bad credit, is exactly what happened between the years 2000-2006. When the big private corporate companies are mentioned, those are the banks that essentially contributed to causing the crisis. Once the recession finally struck in 2007 those loans as subprime loans that were given out to the citizens with bad credit, they defaulted on those loans eventually leading to the foreclosure of their homes. The banks used securitization during this time to liquidate the mortgages and put all the pressure on the private investor so they would not have to take the hit once the homeowner defaulted. Because banks kept relaxing on the loans, mortgages became in demand so citizens kept applying for loans but they did not realize they all that these corporate banks were

The definitive effects of the securitization of subprime mortgages on the financial crisis accentuated the prominent failure of institutions to follow proper risk management and investment guidelines. Financial institutions, failed to aligned company goals with risk management practices and instead fueled greed by issuing monetary incentives based on the quantity of subprime loans issued or securities sold, rather than concentrate on the quality. Investment banks such as Lehman Brother, Bear Stearns and Merrill Lynch all participated in risky investment practices, which compounded the institutions risk and involvement in the securities. In 2006 Merrill Lynch doubled their endeavors in mortgaged backed securities and by the

JPMorgan Chase had many incidents where it has violated the rules and regulation and ended up paying big chunk of money for the violations. But one of the biggest penalties the bank had to pay was $13 billion. The bank represents several alliances of most Chicago and New York money center banks. In 2008, JPMorgan Chase bought two failing institutions after the government asked it to help out when the institutions got into deep financial difficulties. First one was brokerage house Bear Stearns that was one of the firms that was heavily involved in the businesses of packaging and reselling subprime mortgage-backed securities. In March 2008, to prevent Bear Stearns from collapsing, JPMorgan stepped in to buy the company with help of $29 billion

With encouragement from politically influential persons to increase home ownership rates and the optimism that followed the yields on government bonds, lenders and investors sought assets with even higher-yields. The problem, however, was the lack of credit-worthy borrowers. To remedy this, lenders sought out those who would not ordinarily meet typical credit standards within the sub-prime (and non-standard loans) segment of the housing market. These subprime borrowers were considered profitable and were viewed as the solution to the lenders ' search for higher yields. This, of course, was a much riskier tactic and led banks to hide their questionable transactions. The actions on behalf of the banks, along with their reckless behavior, resulted in the creation of the subprime US housing market and ultimately led to the deterioration of the economy.

The U.S. subprime mortgage crisis was a set of events that led to the 2008 financial crisis, characterized by a rise in subprime mortgage defaults and foreclosures. This paper seeks to explain the causes of the U.S. subprime mortgage crisis and how this has led to a generalized credit crisis in other financial sectors that ultimately affects the real economy. In recent decades, financial industry has developed quickly and various financial innovation techniques have been abused widely, which is the main cause of this international financial crisis. In addition, deregulation, loose monetary policies of the Federal Reserve, shadow banking system also play

The new lackadaisical lending requirements and low interest rates drove housing prices higher, which only made the mortgage backed securities and CDOs seem like an even better investment. Now consider the housing market which had become a housing bubble, which had now burst, and now people could not pay for their incredibly expensive houses or keep up with their ballooning mortgage payments. Borrowers started defaulting, which put more houses back on the market for sale. But there were not any buyers. Supply was up, demand was down, and home prices started collapsing. As prices fell, some borrowers suddenly had a mortgage for way more than their home was currently worth and some stopped paying. That led to more defaults, pushing prices down further. As this was happening, the big financial institutions stopped buying sub-prime mortgages and sub-prime lenders were getting stuck with bad loans. By 2007, some big lenders had declared bankruptcy. The problems spread to the big investors, who had poured money into the mortgage backed securities and CDOs. They started losing money on their investments. All these of these financial instruments resulted in an incredibly complicated web of assets, liabilities, and risks. So that when things went bad, they went bad for the entire financial system. Some major financial players declared bankruptcy and others were forced into mergers, or needed

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

deregulation (Morin and Maux, 2011). These factors were responsible for the crisis of credit and not solely the failure of Lehman Brothers. Still, the market of Credit Default Swaps was one of the biggest factors dedicating to the catastrophe, if not the biggest one as Lehman was heavily involved in that market. In explaining the sub-prime market, Morin and Maux (2011) explain that sub-prime loans “refer to inferior quality (sub) real estate loans whose higher risk of payment

The second World War broke out and once again military engineering triggered the much need economic growth. During the war the American economy seemed to breathe fresh air. Suddenly there were opportunities everywhere. The country began to use this war as a catalyst to gear up the industry. The unemployed got inducted in the defence services. The governments’ subsidized wage program also gave renewed impetus to the factories. The factories in turn generated employment. Military engineering also propelled the economy with new growth arenas. New shipyards, bus services and emergence of new electronic factories suddenly seem to bring in the lost glory to the US economy. Gradually the cloud Depression was no longer over the American sky and the