Why Investment Decisions Have Been Affected By Credit Quality Problems Over The Last 30 Years

The banking industry has undergone major upheaval in recent years, largely due to the lingering recessionary environment and increased regulatory environment. Many banks have failed in the face of such tough environmental conditions. These conditions

Additionally, when America’s economy was melting in 2008, the Federal Reserve played a big role to stabilize it. Besides the Great Depression during the years 1929 through 1939 the worst economic time for the United States, 2008 was unmistakable one of the worst years of America’s economy history. When this economic recession was taking place, the Fed had to take action to avoid another depression and to stop a fall from the financial system. With the help of the Federal Reserve J.P. Morgan Chase and Co.’s they planned to help Bear Stearns (an investment bank) with financial assistance to help the government to buyout AIG, a well-known insurance company. This helped to produce a strategy targeting to stabilize the credit market and also the short-term interest rate from 45% to almost 0 from the benchmark (Coste). Thanks to the Federal Reserve and their well design plan to avoid another recession they prevented the economy of the world or better known as Macroeconomic system from falling and getting it

The panic of 1907 and the Great Recession of 2007-2009 has both been major economic events in the United States economic history. This paper compares and contrasts these two major events and enables us to understand importance of certain financial institutions and regulations during troubled times in the financial sector. In this paper, both panics of 1907 and 2007 are historically analyzed and compared.

These actions led to the fall in prices of securities. Loans were liquidated and borrowing from banks and other lenders became difficult. Interest rates would rise rapidly and sharply. This type of financial hardship led to the liquidation of bank credit. Over a long enough span, this liquidation would lead to money crises (Federal Reserve System 5th ed pp. 10-11).

A decade ago the Lehman Brothers were the fourth largest investment bank in America. Dealing with Investment banking and investment management, the Lehman Brothers was one of the largest global financial service providers. Consequently, the subprime mortgage crisis left the company filing for the declaration of the chapter 11 bankruptcy protections, due to the unnecessary undertaken risk and obnoxious negligence accusations directed towards the group. Companies should utilize observational and analytical pundit functions in identifying the presence of crisis situations to avoid an economic downturn in the business (Pontell, 2014). The fraud would have prevented through stronger and better internal controls, which

The world’s financial system was almost brought down in 2008 by the collapse of Lehman Brothers that was a major international investment bank at that time. The government sponsored these banks’ bailouts that were funded by tax money in order to restore the industry. Before the crisis, banks were lending irresponsible mortgages to subprime borrowers who had poor credit histories. These mortgages were purchased by banks and packaged into low-risk securities known as collateralized debt obligations (CDOs). CDOs were divided into tranches by its default risk. The ratings of those risks were determined by rating agencies such as Moody’s and Standard & Poor’s. However, those agencies were paid by banks and created an environment in which agencies were being generous to ratings since banks were their major clients.

Definition: The Savings and Loans Crisis was the greatest bankcollapse since the Great Depression of 1929. By 1989, more than 1,000 of the nation's Savings and Loans (S&Ls) had failed. This effectively ended what had once been a secure source of home mortgages.

During the financial crisis, the Fed’s monetary policy and the Treasury’s fiscal policy were both expansionary and thus essentially complementary to each other. Both policies aimed at stimulating the economic activities and stabilizing the credit market and the entire financial system. During the crisis, the inflation rate dropped significantly as the commodity prices plummeted, which freed the Fed from worrying about inflation risk. The foreign investors poured their money into the U.S. Treasury, allowing the U.S. government to borrow at extremely low interest rates. The various actions taken by the Treasury and the Fed served to work together to address the problems which were critical to save the U.S. financial system from collapse and to end the most severe recession since the Great Depression.

Since the onset of the financial crisis 2008, the sovereign debt crisis in western economies and the new financial regulation with Basel III coming up, the financial industry faces the challenge of reinventing itself. The ring-fence for Commercial and Investment Banking, and new economic and regulatory capital requirements will determine the kinds of products banks will be able to distribute. It will have a huge impact in the Investment Banking business, which will suffer tough regulation and supervisory procedures. At the same time, credit risk models will be reviewed because they have failed to predict the crisis of 2008. The current financial and economic crisis doesn’t have any precedent in the past.

With copious amounts of supporting details, the author’s point of view may be one that focuses on economists in relation to the Federal Reserve Act and less on political agendas. The economists were the ones responsible for providing research and acknowledging different solutions to the crisis of 1907. The author depicts economists in the article as “direct advisors” and “policy makers” which gives the reader a better understanding of their roles in which they were perceived by the Senate and Congress (Caporal, 2003). These were individuals that strived for excellence and would go to great means to make an impact in the economy that would alter the banking system forever.

Beside internal factors, we examine the external factors, Opportunities and Threats, of KBRA. The incumbent credit raters’ fail in the financial crisis gave an opportunity for new rating agencies like KBRA. After the financial crisis, the government and the investors realized the importance of appropriate corporate credit rating. The government might tend to subsidize newly-established rating organizations and create new regulations for credit rating in order to eliminate the oligopoly of three big financial agencies. KBRA benefits from such environment. Also, it is easier for small or new rating agencies like KBRA to apply a new revenue model under revised regulations.

The recent financial crisis has a huge impact on systemic Important Financial Institutions; it’s distressing effect can be felt in almost every business area and process of a bank. A fairly large literature investigates the impact of financial crisis on large, complex and interconnected banks. The great recession did affect banks in different ways, depending on the funding capability of each bank. Kapan and Minoiu (2013) find that banks that were ex ante more dependent on market funding and had lower structural liquidity reduced supply of credit more than other banks during crisis. The ability of banks to generate interest income during the financial crisis was hampered because there was a vast reduction in bank lending to individuals and

The 2008 subprime mortgage crisis devastated from the global financial market. People believed that the “Big Three” credit rating agencies played a significant role at various stages in the crisis. The Reuters, in an article published in 2011, even claimed that credit rating agencies triggered the financial crisis. The Reuters believed that Moody’s Corp and Standard and Poor triggered the worst financial crisis in decades by downgrading the rating on complex mortgages securities triggered the worst financial crisis in decades. However, the problems of rating agencies have existed for quite a long time and accelerated the crash down in some extend. In my opinion, despite the significance of the “trigger”, the credit rating agencies served as the “catalyst” for the crisis by inducing the investor to enter under-served markets.

The 2008 subprime mortgage crisis devastated the global financial market. People believed that the “Big Three” credit rating agencies played a significant role at various stages in the crisis. The Reuters, in an article published in 2011, even claimed that credit rating agencies triggered financial crisis. The Reuters believed that Moody’s Corp and Standard and Poor’s action of downgrading the rating on complex mortgages securities triggered the worst financial crisis in decades. However, the problems of rating agencies have existed for quite a long time and accelerated the crash down in some extend. Therefore, besides the “trigger”, I regard the credit rating agencies as the

To understand how the CRAs played a major role in the crisis, we must first understand why they became such a significant influence on investor perception. Investors- both individual and institutional look at the CRAs to provide them with risk analysis of a debt security, in form of a credit rating, which is instrumental to these investors’ decision-making process. The risk originates due to two main factors: the ultimate mortgage holders never having met the debtors, and the sheer complexity of these securities that comprise of parts of a plethora of loans. Most individual investors lack the resources to gauge the creditworthiness of these loans. This