Financial Crisis

analytical Essay
3254 words
3254 words

The Impact of a threat of a credit default. The financial crisis 0f 2007-2008 is widely considered to be the worst financial crisis since the great depression. The effects of the financial crisis were cataclysmic it resulted in companies going under, others getting bailed out by the government and the stock market taking a nose-dive which led to a domino effect of recessions and bail outs around the world. The warrant for the financial crisis of 2007 was motivated by the subprime mortgage crisis. There was an increase in subprime lending which started in the early 1990’s and by 2007 all these loans totaled 1.3 trillion dollars which accounted for 20 to 25 percent of the u.s. .Housing market. During 2007 approximately around 6 million home owners could not meet there loan obligations. Borrowers took out loans that had a adjustable rate mortgage conjecturing they would buy a home with all debt financing then sell it in a couple of years assuming the housing prices would spiral up.The banks financed these loans using CDO’S and morgatge backed securities then selling these assets to other financial intermediaries letting the banks be the conciliator of these risky loans packaged into credit instruments.All though these loans were given out to grow and boost the economy it did the inverse. “How does a credit crisis begin? The basic structure of a credit crisis is excessive liquidity leads to excessive lending which leads to excessive leverage which leads to excessive-risk taking. The result of this equals tremendous spread tightening that leads to a credit bubble that will eventually burst. This cycle is inspired by the government’s lax laws on borrowing money. Even though people should worry about deflating the bubble. The start of th... ... middle of paper ... ... the most epic interventions in matters of business. The executives of both companies Freddie and Fannie were fired. They also issued senior preferred stock and common stock totaling 79.9 percent of each company. The value of the stock prior to the governments take over was greatly deflated by the government’s policy to pause the distribution of dividends on previous shares in order to preserve the value of the company debt and mortgage backed securities .After the turmoil of both Fannie mae and Freddie mac the government started to sue banks for their recklessness in underwriting mortgages.Also the government has been sued by the shareholders for allowing fannie mae and Freddie Mac for operating in a reckless manner that would not allow them to receive their dividends and by making the management of Fannie and Freddie to sign over there companies to the government.

In this essay, the author

  • Explains that credit derivatives shift credit risk from one borrower to another debt holder or corporation. they are tied to a reference entity or reference obligor.
  • Explains the concept of cdos in the 1980's by a bank called salomon brother by securitizing the loans and converting them to bonds.
  • Explains that the housing market was coming down but inflation was going up and the u.s. central banks tried to combat the rising inflation by increasing interest rates.
Continue ReadingCheck Writing Quality

Harness the Power of AI to Boost Your Grades!

  • Haven't found what you were looking for? Talk to me, I can help!
Continue Reading