The U.S. Financial Crisis

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It is difficult to quantify exactly how much revenue a bank generates from proprietary trading, one brokerage analyst estimated that 5%-10% of trading done by large banks is a result of trading not done on behalf of the client.32 These investments are the reason Lehman Brothers Holdings Inc., a global financial services firm, failed. The firm participated in investment banking, equity, fixed-income sales, research, trading, investment management, private equity, and private banking. At one time, Lehman Brothers Holdings Inc., was a primary dealer in the United States Treasury securities’ market. In 1998, 25% of Lehman’s revenue was generated from proprietary trades.33 The company, at this time, held $28 billion in securities and other financial instruments.34 In 2006, 56% of revenue was from proprietary trades.35 In 2007, when the financial crisis began, the company’s holdings in securities and other financial instruments was $313 billion.36 This growth was exceptional, $100 billion more than in the previous year.37 When the large investments Lehman and others made turned sour, the negative financial and economic impact was just as large. The enormous amount of money firms invested, and the risky transactions bet on, called for Congress and regulators to act. However, banks, whose revenue from proprietary trading is essential, fear the proposed limitations could result in major loss. They argue that many banks would fail because there would be no government cushion to fall back on, taxpayers would not be held responsible for bailing out declining firms. Further, if a bank avoided failure, the amount of money the firm would lose in the process of saving the institution would result in such a significant loss that it would n... ... middle of paper ... ...buted to the financial crisis. Government sponsored enterprises, such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) helped further political interests of the Community Reinvestment Act. If loans met specific conditions, they would purchase them from the banks and lenders.51 These enterprises guaranteed that if the borrower defaulted, they would cover the debts. The investors who bought this mortgage-backed securities thought banks would remain secure and the United States was monitoring loans made, making certain the money was really there. However, the money was not there. Subprime mortgages were not paid, and houses were foreclosed on. In 2008 the financial crisis came to a head when many large institutions, like Lehman, were losing enormous amounts of money on investments in mortgages.
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