Foreign companies and investors found an emerging market opportunity as operating... ... middle of paper ... ...rease, Cypriot banks will generate losses from their asset accounts, and eventually impacts their capitals. During the period of Greek debt crisis, bank of Cyprus lost about €1 billion, which the Cyprus Popular bank lost over €2.5 billion and it had been forced to recapitalization (Jack 2012). As mentioned before, Cypriot banks are highly related each other, they can be seemed as too big to fail. However, Cypriot banking sectors were far beyond the control of Cypriot government. As a result, when bank of Cyprus and Cyprus Popular bank are experiencing financial stress, the bank panic certainly will spread to other banks and then ends with systemic banking crisis.
The problems arrived over a period of time from 1995 to 2008. The first and main problems that lead to the economic collapse was sub prime mortgages. Sub prime mortgage is a certain kind of loan granted to people with poor credit histories, who which wouldn’t usually be qualified for conventional mortgages (Investopedia). These sup prime mortgages would backfire on banks across the nation resulting in huge financial loses. According to USA Today, “Housing crisis deepens.
By the time March 2007 came around, you had the failure of Bear Stearns because of their hand in underwriting a multitude of the investments tools that were linked precisely to the subprime mortgage market and it became apparent that the whole subprime lending market was in danger. “Homeowners were defaulting at high rates as all of the creative variations of subprime mortgages were resetting to higher payments while home prices declined. Homeowners were upside down - they owed more on their mortgages than their homes were worth - and could no longer just flip their way out of their homes if they couldn 't make the new, higher payments. Instead, they lost their homes to foreclosure and often filed for bankruptcy in the process.” (Kosakowski, 2008) The Stock Market Crash of 2008 The financial market continued to rise however and in to October 2007 despite everything that happened. The Dow Jones Industrial Average (DJIA) reached a closing high of 14,164 on October 09, 2007.
Furthermore, it became a worldwide phenomenon; “the way the debt was sold on to investors gave the crisis global significance. The US banking sector package sub-prime home loans into mortgage-backed securities known as CDOs (collateralised debt obligations). These were sold on to hedge funds and investment banks who decided they were a great way to generate high returns (and big bonuses for the oh-so-clever bankers that bought them). When borrowers started to default on their loans, the value of these investments plummeted resulting in huge losses for banks globally”, (timesonline.co.uk). As this was going on, consumers felt the effect of basic necessities prices increasing.
It describes the events that led from government regulated financial industry to deregulation which allowed the financial institutions to make risky investments, the merging of banks into giant firms and their domination of the market, the origin of derivatives, collateralized debt obligations (CDO) and Internet Stock bubble burst. Deregulation continues to affect the economy and causes a housing boom. Predatory lending becomes popular due to high rates of subprime loans and investment companies start to borrow money to buy loans and turn them into CDOs. Credit default swap allows people bet against CDOs that they did not own; many companies and brokers start to speculate on the market by providing faulty ratings to their investors. The ratio of borrowed money against the assets grows rapidly until big investment firms run out of money and declare bankruptcy.
With the rapid retard of these industries, the unemployment rate developed into a full grown national crisis to finally result in individuals lacking the ability to pay their bills and primarily defaulting on their monthly mortgages (which led to the meltdown of the financial & banking industry). The mass media and general public associated most of the responsibility of the financial meltdown of the banking industry with the predatory lenders, whom allowed couples and individuals to purchase homes and properties they knowingly could not afford. These purchases were tolerated simply if these people were to agree to an adjustable mortgage rate. The financial crisis facing the banking industry was a direct result of hiking interest rates by banks on adjustable mortgages. These rates increased due to many of the banks experiencing the effects of the growing economic delay, which principally led to the forfeit of many monthly home payments.
In 2008, The United States economy was bombarded with a severe recession because of a lack of regulations on Wall Street and investment in general. This lack of regulation caused many risky loans to be passed, leading to many of them defaulting. Most major investment banks like Lehman Brothers and Goldman Sachs were dealt crushing blows, forcing them to either file for bankruptcy or take capital injection from the government. The economy fell into a free fall because people simply wanted to make easy money. “How an Economy Grows and Why It Crashes” does a tremendous job in explaining the crash of 2008 in layman’s terms, while still being extraordinarily accurate and full of knowledge.
From 2008 until now the national unemployment rate has risen from 5-6% to about 10.2% (U.S. Bureau of Labor Statistics). With unemployment rates continuing to climb, more and more Americans are stuck in large mortgages with no means to pay them. Many of these debtors are faced with mortgages that are greater than the values of their homes due to impairment resulting from the market collapse. With the job market in its current state and unemployment continuing to grow, most of these debtors look to default as the best solution to their problems. Simply, the best preventive measure to the foreclosure crisis would have been to not to overextend yourself.
This crisis started under the surface for many years then emerged into the public in March 2008 when cash-strapped Bears Steams were being forced to sale to JP Morgan Chase; they did this for a worthless $2 a share (Jost/Misconduct). The Financial Crisis happened because of these 5 things; systemic risk, too big to fail banks, payment systems, credit rating agencies, and hedge funds. Systemic Risk What is this? Systemic Risk is a risk that triggers an event, for example, the failure of a large financial firm. This can and most likely will seriously harm the broader economy and impair financial markets (Bullard).
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.