Lehman Brothers was a big global financial services firm. In September 2008 the firm almost brought down the world’s financial system as it collapsed and filed for bankruptcy. This was because they faced liquidity problems because they didn’t have enough capital in reserve.
A financial crisis can be known as a commotion in the financial market. This is associated typically with falling asset prices and insolvency among debtors and intermediaries, which spreads through the financial system, disrupting the market’s capacity to allocate capital. The most common financial crisis occurs when certain financial institutions or funds invested in financial assets lose most of their value.
In this essay I will be explaining the reasons for the 2007/2008 deepened financial crisis in the European Union. A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system causes severe adverse selection and moral hazard problems that render financial markets incapable of channelling funds efficiently from savers to households and firms with productive investment opportunities. (Frederic. S, Mishkin Kent Matthews Massimo Giuliodori)
During the crisis, an overwhelming amount of mortgages were given out in America. Loans were given out to ‘Subprime’ borrowers. This meant they didn’t look at any credit history of the borrower. These risky mortgages were passed on to ‘financial engineers’ at the large financial institutions, who turned them into low-risk securities by pooling them into large numbers. (Economist, 2013) Pooling only works when t...
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...ts Code of Conduct Fundamentals for Credit Rating Agencies in May 2008 (IOSCO, 2008) to further improve the quality of the rating process, address conflicts of interest, and provide investors with more data on the historical performance of ratings and with more information on rating methodologies and criteria and on how data limitations are addressed.
In the past observers have criticised US the regulatory systems
Utzig, S. (2010). The Financial Crisis and the Regulation of Credit Rating Agencies: A European Banking Perspective. ADBI Working Paper Series. Retrieved January 16, 2016, from http://www.adb.org/sites/default/files/publication/156043/adbi-wp188.pdf
Sacasa, N. (2008). Preventng Future Crisis. Finance and Development. Retrieved January 23, 2016, from http://www.imf.org/external/pubs/ft/fandd/2008/12/sacasa.htm
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