Sub Prime Crisis

imeContent Page Sub prime crisis http// chamfering. ab bug out. com/od/mortgages/a/mortgagecrisis. htm http//www. lewrockwell. com/rozeff/rozeff203. html http//www. slideshargon. net/satanic/subprime-crisis-pre directation-785636 http//en. wikipedia. org/wiki/Ca determinations_of_the_2007%E2%80%932012_global_financial_crisis http//www. investopedia. com/articles/ frugals/09/lehman- companions-collapse. asp http//ezinearticles. com/? Merrill- kill-and-the-Subprime-Mortgage-Market&id=1600761 http//www. youtube. com/ lookout station? v=kb6g3S4scy4 http// silvermorning. com/2008/09/22/ quotation-default-swaps-2/ ttp// coin. cnn. com/2008/09/16/news/companies/aig_questions/index. htm http//en. wikipedia. org/wiki/Credit_ rank_agencies_and_the_subprime_crisis Discuss the amaze of the Sub-Prime crisis and the parties trus 2rthy for causing such a crisis. There were different complex factors that whitethorn ask contributed to the Sub-prime crisis during 2008-2009. They were easily associa ted with the investment banks and goernment sponsored enterp aerodynamic lift, such as Fannie Mae, on how to fox dealt with their liquidness issues and Subprime mortgage adds that got them back-fired.One of the largest contributors to the expansion of the high-risk- contributes was Fannie Mae and Freddie Mac. When majority of the banks first started onward with low honor fitted mention interest and easy conditions loans, situation was seen as an appreciating asset. Banks bump byered adjustable-rate-mortgage (ARMs) and Subprime loans to tot totally(a)y kind of people with good or freehanded identifications lots as they wanted higher r stock-stillue when they resell the bundled subprime mortgages called the Collateralized debt obligations (CDOs) and Mortgages- support securities (MBS) to the other Investors near the world.The subprime crisis had shaken Northern Rock bank so badly that they had a hard time seeking help to keep the business going. The British banks Lloyds T SB group Plc had bought over HBOS Plc whom is the largest mortgage loans lenders. Bradford & Bingley took control over by UK regime while their branches were taken over by Spains Santander. Germany struggled to save hypodermic Real Estate while Nomura Holdings Inc was being bought over by Lehmans franchise in many countries such as Europe, Asia Pac, Japan and Australia.The Crisis caused shockwaves and displace panic to the other neighbouring countries causing shares to filter sharply over a con period of time. Commercial Banks, investment banks, investors and people suffered great losings resulting in certain foreclosure or yet bankruptcy. Large join of loan was besides taken from hedge notes to help iodinself banks that are travel apart. When banks fell from its former glory, tons of people mazed their jobs and banks became more cautions when relations with any loans to business, properties or even to other banks.Traditionally, banks would go deep into analysing al l(prenominal) single loan applicant, from their credit scores, to their employment details, net disposable income and even to check their ability to recompense off their mortgage loans before finance the applicant with sufficient funds to spoil their desirable prop. Thorough checks had to be done before granting them with the loans as some of the applicants that came forward may engage high probabilities of defaulting their loan or would leave for other competitions for loan which would in conclusion cause a property downturn in the market.These methods were often the safest pickax but banks were restricted to their growth. The traditional methods were soon discarded by the newer coevalss. Hence, the newer generation were entrusting to take higher risk loans for higher revenues. Assuming that prices for property continue to appreciate, they would be enjoying higher boodle thus willingly offered big amount of loans at low interest rates to the borrowers. Before subprime m ortgage was implemented, prime mortgages were change to banks investors which they would bundle them up as CDOs and sell it to immaterial investors after securitising it.Securitization became a take aim as it provides the opportunity for rating agencies to rate, or in another words to repackage or beautify those poor credit score investment assets from the collateral pool into AAA grade credit score investment assets. Investors whom are not well versed with these bundled subprime mortgages called the CDO were overt to high risk investment unknowingly as they assumed that what they were handling was a group of people who have good credit scores.As banks at wallstreets began to greed, mortgage underwriting precedents de-proved during this period where the banks failed in these 3 sectors Failure to examine if the borrowers is able to re sacrifice the amount, implemented automated loan approval (which reserves users to get through even without proper documentations) and fabricat ing information or fraud by twain banks and applicants. This simply showed how devious and irresponsible the banks were when they try to gain huge profits through the loopholes of the poor standard mortgage underwritings over a short period of time.Studies showed that the difference between normal prime mortgage interests declined greatly comparing to subprime mortgages as Subprime mortgages offer better returns than the normal prime mortgages. The rise of the property increase greatly until the subprime mortgages began to default after repaying of the first two years, Federal interest rate rose and adjusted. Subprime loaners soon encounter difficulties in refinancing their houses due to ARMs, which eventually led to foreclosure after a a few(prenominal) example letters.As the bank investors included Subprime mortgages, which are defaulted, in the CDOs they are dealing to the away(p) investors. The outside investors soon suffer losings as the CDOs became worthless over a short p eriod of time and U. S propertys prices dipped as more foreclosure occurred. Economy was affected as few of these U. S. banks such as e. g. Peter Lehman which was refused by the Federal government to be gage out plunk for Stearns, an investment bank, which was acquired by J. P. Morgan Chase lost US$1. billion Washington Mutual was closed by the US Government their assets was bought over by J. P Morgan Chase. With reference to President Obama oral communication on his take on banks Too big to fail, The American people who are already struggling in their own office were forced to rescue financial firms liner crisis largely of their own innovation. The actual meaning of such is that the valuate payers have become the recourse net of the financial institutions which went into crisis and the tax payers are paying off their debt on behalf of them.President Obama likewise states that banks should not use tax payers money to trade for profit or abuse the funds coming from the tax p ayers as subsidy for investment. It is unfair to those tax payers as it will cause conflict of interest between the banks and the customers. President Obama also said that the Americans have to cut down on their luxuries to help in this crisis. The parties that are responsible for the crisis are, Bear Stearns, Lehman Brothers Investment Bank, Merrill Lynch & Co and AIG. Bear Stearns used to be a conservative firm and see conservation as a defensive move.Eventually, they are discovered of risking the hedge funds for higher turn-over which they miscalculated investing huge amount (without setting aside a sum for event risk) in CDOs and insuring Credit default swaps (CDS) bonds in a short period of time and the cash back was too slack off for them to have a turnover in time of crisis which brought them to their failure. To put it in a simpler way, they leverage CDOs that are deemed to be rated AAA by rating firms, sells them to investing banks (usually in bundles and at the cheaper r ates) and then again sells them to investors.This allows the bank to loose itself from the principles and interests they are getting for the borrowers gaining lump sum from the investors, called Mortgage backed securities. The CDS bonds workings with 3 parties which are the CDS buyer, the bond issuer and the CDS seller. Assuming that if bond defaults when the CDS issuer is unable to pay back the principle and the interests at the maturity date, the CDS buyer may pay a certain amount of interest to the CDS seller (for instances, Bear Stearns) to buy a CDS as an insurance for the invested amount.Therefore, if the bond issuer is unable to pay up, the CDS buyer that made his purchase of CDS with the CDS seller will be compensated by the CDS Seller. This strategy is known as the absolute return strategy, if everything flows smoothly and economic continues to boom, which was not the case. Problem began to arise when the subprime mortgages didnt work out and property apprize dipped tre mendously. When the property price dipped, Bear Stearns managers realised that they do not have sufficient funds to protect the losses.Its a domino result when public was enlightened of Bear Stearns crisis. They started change the bonds at lower price to fund their losses and more bonds are sold when they realise that the losses increase exponentially causing the price of the subprime bonds to drop tremendously and eventually led to the down fall of Bear Stearns. in short after the downfall of Bear Stearns, Lehman Brothers filed the largest amount of debt throughout the history, debt of $619 Billion dollars. As the U.S government refuses to bail them out, Lehman Brother, one of the few largest banks in U. S. faces their downfall and sent 25,000 Americans jobless. This tremor caused by Bear Stearns directly result in the diminish value of CDOs prices day by day. CDS bond causes banks to fail as more and more defaults are happening. Subsequently, it led to the bank liquidity issues and went into a credit crunch while being unable to sell their CDOs to sufficiently assist the losses they face.Lehmans stocks plunged as investors pull out on them and their liquidity pool depletes. Lehman then tries to sell their firm to prevent further losses but potential drop partners turned them down as such, led to their bankruptcy. right wing after the downfall of Bear Stearns and Lehman Brothers Investment Bank, Merrill Lynch & Co followed up, facing the crisis as they are into generating commissions, subprime loans, CDOs and such which are similar with what Bear Stearns and Lehman brother dealt with.On top with what they are dealing with, they took an extra path by providing loans to investors for the purchase of their bundle of CDOs right after they have been securitized. Some of the CDOs are even brought over from nonbank institutions and sent for a much risky asset backed securitization (ABS), before providing more loans to the investors for the purchase of the bond. This was also the reason why Merrill Lynch was able to survive as they are the most aggressive when dealing with subprime market.Merrill was the investment banks that grass the highest amount of loans to any nonbanks as long as they sell the mortgages to Merrill eventually. Before Merrill falls, they actually tried to get Bear Stearns to pay them back the $850 million from the hedge funds which Bear loans hoping to make a turn over. However, the hedge funds collapsed and started the economic crisis. It was when Lehman brothers was still struggling, the government refuses to bail them out but instead requested The Bank of America to buy over Merrill Lynch as they see them both a potential assistance to the subprime crisis.Merging Merrill Lynch and Bank of American, it made them the ninth largest corporation in the world and presently called the Bank of American Merrill Lynch. American International class Inc (AIG) was the largest insurance come with that grew aggressively in U. S. The problems arise when AIG started to lose money in the investment they dealt with like CDOs, CDS, Pool of subprime mortgages and pool of Alt-A mortgages. Without a doubtfulness they were earning a huge amount of premium incomes from their invested products, they came crashing when the prices of the properties falls.Increasing rate of foreclosure and amount of the loan pools it had insured cannot be leveraged and realized that their company do not have enough money for pay-outs. The Securities and Exchange Commission also found out that AIG had got low integrity as they shifted from the main balance sheet to the off balance sheet to cover up the problem. There werent transparence as the company tries to move or shift the amount that was conjectural to be shown on the main balance sheet to the written off balance sheet, abusing the loopholes of the off balance sheet to beautify the main ones.They suffered the largest amount of losses when the rating firms such as meter & Poors, Moodys Investors Service and Fitch Ratings Inc lower the companys rating. AIG was already on the edge of bankruptcy when all the counterparties started to demand for their cash which they do not have. AIG was greedy and irresponsible and failed to assure that on that point was enough fund to pay-out all the insured parties. The U. S Government cannot let AIG fall as they are one of the largest insurance company, if they were to declare bankrupt, U.S will fall into a financial crisis and the insurance regulator will have to take over the firm and compensate the insured and it would create a tighter credit market for consumers and businesses trying to get loans. Thus, the U. S government cannot allow the economy to go down any further, they will have to use the tax payers money as a preventative net to bail AIG out. Credit rating agencies such as specimen & Poors (S&P) have been reprimanded as they are also one of the crucial groups of people that contributed to the subprime crisis .They handled complex securities such as the MBS and CDO which are from the loaners with bad credit scores and rated them highly so it could be sold to the investors. The underrated MBS and CDOs that the investors purchase caused them to suffer great losses. It comes hand in hand, as without the rating agencies doing, the bank would not be able to resell the CDOs and MBS. It was ridiculous as a subprime loaner with a bad credit score can be securitized and rated as AAA ratings. It was also said that part of the revenue that the banks got from selling the CDOs and MBS are shared to the agencies.Competitions happened between different rating agencies as all of the wants to enjoy the high influx of revenue which eventually caused the rating standard to drop tremendously due to the conflict of interests. A source from (from where) also states that due to the low standardization in the ratings from the agencies, the AAA CDOs and MBS that went through securitizations treble the amount a s it used to be. As rating the CDOs and MBS is the rating agencies job, they are not held responsible for the compensations to the investors as ratings, was only a piece of advice from them to make references to.TO sum it up, investment banks was unable to rectify the illusion of how property value would climb continuously thus causing a domino effect that ultimately caused their downfall. When there is rise, there will always be a fall. As the bank did not foresee such circumstances touch on the prices of property, hence continued with the high-risk-loans to everyone and anyone that applies for a grant to purchase a property. It all falls into place when rating agencies started lowering their rating standard to postulate with their competitions due to favouritism of their own interests.