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Apiraami Pathmalingam

Global Financial Crisis - 1 views

www.globalissues.org/...global-financial-crisis

crisis how can be avoided

shared by Apiraami Pathmalingam on 11 Jan 11 - Cached
  • Global Financial Crisis
  • The City Uncovered with Evan Davis: Banks and How to Break Them (January 14, 2008), rating agencies were paid to rate these products (risking a conflict of interest) and invariably got good ratings, encouraging people to take them up.
  • Starting in Wall Street, others followed quickly. With soaring profits, all wanted in, even if it went beyond their area of expertise. For example,Banks borrowed even more money to lend out so they could create more securitization.
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  • Some banks loaned even more to have an excuse to securitize those loans
  • Running out of who to loan to, banks turned to the poor; the subprime, the riskier loans. Rising house prices led lenders to think it wasn’t too risky; bad loans meant repossessing high-valued property. Subprime and “self-certified” loans (sometimes dubbed “liar’s loans”) became popular, especially in the US.
  • Some banks evens started to buy securities from others.
  • Many banks were taking on huge risks increasing their exposure to problems. Perhaps it was ironic, as Evan Davies observed, that a financial instrument to reduce risk and help lend more—securities—would backfire so much.
  • The problem was so large, banks even with large capital reserves ran out, so they had to turn to governments for bail out.
  • As people became successful quickly, they used derivatives not to reduce their risk, but to take on more risk to make more money. Greed started to kick in. Businesses started to go into areas that was not necessarily part of their underlying business.In effect, people were making more bets — speculating. Or gambling.Hedge funds, credit default swaps, can be legitimate instruments when trying to insure against whether someone will default or not, but the problem came about when the market became more speculative in nature.
  • The market for credit default swaps market (a derivative on insurance on when a business defaults), for example, was enormous, exceeding the entire world economic output of $50 trillion by summer 2008. It was also poorly regulated. The world’s largest insurance and financial services company, AIG alone had credit default swaps of around $400 billion at that time. A lot of exposure with little regulation. Furthermore, many of AIGs credit default swaps were on mortgages, which of course went downhill, and so did AIG.
  • The trade in these swaps created a whole web of interlinked dependencies; a chain only as strong as the weakest link. Any problem, such as risk or actual significant loss could spread quickly. Hence the eventual bailout (now some $150bn) of AIG by the US government to prevent them failing.Derivatives didn’t cause this financial meltdown but they did accelerate it once the subprime mortgage collapsed, because of the interlinked investments. Derivatives revolutionized the financial markets and will likely be here to stay because there is such a demand for insurance and mitigating risk. The challenge now, Davis summarized, is to reign in the wilder excesses of derivatives to avoid those incredibly expensive disasters and prevent more AIGs happening.
  • Rachel Choi on 11 Jan 11
     
    This article provides an overview of the crisis with links for further, more detailed, coverage at the end (REALLY GOOD SITE)
  • Apiraami Pathmalingam on 14 Jan 11
     
    This article states a very good point on how it could have been prevented.
Tahmid Rouf

The financial crisis for dummies: Why Canada is immune from a U.S.-style mortgage meltd... - 0 views

network.nationalpost.com/...mortgage-meltdown-kind-of.aspx

financial crisis economics canada

shared by Tahmid Rouf on 12 Jan 11 - No Cached
  • very reassuring Sept. 25 report from Scotiabank that explains, quite persuasively, why Canada isn't going to suffer the same sort of subprime-mortgage-fueled financial-market meltdown that's wreaked so much havoc in the United States.
  • In Canada, household liabilities as a percentage of assets sits at 20% — close to the stable, sustainable level it's been at since the late 1980s.
  • Canada's subprime mortgage market (to the extent the bottom end of our mortgage market can even be called "subprime" in the American sense) represents only about one in every 20 mortgages.
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  • In the United States, homeowners' net equity as a percentage of home value has plummeted from around 65% to 45% over the last two decades. with more than half that drop coming since 2000. In Canada, on the other hand, this ratio has remained stable at between 65% and 70% since the 1980s.
  • Less off-balance-sheet mortgages. The frenzy of mortgage securitization that gripped the United States in recent years (famously explained/satirized in this comic strip) never really took off here. According to Scotiabank "The majority of mortgages are held on balance sheet in Canada, with only 24% having been securitized." That's huge, because it is the radioactive quality of these securities — many of which contain a tangled welter of mortgages of varying quality — that has really sunk the U.S. credit market: Since no one knows how much these complex instruments are really worth, they still haven't established an equilibrium price level, thereby freezing the credit market for any entity that has a large number of them on their books. (What's more, even those 24% have mostly been securitized through the CMHC, a Crown corp. with government backing.)
  • Finally, there is the fact that Canada simply has a different — and more prudent — banking culture:
  • Canada banks continue to apply prudent underwriting standards. In other words, they have always checked, and continue to check, incomes, verify job status, asks for sales contracts, etc.,
  • On average, Canadian home prices are roughly 200% what they were in 1989. In the United States, the corresponding ratio peaked at 260% before crashing down to 220%.
  • This is the most shocking stat of all. In the United States, a full 4.5% of mortgages are in 90-day arrears (i.e. the local sheriff is ready to move in and tack a notice to the door). In Canada, the figure is one 20th that level — just 0.27%.
  • All in all, what do these figures show? A prudent, risk-averse, well-regulated Canadian real estate and mortgage community that — on both the seller, mortgagor and buyer sides — has avoided the pitfalls swallowing up the United states.
  • Tahmid Rouf on 12 Jan 11
     
    Very interesting. Highlights the main aspects that may have prevented us from being hit as hard as the States. It is important to note that our financial system is different in many aspects from the one in the states that triggered the recession.  This should be helpful for the housing/home-buyer people.
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