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Sophia Wang

Definitions - 98 views

Alpha and Beta accutally have interesting meanings in business. Alpha 1. A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares it...

financial crisis definitions

started by Ms Cuttle on 12 Dec 10 36 follow-ups, last by Sophia Wang on 14 Jan 11
Apiraami Pathmalingam

#Acrisissoseveretheworldfinancialsystemisaffected - 0 views

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

central bank global crisis banks

shared by Apiraami Pathmalingam on 14 Jan 11 - No Cached
  • the US has defended the dollar as a global currency reserve
  • allow them to lose more money without going bust
  • Banks borrowed even more money to lend out so they could create more securitization. Some banks didn’t need to rely on savers as much then, as long as they could borrow from other banks and sell those loans on as securities; bad loans would be the problem of whoever bought the securities.
  • ...20 more annotations...
  • Some banks loaned even more to have an excuse to securitize those loans.
  • High street banks got into a form of investment banking, buying, selling and trading risk.
  • banks even with large capital reserves ran out, so they had to turn to governments for bail out
  • In Europe, starting with Britain, a number of nations decided to nationalize, or part-nationalize, some failing banks to try and restore confidence
  • US Fed announcing another $800 billion stimulus package at the end of November.
  • 360 banks that received Treasury bailout funds and found that almost all were using the money in ways other than to lend
  • The banking system virtually collapsed and the government had to borrow from the IMF and other neighbors to try and rescue the economy
  • Eurozone countries such as Portugal, Italy, Greece and Spain are also facing potential problems, while Iceland has gone through many in the past.
  • urged the US to provide meaningful assurances and bailout packages for the US economy
  • Asia was sufficiently decoupled from the Western financial systems
  • foreign investment in Asia
  • While the Western mainstream media has often hyped up a “threat” posed by a growing China, the World Bank’s chief economist (Lin Yifu, a well respected Chinese academic) notes “Relatively speaking, China is a country with scarce capital funds and it is hardly the time for us to export these funds and pour them into a country profuse with capital like the U.S.”
  • Many of these debts were incurred not just by irresponsible government borrowers (such as corrupt third world dictators, many of whom had come to power with Western backing and support), but irresponsible lending (also a moral hazard) from Western banks and institutions they heavily influenced, such as the IMF and World Bank
  • I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.
  • I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.
  • prices fully and efficiently reflect all available information
  • Central bankers’ belief that controlling inflation was necessary and almost sufficient for growth and prosperity had never been based on sound economic theory.
  • World Bank admitted that developing countries have “come to the rescue” of the global economy, picking up the slack of the advanced economies which were hurt the worst by the financial crisis.
  • developing world is becoming the driver of the global economy. Led by emerging markets, developing countries now account for half of global growth and are leading the recovery in world trade
  • Bank believes the following factors help to explain this: Faster technological learning Larger middle-classes More South-South commercial integration High commodity prices, and Healthier balance sheets that will allow borrowing for infrastructure investment
  • Apiraami Pathmalingam on 14 Jan 11
     
    This article takes about what the many banks did and where the money was distributed.
Dmitri Tkachenko

National Bank is North Americas Strongest Bank: Bloomberg - 0 views

www.canadianmortgagetrends.com/...-strongest-bank-bloomberg.html

Canadian banks best internationally

shared by Dmitri Tkachenko on 18 May 11 - No Cached
  • Dmitri Tkachenko on 18 May 11
     
    "Canada has five banks in the top 20, with CIBC ranking 4th internationally behind National Bank. Canadian banks have "higher capital ratios than anyone else in the world," Canaccord Genuity analyst Mario Mendonca told Bloomberg. National Bank Pres. & CEO Louis Vachon told Bloomberg: "…size is not everything in financial services," and indeed it's not. National Bank's #1 North American ranking shows that prudent risk management and liquidity are meaningful and a source of confidence for investors and customers alike. Other ranking criteria included non-performing assets, loan-loss reserves, deposits-to-funding, and cost efficiency."
Tahmid Rouf

Truth and Lies about the Financial Crisis - a knol by Marc Samuel - 1 views

knol.google.com/...ies-about-the-financial-crisis

financial crisis economics hedge funds global recession

shared by Tahmid Rouf on 12 Jan 11 - No Cached
  • Because Hedge Funds' management are opaque, because they are located in Tax Havens, because the bonuses of their top managers are way above that of Goldman Sach's heads, they are regularly criticized by politicians, who perceived them as a threat to the financial stabilization
  • so the Hedge Fund Industry in general brought many suspicion with the current crisis; however, things are quite different now. Let's recall why:
  • When oil soared till mid-2008, many said hedge funds were speculating on a continuous rise with a 200 $ target for the barrel. But the rise of oil was led by simple supply & demand criteria, and the Hedge Funds had nothing to do with it.
  • ...13 more annotations...
  • The graph below shows the evolution of Hedge Fund indices recently, for each strategy used (Equity Market Neutral, Convertible Arbitrage, Event Driven, Macro & Equity Hedge); it proves that Hedge Funds suffered the crisis (because of spreads widenings and liquidity contraction).
  • One common argument you may hear is that traders' desire to get big bonuses led them to take too many risks, which ended up in the crisis; this is completely false
  • Actually, a good trader is an efficient risk-manager, and not a speculator. Inside a trader's book, there are - sometime complex - financial instruments that carry some risks (rate risk, credit risk, forex risk....), and the trader's job consists in managing those risks to hedge his book.
  • This is a touchy part that deserves a clear explanation; when American banks started to lend money to individuals who didn't meet underwriting guidelines, they didn't keep these loans in their balance sheet, using a sophisticated financial technique called securitization: described simply, a bank create a pool of the mortgages embedded in its balance sheet and produce a financial security (called ABS, "asset-backed security")  which is in turn sold to investors, and freely negotiated on capital markets.
  • Once those mortgages were packaged in MBS (for "Mortgage-Backed Securities"), they were traded on capital markets, either directly or through tranches of CDO (for "collateralized-debt obligations"); those products were supposed to offer a very interesting risk-reward profile, so many investors and banks buy those products throughout the World, and consequently regional banks in Germany, Scandinavia turned out to have subprime mortgages in their balance sheets; they were exposed to the US Real Estate market.
  • The conclusion is that banks' balance sheets and assets are so much intertwined that flaws in securities built on American Mortgages impacted banks in the entire World; an interesting thing to underline is that bankers faced fierce criticism for creating sophisticated derivatives products, but no one ever thought of asking to treasurers in smaller banks and financial institutions why they bought those complicated products.
  • And as one can see, every financial crisis that occured during the past thirty years had nothing to do with structured products and/or derivatives; the subprime crisis of 2007-2008 had one simple reason: the end of the rise of the Real Estate Market in the US, that is shown on the graph below:
  • Since the mortgages lent to American borrowers were based on the value of their houses, and not on their own wealth, things started deteriorating when the Real Estate market stopped rising. Obviously, US bankers that recommanded those mortgages were not absolutely honest...
  • Some pointed at the Rating Agencies (Moody's, S&P, Fitch) for they role in the crisis; but not enough, to my mind... and even if more regulation is being discussed at the time, one could wander if strong decisions will be taken in the end.
  • A Rating Agency assesses the credit worthiness of a firm which issues bonds; this credit worthiness is symbolized by letters, from AAA (the company has very little chance of defaulting) to C or D (the company has defaulted or is close to default); surprisingly, and though many banks fiercly compete with each others to get customers, rating agencies almost form a monopoly: only three major rating agencies exist, two of them acting as leaders on the market (Fitch is a little less active).
  • The way they work carries some conflict of interest; the firm who want to have its debt ranked has to pay the agency, which in turn must be as objective as possible when assessing the firm...
  • The Rating Agencies not only rated debts issued by companies, but also the famous Asset Backed Securities, Mortgage Backed Securtities and CDOs discussed above; many of those products got a very good grade, mostly AAA, though it appeared that the risks embedded in those products were largely undervalued.
  • As a matter of fact, the issue with the subprime crisis was that no one was fully aware of where lied the risks, no that there was too much risk.... the difference is important.
  • Tahmid Rouf on 12 Jan 11
     
    Very opinionated piece backed up by some facts. 
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.
  • ...8 more annotations...
  • 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.
Jonathan Li

Credit Crisis Timeline - 4 views

www.creditwritedowns.com/credit-crisis-timeline

Credit Crisis financial crisis Timeline

shared by Jonathan Li on 11 Jan 11 - Cached
  • Government intervention to end panic2008 09 29 B&B nationalisation is confirmed2008 09 29 Iceland nationalises Glitnir bank2008 10 03 Dutch part of Fortis is nationalised2008 10 06 Hypo Real Gets EU50 Billion Government-Led Bailout2008 10 07 UK makes massive rescue plan for banks2008 10 08 Fed Will Lend Directly to Corporations2008 10 12 Australia to guarantee bank deposits for three years: PM2008 10 13 RBS, HBOS and Lloyds to get $64 billion from U.K.2008 10 13 Fed Says ECB, Others to Offer Unlimited Dollar Funds2008 10 13 EU Nations Commit 1.3 Trillion Euros to Bank Bailouts2008 10 13 Germany Pledges EU500 Billion in Bank Rescue Plan2008 10 15 European central banks pump $250bn liquidity2008 10 15 EU backs emergency accounting changes2008 10 16 ECB Widens Collateral Rules, Slashes Required Ratings2008 10 16 ECB gives Hungary €5bn credit line2008 10 16 Swiss banks raise emergency funds to fight crisis2008 10 22 Wachovia reports 23.9 billion loss
    • Abdiwahab Ibrahim
      Abdiwahab Ibrahim on 12 Jan 11
       
      VERY, VERY NICE.
  • Jonathan Li on 11 Jan 11
     
    This site hosts a comprehensive list of timelines for every major player in the recession. It's a good source for finding hard facts about when somebody took action to do something.
Jasmine Ding

Raters Ignored Proof of Unsafe Loans, Panel Is Told - NYTimes.com - 0 views

www.nytimes.com/...27ratings.html

Goldman Sachs financial crisis econ inquiry proof

shared by Jasmine Ding on 12 Jan 11 - No Cached
  • Yet, Clayton found, Wall Street was placing many of the troubled loans into bundles known as mortgage securities.
  • The Massachusetts attorney general recently accused Morgan Stanley of deceptive practices in its financing of mortgage lenders during this period, saying that the firm had knowingly placed dubious mortgages into securitized pools. Morgan Stanley settled with the attorney general in June and paid $102 million. The facts in that case relied on Clayton reports of loan quality commissioned by Morgan Stanley.
  • According to testimony last week, from January 2006 to June 2007, Clayton reviewed 911,000 loans for 23 investment or commercial banks, including Citigroup, Deutsche Bank, Goldman Sachs, UBS, Merrill Lynch, Bear Stearns and Morgan Stanley.
  • ...5 more annotations...
  • The statistics provided by these samples, according to Mr. Johnson and Vicki Beal, a senior vice president at Clayton who also testified before the inquiry commission, indicated that only 54 percent of the loans met the lenders’ underwriting standards, regardless of how stringent or weak they were.
  • Some 28 percent of the loans sampled over the period were outright failures — that is, they were unable to meet numerous underwriting standards and did not have positive factors that compensated for their failings. And yet, 39 percent of these troubled loans still went into mortgage pools sold to investors during the period, Clayton’s figures showed.
  • At Goldman Sachs, 19 percent of loans failed to make the grade in the final quarter of 2006 and the first half of 2007, but 34 percent of those loans were still sold by the firm. Throughout this period, Goldman Sachs was also betting against the mortgage market for its own account, according to documents provided to government investigators.
  • A Goldman Sachs spokesman said the percentage of deficient loans that went into its pools was smaller than Clayton’s average, indicating that the firm had done a better job than its peers. Because these loan samples were provided to the Wall Street investment banks that commissioned them, they could see throughout 2006 and into 2007 that the mortgages they were financing and selling to investors were becoming increasingly sketchy.
  • A more proper procedure, analysts said, would have been for lenders like these — New Century Financial and Fremont Investment and Loan among them — to buy back the problem loans and replace them with higher-quality mortgages. But because these companies did not have enough capital to do that, they were happy to sell the troubled mortgages cheaply to the brokerage firms.
  • Jasmine Ding on 12 Jan 11
     
    "The commission, a bipartisan Congressional panel, has been holding hearings on the origins of the financial crisis. D. Keith Johnson, a former president of Clayton Holdings, a company that analyzed mortgage pools for the Wall Street firms that sold them, told the commission on Thursday that almost half the mortgages Clayton sampled from the beginning of 2006 through June 2007 failed to meet crucial quality benchmarks that banks had promised to investors. "
Han Kyul Lee

Crisis Pie Infographic - 55 views

Rating agencies, sub-prime mortgage lenders and investment banks are DEFINITELY the biggest titles at fault. The main reasons have already been covered; rating agencies failed to rate the toxic ass...

financial crisis economics crisis blame Financial caused what pie infographic

started by Abdiwahab Ibrahim on 14 Jan 11 7 follow-ups, last by Han Kyul Lee on 19 Jan 11
Apiraami Pathmalingam

Fed Documents Breadth of Emergency Measures - 0 views

www.nytimes.com/...02fed.html

central banks crisis

shared by Apiraami Pathmalingam on 10 Jan 11 - No Cached
  • the Federal Reserve opened its vault to the world on a scope much wider and deeper than previously disclosed
  • Fed loans offered at rock-bottom rates.
  • released details of more than 21,000 transactions under the array of emergency lending programs and other arrangements it conjured up in response to the crisis
  • ...4 more annotations...
  • The central bank, in essence, pumped liquidity, the lifeblood of credit markets, into the circulatory system of an economy that was experiencing a potentially fatal heart attack.
  • “I think our actions prevented an even more disastrous outcome,” said Donald L. Kohn, who was the Fed’s vice chairman during the crisis. Without the Fed’s help, he said, “liquidity would have dried up even more than it did, asset prices would have fallen even more than they did, and economic activity and employment would have fallen further and faster then they did.”
  • Fed should have forced banks to restrict executive pay and reduce the financial burdens on mortgage borrowers as a condition of its aid.
  • European Central Bank drew the most heavily on these currency arrangements, the records show, but nine other central banks also made use of them: Australia, Denmark, England, Japan, Mexico, Norway, South Korea, Sweden and Switzerland.
  • Apiraami Pathmalingam on 10 Jan 11
     
    This article contains alot about what the federal reserve did to try to get money flowing again.
Abdiwahab Ibrahim

Boom, Bust and Blame - The Inside Story of America's Economic Crisis - Global Recession... - 1 views

www.cnbc.com/31189237

financial crisis economics crisis blame financial caused what

shared by Abdiwahab Ibrahim on 13 Jan 11 - No Cached
  • Millions of workers across all industries and sectors would lose their jobs.
  • we had spent, borrowed, and fooled ourselves into a false sense of security.
  • Government Seizes Fannie Mae And Freddie Mac
  • ...16 more annotations...
  • Lehman Rocks Wall Street, Declares Bankruptcy
  • The Treasury Department and Federal Reserve watched Lehman implode, unable to predict the scope of the global financial damage that would follow.
  • While Lehman Brothers failed to find a buyer, Merrill Lynch succeeded
  • Merrill’s CEO Stan O’Neal was so fixated on the revenue generated by the mortgage business, he didn’t just want to securitize them, he wanted to originate them, too. So, in 2007, Merrill bought mortgage lender First Franklin.
  • Bank Of America Rescues Merrill From ExtinctionBy September 2008, Merrill Lynch was suffering huge mortgage-related losses.
  • Although Bank of America’s purchase of Merrill ultimately saved the company, the transaction later came under intense scrutiny because of larger-than-expected losses and controversial year-end bonuses paid to Merrill executives.
  • Fed Accused Of 'Cover Up' In BofA, Merrill Deal
  • “Too Big To Fail,” Feds Take Control Of AIG
  • Paulson And Bernanke Issue Dire Warning
  • Paulson requested $700 Billion from Congress for a program intended to buy toxic assets from banks and infuse financial institutions with capital
  • contained no rules and standards for oversight. Infuriated politicians
  • Washington Mutual, weighed down by mortgage-related losses, was seized by federal regulators and sold to JPMorgan Chase.
  • largest bank failure in U.S. history, caused by an old fashioned, Depression-like run on WaMu’s deposits, following rumors about the bank’s ability to survive. 
  • Dow Jones Industrial Average plunged a record 778 points, its biggest drop in history.
  • Congress acted again. This time, lawmakers  approved the package, known as the Troubled Asset Relief Program. It included significantly greater oversight of the $700 Billion and more specific details on how it would be used to bolster the U.S. banking system.
  • Paulson’s “tough love” was a bitter pill for some bank bosses to swallow.
  • Abdiwahab Ibrahim on 13 Jan 11
     
    P9
Liron Danovich

How Lehman Brothers became Bankrupt? - AbhiSays.com - 0 views

abhisays.com/...-brothers-became-bankrupt.html

shared by Liron Danovich on 09 Jan 11 - No Cached
  • 15th Sept 2008 has become a black day in the history of financial market with US fourth-largest investment bank Lehman Brothers filing for bankruptcy
  • The firm does business in investment banking, equity and fixed-income sales, research and trading, investment management, private equity, and private banking
  • These days there is mortgage crisis in United States due to decline in prices of real-estates
  • ...2 more annotations...
  • housing loans made by the bank to people with little support made these loans very risky, and when interest rates were raised by these banks, these borrowers could no more repay Lehman
  • One of the main reason for its downfall was its poor relations with top banks of United States
Apiraami Pathmalingam

Fed Documents Breadth of Emergency Measures - 0 views

www.nytimes.com/...02fed.html

central banks

shared by Apiraami Pathmalingam on 11 Jan 11 - No Cached
  • Fed Documents Breadth of Emergency Measures
  • the Federal Reserve opened its vault to the world on a scope much wider and deeper than previously disclosed.
  • end of 2008, the Fed had about $1.5 trillion in outstanding credit on its books
  • ...5 more annotations...
  • Without the Fed’s help, he said, “liquidity would have dried up even more than it did, asset prices would have fallen even more than they did, and economic activity and employment would have fallen further and faster then they did.”
  • huge sum that went to bail out foreign private banks and corporations.”
  • forced banks to restrict executive pay and reduce the financial burdens on mortgage borrowers as a condition of its aid.
  • opened swap lines with foreign central banks, allowing them to temporarily trade their currencies for dollars to relieve pressures in their financial markets
    • Apiraami Pathmalingam
      Apiraami Pathmalingam on 11 Jan 11
       
      This shows that Fed was trying pull back all the money back into the country
  •  Without the Fed’s help, he said, “liquidity would have dried up even more than it did, asset prices would have fallen even more than they did, and economic activity and employment would have fallen further and faster then they did.”
  • Apiraami Pathmalingam on 11 Jan 11
     
    This article covers alot information about alot of the business and commercial bank. It says what the FED did during the crisis to help them.
Jeremy Ip

Ratings agencies involvement in the sub-prime mortgage crisis | The Casual Truth - 1 views

www.thecasualtruth.com/266

Rating Agencies

shared by Jeremy Ip on 12 Jan 11 - No Cached
  • The reality is they were at the core of the problem. They made the investments appear a lot better and safer than they really were – and the whole system relied on their ratings.
  • Over the past decade, a lot of people in America couldn’t really afford the money they borrowed for their house. These were called sub-prime mortgages.
  • These sub-prime mortgage contracts were grouped together with some safer mortgage contracts and other investments and sold on as one overall asset.
  • ...9 more annotations...
  • These bundles of rubbish were known as Collateralised Debt Obligations (CDOs) and were sold on to the big investment banks that needed assets to balance out their liabilities.
  • However, before any buyer bought these CDOs, they checked their rating to see how risky they were. Most buyers (investors) would not buy something with a CC rating for instance. In fact, many savings funds like pensions had a rule of only investing in A or above rated investments.
  • Therefore, the banks needed the rating agencies to effectively lie and give them a higher rating.
  • So to sell these CDOs to investors, the rating had to qualify. The problem was many of the CDOs didn’t deserve a high rating because they were based on people who couldn’t realistically pay back their mortgage.
  • The rating agencies were more than willing to do this because if they didn’t, the bank would simply go to their competitor down the road who would gladly take the business. And with average rating fees of over US$300,000 and margins of 50 percent, it was no wonder.
  • The agencies also became advisers rather than independent judges. They would tell the banks how to restructure the dodgy asset so that they could give it a higher rating. And these changes were mostly technicalities rather than anything of sound substance.
  • There was a supposed safety net in the system which meant that each investment had to be rated by two different agencies. However, this just resulted in two false ratings effectively making the safety net useless
  • When investors complained that their supposedly safe investments were actually rubbish, the rating agencies pointed to a clause saying that they cannot be held liable for any incorrect ratings – basically “sorry, but sometimes we get it wrong”.
  • Yes the banks were at fault in pressuring the agencies to lie, but the agencies were clearly willing partners for their own financial gain.
Jeff He

The American Spectator : The True Origins of This Financial Crisis - 0 views

spectator.org/...1

blame financial crisis

shared by Jeff He on 14 Jan 11 - No Cached
    • Jeff He
      Jeff He on 14 Jan 11
       
      Very nice article that shows the root of the cause of the financial crisis. It places the blame on everyone, but shows that poor lending policies/standards advocated by the government triggered everything.
  • Tax laws further amplified the problems of the housing bubble and diminished levels of home equity, especially the deductibility of interest on home equity loans.
  • The GSEs’ purchases of sub-prime and Alt-A loans affected the rest of the market for these mortgages in two ways. First, it increased the competition for these loans with private-label issuers.
  • ...11 more annotations...
  • Second, the increased demand from the GSEs and the competition with private-label issuers drove up the value of sub-prime and Alt-A mortgages, reducing the risk premium that had previously suppressed originations. As a result, many more marginally qualified or unqualified applicants for mortgages were accepted.
  • Since these mortgages aggregate more than $2 trillion, this accounts for the weakness in bank assets that is the principal underlying cause of the current financial crisis.
  • state-based residential finance laws give homeowners two free options that contributed substantially to the financial crisis. First, any homeowner may, without penalty, refinance a mortgage whenever interest rates fall or home prices rise to a point where there is significant equity in the home, enabling them to extract any equity that had accumulated between the original financing transaction and any subsequent refinancing.
  • The homeowner’s opportunity to walk away from a home that is no longer more valuable than the mortgage it carries exacerbates the effect of the cash-out refinancing.
  • From 2005 to 2007, Fannie and Freddie bought approximately $1 trillion in sub-prime and Alt-A loans.
  • interest on home equity loans is deductible no matter how the funds are used. As a result, homeowners are encouraged to take out home equity loans to pay off their credit card or auto loans or to make the purchases that would ordinarily be made with other forms of debt.
  • Bank regulatory policies should also shoulder some of the blame for the financial crisis.
  • Bank assets are assigned to different risk categories, and the amount of capital that a bank holds for each asset is pegged to the asset’s perceived riskiness.
  • These rules provided an incentive for banks to hold mortgages in preference to commercial loans or to convert their portfolios of whole mortgages into an MBS portfolio rated AAA, because doing so would substantially reduce their capital requirements.
  • U.S. housing policies are the root cause of the current financial crisis. Other players--greedy investment bankers; incompetent rating agencies; irresponsible housing speculators; shortsighted homeowners; and predatory mortgage brokers, lenders, and borrowers--all played a part, but they were only following the economic incentives that government policy laid out for them.
  • our first order of business should be to correct the destructive housing policies of the U.S. government.
Stephen Lu

Fed Lowers Discount Rate - What Does It Mean? - 0 views

useconomy.about.com/...000146.htm

financial crisis economics lowers discount rate fed

shared by Stephen Lu on 13 Jan 11 - No Cached
  • On Friday, August 17, the Federal Reserve lowered its discount rate from 6.25% to 5.75%. This not to be confused with the Fed Funds Rate, although many Fed-watchers think this means the FOMC will lower that rate at its next meeting on September 18.
  • The Fed lowered the rate to restore confidence in the financial markets, battered by the ongoing 2007 banking liquidity crisis. The discount rate is the what the Fed charges banks at its discount window. By lowering the rate, the Fed makes it easier for banks to borrow funds needed to maintain their reserve requirement. Normally, banks would borrow from each other, rather than go to the Fed's discount window.
  • Stephen Lu on 13 Jan 11
     
    Why the FED lowered interest rates
Kripansh Sharma

Wells Fargo, Bank of America, 15 others hit for pay during crisis | New Mexico Business... - 1 views

www.bizjournals.com/...daily47.html

Retail_commercial financial crisis bank

shared by Kripansh Sharma on 12 Jan 11 - No Cached
  • Wells Fargo & Co. and Bank of America Corp. were among 17 banks criticized Friday by U.S. pay czar Kenneth Feinberg for collectively paying out $1.6 billion in bonuses and other additional compensation to executives
  • All the payments took place in the five months between September 2008, when bank bailouts began, and February 200
  • The payments were not illegal but were “ill advised” and lacked a clear rationale, he said.
Jeremy Ip

The financial crisis: challenges and responses - 0 views

www.ecb.int/...sp091016_2.en.html

Rating Agencies

shared by Jeremy Ip on 12 Jan 11 - No Cached
  • in the four years leading up to the summer of 2007, macro-financial conditions were very favourable – on the surface, that is.
  • in the four years leading up to the summer of 2007, macro-financial conditions were very favourable – on the surface, that is. The world economy was growing strongly; inflation was low; liquidity in capital markets was abundant; the financial sector was providing remarkable returns; profitability was high; asset prices were rising, and implied volatilities in equity markets, bond markets, credit markets and foreign exchange markets all very low by historical standards; and finally, risk premia were extraordinarily small.
  • nnovation was rapidly taking place in financial markets. One prominent example is securitisation: banks repackaged loans, in particular, mortgage loans and sold them on, thereby freeing up capital for new lending. This was widely perceived as a positive development, as it enabled a better and wider distribution of risk. This perception is likely to have encouraged risk-taking not only inside but also outside the financial sector. With abundant liquidity available, some banks’ business lines became heavily dependent on securitisation and on funding from the unsecured money markets.
  • ...9 more annotations...
  • one blemish
  • significant imbalances were building up at various levels in the global economy and the global financial system
  • exuberant real estate prices and an ebullient securitisation business which facilitated huge credit growth
  • developments were unsustainable and would only need a spark to cause turmoil in the financial markets and the world economy
  • US mortgage market provided that spark.
  • Rising delinquencies and foreclosures revealed the exuberance in the housing market, and brought the sub-prime business to a sudden halt. Securitisation markets froze, banks had to bring assets from special purpose vehicles back onto their balance sheets, and confidence in the financial markets started to crumble. The crisis rapidly spread through the financial sector and spilled over to other industrialised and emerging market economies.
  • Central banks became the first line of defence, responding to the emerging crisis by injecting liquidity into the financial system. When the liquidity crisis became a solvency crisis that threatened the stability of the financial system, governments initially resorted to traditional measures to rescue individual institutions: liquidity lines were granted to insolvent institutions which in many cases were then sold and merged with a partner presumed to be stronger.
  • inancial system stood on the brink of disaster in autumn 2008 after the collapse of Lehman Brothers on 15 September. Its failure sent a shock wave through the global financial system, largely due to its importance as a counterparty in the credit derivatives market.
  • Conditions in interbank markets and other short-term funding markets deteriorated sharply. Credit risk spreads rose to new highs, and equity prices fell sharply. And financial markets in emerging market economies came under pressure as a flight to safety reversed capital flows.
Ariel Shain

Who Is To Blame For The Subprime Crisis? - 0 views

www.investopedia.com/...subprime-blame.asp

financial crisis what caused economics blame

shared by Ariel Shain on 12 Jan 11 - No Cached
  • In the instance of subprime mortgage woes, there is no single entity or individual to point the finger at. Instead, this mess is a collective creation of the world's central banks, homeowners, lenders, credit rating agencies and underwriters, and investors.
  • Biggest Culprit: The LendersMost of the blame should be pointed at the mortgage originators (lenders) for creating these problems. It was the lenders who ultimately lent funds to people with poor credit and a high risk of default.
  • When the central banks flooded the markets with capital liquidity, it not only lowered interest rates, it also broadly depressed risk premiums as investors sought riskier opportunities to bolster their investment returns. At the same time, lenders found themselves with ample capital to lend and, like investors, an increased willingness to undertake additional risk to increase their investment returns.
  • ...12 more annotations...
  • subprime mortgage originations grew from $173 billion in 2001 to a record level of $665 billion in 2005, which represented an increase of nearly 300%. There is a clear relationship between the liquidity following September 11, 2001, and subprime loan originations
  • Partner In Crime: HomebuyersWhile we're on the topic of lenders, we should also mention the home buyers. Many were playing an extremely risky game by buying houses they could barely afford. They were able to make these purchases with non-traditional mortgages
  • However, instead of continued appreciation, the housing bubble burst, and prices dropped rapidly
  • As a result, when their mortgages reset, many homeowners were unable to refinance their mortgages to lower rates, as there was no equity being created as housing prices fell. They were, therefore, forced to reset their mortgage at higher rates, which many could not afford. Many homeowners were simply forced to default on their mortgages. Foreclosures continued to increase through 2006 and 2007.
  • Lenders lost money on defaulted mortgages as they were increasingly left with property that was worth less than the amount originally loaned. In many cases, the losses were large enough to result in bankruptcy.
  • a collateralized debt obligation (CDO). In this process, investment banks would buy the mortgages from lenders and securitize these mortgages into bonds, which were sold to investors through CDOs.The chart below demonstrates the incredible increase in global CDOs issues in 2006.
  • Investment Banks Worsen the SituationThe increased use of the secondary mortgage market by lenders added to the number of subprime loans lenders could originate. Instead of holding the originated mortgages on their books, lenders were able to simply sell off the mortgages in the secondary market and collect the originating fees. This freed up more capital for even more lending, which increased liquidity even more. The snowball began to build momentum.
  • Rating Agencies: Possible Conflict of InterestA lot of criticism has been directed at the rating agencies and underwriters of the CDOs and other mortgage-backed securities that included subprime loans in their mortgage pools. Some argue that the rating agencies should have foreseen the high default rates for subprime borrowers, and they should have given these CDOs much lower ratings than the 'AAA' rating given to the higher quality tranches. If the ratings had been more accurate, fewer investors would have bought into these securities, and the losses may not have been as bad.
  • The argument is that rating agencies were enticed to give better ratings in order to continue receiving service fees, or they run the risk of the underwriter going to a different rating agency
  • Fuel to the Fire: Investor BehaviorJust as the homeowners are to blame for their purchases gone wrong, much of the blame also must be placed on those who invested in CDOs. Investors were the ones willing to purchase these CDOs at ridiculously low premiums over Treasury bonds. These enticingly low rates are what ultimately led to such huge demand for subprime loans.
  • Final Culprit: Hedge FundsAnother party that added to the mess was the hedge fund industry. It aggravated the problem not only by pushing rates lower, but also by fueling the market volatility that caused investor losses. The failures of a few investment managers also contributed to the problem.
  • there is a type of hedge fund strategy that can be best described as "credit arbitrage". It involves purchasing subprime bonds on credit and hedging these positions with credit default swaps. This amplified demand for CDOs; by using leverage, a fund could purchase a lot more CDOs and bonds than it could with existing capital alone, pushing subprime interest rates lower and further fueling the problem.
Tahmid Rouf

Hedge Funds, Historians Are Winners of Recession: Matthew Lynn - Bloomberg - 0 views

www.bloomberg.com/...news

financial crisis

shared by Tahmid Rouf on 12 Jan 11 - No Cached
  • That’s it, then. The global recession is over. At least that’s what Federal Reserve Chairman Ben Bernanke says.
  • And yet the biggest shock to the global financial system since the 1930s won’t just leave us with a legacy of lost output and higher unemployment. The recession will reshape the way we think about the economy for a generation.
  • So who are the winners and losers from the recession? Here are five places to start: Historians have triumphed over economists; hedge funds over bankers; Germany over Britain; the right over the left; and the frugal over the spendthrift.
  • ...7 more annotations...
  • One: Historians won out over economists. No single group of professionals took a worse battering during the economic slump than economists. Not even bankers.
  • Two: Hedge funds over bankers. If Lehman Brothers Holdings Inc. had a dollar for every time someone warned that hedge funds would bring the financial system to its knees, the bank wouldn’t have gone bust. While hedge funds took plenty of criticism, and are still facing calls or more regulation, the simple fact remains that they didn’t blow up the way many predicted.
  • It was the mainstream banks that caused the crisis. That will influence regulators and investors for many years. Whatever people say now, it’s the banks that will face more scrutiny, not hedge funds. The result? The lightly regulated, cash-rich hedge funds will grow in importance, while the tightly controlled, capital- constrained banks stagnate.
  • Baseless Fears Three: Germany over Britain. For much of the past decade, the fast-growing U.K. was gaining on Germany for the role of Europe’s most influential nation. Almost 20 years after reunification, fears of a resurgent Germany turned out to be baseless. It was Britain, with its financial center, that was emerging as the leading European nation. The credit crunch will throw that into reverse.
  • Four: The right over the left. The credit crunch was probably the perfect moment for left-wing, anti-capitalist and anti-globalization movements to make their mark. After all, if this wasn’t a failure of capitalism, it is hard to imagine what might be. Vladimir Lenin would have led the overthrow of a dozen governments presented with an opportunity like this. But his heirs on the left failed to advance any cogent arguments. Nor did they develop any alternatives to free-market, finance-led capitalism. The plate was empty, but the anti-globalization movement failed to step up to it.
  • Five: Frugality over extravagance: The nub of the credit crunch was an attempt to load more and more debt onto people -- mainly in the U.S. and U.K. -- whose real wages were stagnant or growing very modestly. That will be thrown into reverse, and for the next decade, people will be paying down debt rather than accumulating it. House prices will be subdued as finance remains scarce, and household budgets will be tight. The result will be that companies will thrive if they offer value, drive down costs, and make themselves the lowest-cost supplier.
  • The Great Depression of the 1930s dominated the way people thought about the economy for the next 50 years. The great recession of 2008 and 2009 may not have such a long-lasting impact. But in those five ways, it will dominate policy for at least a decade.
  • Tahmid Rouf on 12 Jan 11
     
    A look back at the mess and what we can pick up from the ruins. I found this article to have good comedy value. However, it is very serious.
Han Kyul Lee

The credit squeeze: Abandon ship | The Economist - 0 views

www.economist.com/9587542

economics financial crisis Bear Stearns homeowners

shared by Han Kyul Lee on 10 Jan 11 - No Cached
    • Han Kyul Lee
      Han Kyul Lee on 10 Jan 11
       
      A combination of very loose-lending practices and increasing interest rates created a very deep, and further deepening bust. It is a downward spiral to both the lenders and the borrowers in the housing market.
    • Han Kyul Lee
      Han Kyul Lee on 10 Jan 11
       
      Looks like housing prices can drop after all. Because of this crisis at the housing markets, both residential construction and house prices have taken a fall. There are a number of homeowners who took out mortgages at cheap introductory rates, and they are to face ever-higher payments as the loans reset. Because of all the homeowners going default, many lenders have gone out of the market, including American Home Mortgage Investment.
    • Han Kyul Lee
      Han Kyul Lee on 10 Jan 11
       
      The article also assumed that the housing prices were still yet to fall, as a combination of weak demand for homes and the stock of homes for sale being at its highest in 15 years. If lending standards were to tighten now, however, the demand would grow even weaker, thus further dropping the prices.
  • As for credit markets, the remarkable thing is the low level of spreads before the sell-off, rather than where they are now (see chart).
  • ...6 more annotations...
  • Residential construction has plunged and house prices have fallen. Mortgage defaults have soared, particularly among the least credit-worthy subprime borrowers. Home-owners who took out mortgages at cheap introductory rates face sharply higher payments as these loans reset. There have been plenty of financial-market casualties. The latest was American Home Mortgage Investment, a largish lender which this week said it would no longer fund home loans.
  • Ever since the demise of Long-Term Capital Management in 1998, regulators have worried that banks might lend too much to individual funds. But the Bear Stearns debacle shows that banks may also have to stump up capital to rescue hedge funds within their own stable. Bear had to promise an additional $1.6 billion of collateral to the funds' prime brokers.
    • Han Kyul Lee
      Han Kyul Lee on 12 Jan 11
       
      Regulators worried that there will be too many loans ever since the demise of the Long-Term Capital Management in 1998.
  • The problems at Bear Stearns triggered the current market decline. Investors were surprised by the scale of the losses and the time it took for them to emerge.
  • There, the deadly combination of loose lending practices and higher interest rates has created a prolonged, and ever-deepening, bust.
  • Credit spreads, the premium that riskier borrowers must pay over government debt, have surged since June. That is a problem for companies and banks in the middle of doing deals.
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