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The 2008 Financial Crisis Essay

1869 words - 8 pages

Introduction

The purpose of this report is to study Global Financial Crisis 2008.This study is inspired by the Wall street crisis and it covers why’s and after effects of the crisis. After this crisis many of the roots causes were observed like speculation, fragility of the system, greed of the managers which adversely affected the market.

What is financial crisis:
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics (A banking panic or bank panic is a financial crisis that occurs ...view middle of the document...

). It became prominently visible in September, 2008 with the failure of several large United States-based financial firms. The underlying causes leading to the crisis had been reported in business journals for many months before September, with commentary about the financial stability of leading U.S. and European investment banks, insurance firms and mortgage banks consequent to the subprime mortgage crisis.
Beginning with failures of large financial institutions in the United States, it rapidly evolved into a global crisis resulting in a number of European bank failures and declines in various stock indexes, and significant reductions in the market-value of equities (stock) andcommodities worldwide. The crisis has led to a liquidity problem and the de-leveraging of financial institutions especially in the United States and Europe, which further accelerated the liqudity crisis. World political leaders and national ministers of finance and central bank directors have coordinated their efforts to reduce fears but the crisis is ongoing and continues to change, evolving at the close of October into a currency crisis with investors transferring vast capital resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading many emergent economies to seek aid from the International Monetary Fund.The crisis has roots in the subprime mortgage crisis
Some of the financial institutions which suffered most are.
Lehman Brothers,Merill Lynch,American International Group(AIG)
The purchasing of home increased abruptly on the assumption that “home prices will keep rising”. As demand for the CDOs started growing across the global investment community, the investment bankers (like Lehman) who were meant to sell these instruments also started investing a significant portion of their own capital in these.
As Wall Street firms like Lehman were churning more and more home loans into CDOs and selling them or investing their own money, there was a pressure on the banks to issue more loans so that they can be sold to the Wall Street firms in return for a commission. Slowly banks started lowering the credit quality for availing a home loan and aggressively used agents to source new loans. This slippery slope went to such an extent that in 2005, almost anyone in the U.S could buy a home worth $100,000 (45 lakhs INR) or more without income proof, without other assets, without credit history, sometimes even without a proper job.
The U.S. housing market went into a classic speculative bubble. Home loans were easy to get, so more and more people were buying houses. The increased demand for houses caused the price to increase. The rising prices created even more demand, as people started to look at homes as investments — investments that never went down in value.

In late 2006, Mortgage lenders noticed that people would choose a house, sign all the mortgage papers, and then default on their very first payment. Although no one could really...

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