Research On The Origins Of Market Crisis

Published Date: 02 Nov 2017

At This point, it would be surprising to ask an average person the reason why this economical situation is in bad shape. Of course we should be considering the many diverse opinions on the subject from individual A to individual B. Some will say it is the government’s fault; it is always playing against the population and making things at its way. More acknowledgeable people would tell us, it is all about financial institutions and their way of doing business, to only make profit and on the people as well; they are only considering themselves and their image in the market. While others more into the subject, economists, historians, and finance gurus will give us numbers, statistics, studies, historical and periodicals events and statistics that led us to where we are now. As many names were given: "recession, credit crunch, financial crisis, economical disaster, subprime mortgage crash, stock market failure and many others, our research is to browse through the information that was available from different sources such as the internet database, newspapers articles and bring the different answers as to the origins or causes of troubles that lead us to this hard economic time. We will start by bringing some timeline events between 2004 and 2009.

Let’s define a few terms before we start the timeline of events. One of them had been added the dictionary as the events occurred and his defined as follows. Credit crunch: A shortage in the availability of credits or loans. Thus Financial institutions themselves has to tighten their policies in terms of offering credits or even stop offering them and focus more on holding on to their capital. Credit not being available has some impact on the credit interest rates which are offered mostly high. It resulted from another event which is the Subprime mortgage crisis.

In the years nineties, the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 required the 2 giants at the time and well known Freddie Mac and Fannie Mae, respectively home loan Mortgage Corporation and national mortgage association, to ease up on the credits for housing and make them affordable to low-income individuals. Thus loans back with the housings as collateral will then be sold later on to financial institutions. In 1993, a closing the gap in the equal opportunity act was wrote in order to loosing things up for people with low income so they could afford housing. As more and more starting to obtain credit and afford their house, it seemed to be some great opportunity for institutions such as Bear Stearns and Co. to make profit on the mortgage backed loans by investing into it. The principal and interest seemed to be profitable in the times to come as Lenders based results on the fact individual making money now and who could afford those houses to accomplish their dream will hold to it and make their payments back on their mortgages.

Situation being, markets was in rise and interest adjustment inflated, the Commodity Futures Trading Commissioner B. Born asked for regulations and transparency on the trading using over the counter derivatives operations as they may hit on the economy. Economist such Alan Greenspan, at the time Chairman of the Federal Reserve, Robert Rubin, Treasury Secretary and Arthur Levitt Chairman of the Securities and Exchange requested no action be taken as they speculated good results based on mathematical formulas called derivatives that combines all those numbers and speculate for future growth. Results were to more mortgage backed securities sold and other corporations and financial institutions make transactions as to generate some money or profit on those tolls that were almost undervalued and insured and called credit default swaps. While President Bill Clinton was still on mandate and the economy went through what is called a "market Boom", the economy was on the rise, jobs were available to people. In 1999, The Graham-Bliley Act was signed by President Clinton which deregulated the financial industry as of banking operations, insurance and securities to that their institutions and groups can grow big. In terms of numbers as reported in the Wikipedia article which sourced a subprime mortgage analysis: http://www.huduser.org/publications/pdf/subprime.pdf: In year 2000 quote "Fannie Mae buys $600 million of subprime mortgages, primarily on a flow basis. Freddie Mac, in that same year, purchases $18.6 billion worth of subprime loans, mostly Alt A and A- mortgages. Freddie Mac guarantees another $7.7 billion worth of subprime mortgages in structured transactions. The subprime mortgage business was going just at best.

Progressively in 2001, things being all going smoothly and many institutions were lending money thus more and more credit was provided to individuals which would spend it and acquire without much trouble their dream houses. The Federal Reserve dropped the interest rate at its lowest in years from 6.5% to 1.5% within a year The housing market was eased up and just doing "great". Liquidity and spending was moving in the economy cycle. Houses were offered at ridiculous value to who would be able to prove a source of income and be able to acquire credit and make his payments for the next years, supposedly with no trouble. A result of $600 billion was the worth of the subprime mortgage business. Freddie Mac and Fannie Mae would acquire those mortgage-backed securities at underestimated value for billions every year. The real estate market rose, speculation was the just bursting and some people would making money by acquiring houses and flip them back into the market by reselling them and make their own profit without even moving in. It was a new type of business that also generated profits to some who were not even institutions but just Incorporations and LLCs.

Houses being affordable to almost everyone, even individuals with no solid credit history, market value of houses started picking up. The Federal Reserve offered to lower again the interest rate to 1%. The new Bush administration in charge at the time now started to turn towards Freddie Mac and Fannie Mae as their way of doing business. This intervention was blocked by congress in 2003. Within the interval of 3 years from 04 to 07, the housing market rose to 292% as it was also opened to the private sector for investments.69.2 was the percentage of house ownership in the US. The US Government let institutions at their own without regulation and at their practices on investing at risk on mortgage-backed securities. The international Swaps and Derivatives Association allowed the practice of credit default swap which is buying some sort of "insurance" against those mortgage-backed securities. Credit Default Swaps would be a contract between buyer and sellers to protect themselves in case of default on those Assets-backed securities. The more and more practices would be generated in that housing market, the more other economists would be concerned about these practices as they would one day backfire on the economy and institutions. OF course the greed and profit of others would shut this proposition to silence, or being absurd. The Mortgage Insurance Companies, themselves, reached out to the Federal Reserve by sending a red flag for the malpractices, easy and risky lending practices

Problems would start rising as some of the borrowers would start failing on their mortgage repayments thus defaulting on their credit. The housing market took a hit as value of houses dropped and interest rates was back to the 6.5% between 2004 and 2006. A slowdown turn hit on the housing market. These group of assets or mortgage-backed securities reached the international market as oversees instructions picked on those "long-term" to be generated profits from the housing market.

Just like a Domino, peaces and chains were building up but one by one being retracted. April 2007, the following institution Century Financial, specialist in sub-prime mortgage, filed for chapter 11 bankruptcy protection and sold its assets included the mortgage-backed securities and cuts its work force. They would fear these pools of assets would crash at a moment. Next follows Investment Bank Bear Stearns in July 2007, after recognizing not being to generate enough if any money to repay its investors from these defaults. They were bought back by JP Morgan Chase. Federal Reserve Chairman Ben Bernanke announced the cost of the sub-prime market up to $100 billion. Another international investment bank BNP Paribas stated that "Liquidity evaporated". Many other institutions took the hit as they all wanted and had a piece of the "to be generating profit" pool of mortgage-backed securities. Interest rate was again cut down to 5.75% in the US and the sign was prominent that the credit crunch could result into a breakdown of the economy. Many European institutions started writing off their debts and tried raising money by selling their asses to others. Some world financial groups lost up $2.8 billion and others were bailed out. In the US the Giants in that business Freddie Mac and Fannie Mae were bailed out and rescued by the US government. In September 2007 was the Fall of Lehman Brothers after trying to find some buyers for their assets to write off their debts. This was a sign that other institutions may also fall as well, just a domino were pieces were all up and next to each other. Washington Mutual was closed down, and bought back by JP Morgan Chase. European Giant in banking and insurance Fortis took a hit and was partly nationalized to survive. Pieces of the domino were just falling apart.

To avoid catastrophe Bush administration The US government passes In October a bailout plan of 700 billion to by bad debts of the financial sector and help some institutions survive. A rejection occurred as some thought it would just benefit again Wall Street. In November a second tentative plan of bailout of $800 billion was pushed this time by the Federal Reserve to further stabilize the financial market. In December 2008 the US was officially declared to be in recession cycle.

Other nations followed as well with bailout plans to help their own economy and financial markets. Interest rate was cut down again at the lowest but markets crashed, Wall Street institutions changed their businesses from investment banking to commercial banking institutions meanwhile. Stock market became bearish, stock price of intuitions will fall from the hundreds to the lowest prices of $10 or even less. Everyone was selling at the panic of losing money. The people called Main Street were at panic as off certain people would withdraw money from their banks fearing the closing of fragile banks such as those who also thought of making money in the mortgage-backed securities. Many jobs lobs resulted into this economy, people losing their houses. Just a chain of events, each was falling one after the other. People not being to continue affording their houses created a default in mortgage, institutions losing money not being able to pay back their investors, filing for chapter 11 bankruptcy protection or even cutting their job effective, other business not being to afford survival as credit was tightened, lost of jobs. Some people as these event occurred could afford cars again which resulted another fall of Corporations such as GMC and Chrysler.

References and Work cited

"BBC NEWS | Business | Timeline: Credit crunch to downturn." BBC NEWS | News Front Page. 07 Aug. 2009. 09 May 2010 <http://news.bbc.co.uk/2/hi/7521250.stm>.