Essay financial crises of 2007-2008
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Added on 2019-12-17
Essay financial crises of 2007-2008
Added on 2019-12-17
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ESSAYThe financial crises of 2007-2008 can be seen as a global crisis as well because it wasone of the worst since the worst depression of the year 1930. The immediate cause of crisis canbe seen in form of busting of USA housing bubble which was at its peak in the year 2004. Fromthe view point of Buckley (2011) the 2008 financial crisis has affected millions of Americansand is currently one of the hottest topics still in the presidential campaigns. In recent times,people of nation have witnessed that many major financial institutions been taken over by otherinstitutions, received bailouts from the local body or there exist outright of the crash. On clearresearch, it was found that there were not a single reason of this crisis, it includes many thingswhich made this thing happened in America. One of the major financial institution in Americanamed Lehman Brothers Holdings Inc. which lends financial services seen a global financialcrisis and been declared as bankruptcy in the year 2008. There were other banks as well whichgot bankrupted and these were Goldman Sachs, Morgan Stanley and Merrill. These all firmswere rendering their services in investment banking, equity and fixed income sale as well astrading. Mentioned financial organization filed for Chapter 11 bankruptcy protection inSeptember 2008. This was the largest bankruptcy filed till date in the history of US with theholding of Lehman of over $600 billion in the assets. Domitrovic (2012) said that Lehman Brothers have filed for the bankruptcy with anamount which is above mentioned in assets and also more than $600 billion in debts as well.Lehman was the fourth largest bank in the US when it got collapsed. They were also havingmore than 25000 employees who were giving productive services whole around the globe. Themajor culprit of the issue were seen in the year 2003 and 2004 where the US housing and prizeof the property were at boom. Mentioned financial institution acquired five major mortgagelenders including firms like BNC, Aurora Loan services, etc. The loan were given to customerson the basis of the Current market price of their property. The acquisition made by the bankearlier seen as prescient as record revenues from Lehman’s real estate were seen and there werealso fast rate in the growth of investment banking as well as the asset management. In the year2006, firm was able to securitize around $146 billion which was exactly 10% hire which wasdone in previous year. Cited organization has also marked record profit from year 2005 to 2007.According to Grigor’ev and Salikhov (2009) the major reason of this downfall was thereduction in the housing rate of property. These reductions were so less that the price of the
property has declined suddenly and people who had took loan from the bank were ready to saletheir mortgage property. With this, the Lehman has faced an unpredicted crisis loss due to thesubprime mortgage crisis. This loss was apparently a major result of having holding on the largepositions in the subprime as well as lower rated mortgages. In the second quarter of the year2008, Lehman shared were closed upto 5%. After their major fall down, Barclays comes intoplay and were ready to take over Lehman Brothers. Manhattan judge also approved the decisionbecause it was the last decision which is available in order to circulate the transactions.Bankruptcy of Lehman’s were lead to major cause of depreciation in the price of the commercialreal estate.Otter and Wetherly (2008) stated that there were many potential causes for the 2008financial crises and some of them can be seen in form of market instability, decline in thehousing market and non- refund from the customers who have applied for the loan. Marketinstability was the major reason and it has been caused due to different other factors. Thesefactors were seen in form of ability to create the new line of credit which has suddenly dried themoney flow and also the economic growth of purchasing and selling the assets. These thingshappened had hurt various individuals, businesses and financial institutions very hard.On the contrary, Chodorow-Reich (2014) said that the decline in the housing market wereone of the other reason. Each and every time when financial institution make loan, they createnew money. In order to improve and regulate their transactions, banks tend to prefer this method.With this, they usually increase the money and debt in the economy (The 2008-2009 FinancialCrisis – Causes and Effects, 2016). With the increase in housing property in US, individualsstarted applying for loans. In that around 31% were for residential property which has pushed therates of houses more fast as compared with wages. A further increase was seen into thecommercial property which was around 20%. With increase in property prices, people startedpurchasing more of the property in order to get better return in coming future. They have appliedfor the loan and tend to pay regular installments for the time period for which the loan is takenfor. From the view point of Garcia-Appendini and Montoriol-Garriga (2013) eventually the timearrived when the debt which was there on individuals head become unpayable to pay. Lendingup of large sums of money into the property market has pushed the price of houses along withthe level of the personal debts. Interest rates were need to be paid on all the loans which bankswere making and with the debt rising more faster than income, people were not able to repay
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