2008 Financial Crisis: the Large Financial Institution Failed

Topics: Subprime mortgage crisis, Debt, Mortgage Pages: 3 (1043 words) Published: February 23, 2013
The U.S. economy experienced a deep recession in years of 2008 through 2009. A huge factor in this was the number of large financial institutions that failed. Also, the stock market declined significantly which can be contributed to the bailout plan that was passed by our government. Third, spreads on many different types of loans over comparable U.S. Treasury securities has expanded significantly (Chari, Christiano, & Kehoe, 2008). The financial crisis is the result of the collapse of the housing bubble in the U.S., which can be seen as the starting point of a crisis in the global economy afterward. The sudden financial crisis and the unexpected economic collapse in 2008 came as a shock to many because the speed and severity of the crisis were unpredicted (Bondt, 2010). Its consequences had strong influences on the financial system of many industrialized countries as well as a large number of developing and emerging economies. Huge cost are carried by every parts of society. Much wealth has been destroyed. Millions of jobs have been lost. The crisis has tarnished the belief in free enterprise, the financial system, and in financial theory (Bondt, 2010). To understand the nature of the crisis, this paper aims to evaluate the underlying causes and analyse the widespread effects of the financial crisis. Sub-prime loans are known as mortgage loans that have been made to borrowers with low credit ratings (Davis, 2008). Sub-prime mortgage crisis was performed through a sophisticated modern financial instruments, known as securitization. In essence, securitization is the process of raising capital by using the assets available on the balance sheet as collateral to issue debt securities. High profit along with greed had led to the abusiveness of lending sub-prime loans. The evaluation procedure was done very loosely and accessing to housing loans became quickly and easily than ever which in turn caused caused the housing bubble. There were two main factors...
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