Winter Semester, 2011
Pension funds Deficits, Public and Private: Cause and Effect.
There is a very well known saying “History repeats itself”. However, many are reluctant and ignorant. Enough precautions weren't taken even though the outcomes were evident. Example of these includes the sub-prime lending. Such have been the trends in the finance industry and seems to will be in case of the problem with a deficit in pension funds both with the public and private entities. Prime refers to the minimum rate of interest that a bank can charge to the best of its customers, or in other words, to a customer who is for a certainty not going to default. Any lending done to a customer who is not likely to default is called prime lending. Any other lending which is more likely to default or lending to people who otherwise are not eligible is called sub-prime lending. The housing mortgage industry in the United States was secured by the federal government. So, it became risk free for banks in United States to mortgage homes. Once all the prime customers had mortgaged their houses, the bank instead of diversifying into other fields, started lending to sub-prime customers, reducing the banks risk. They went to the extent that, they optimistically provided loans to NINJA (No Income, No Jobs and no Assets) customers assuming they will have jobs in the future. When the recession hit the market, not even the NINJA customers but also the well doing customers lost their jobs and started default, creating huge cash flow gaps. These loan defaults resulted in the banks claiming the properties back from the customers and putting on sale. Due to the availability of a large number of such properties on sale, the prices of the properties came rolling down, resulting in the fall of the real value of the asset which was backed as security to the loan which now became large by many times to the security. This resulted in huge... [continues]
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