Why Do Financial Institutions Fail?

Topics: Federal Reserve System, Monetary policy, Finance Pages: 2 (598 words) Published: February 15, 2013
Why Do Financial Institutions Fail?
Do you remember that there was an extremely important historical event, which is the worst financial crisis since the Second World War. The most serious result was that all the investment banks in Wall Street failed, which was a block of healthy development of the world economy. Here is a reason why these investment banks failed. Was it resulting from the wrong policy made by American government or investment banks themselves? Although many people subscribe to the belief that investment banks should take responsibility for the wrong policy, this is in fact a common misconception that we need to clear up. The government should take most responsibility for investment banks failing. Some people say that the reason investment banks failed is the investment banks sold Subordinated bonds (A loan or security that ranks below other loans or securities with regard to claims on assets or earnings) to the customers of the world. However, the subordinated debts were sold by the Federal Reserve Bank, which belongs to American government; it means the investment failed is government’s responsibility. The reason Federal Reserve banks sold subordinated debts to the investment banks is the Federal Reserve banks were risk-averse. At the beginning of this issue happened, the Federal Reserve banks wanted to loan to people with poor credit since they had already loan their money to people with good credit. The Federal Reserve banks counterfeited customer credit to avoid the laws for the people with poor credit. All in all, the government just wanted to make more money. This is the reason why the investment banks failed, American government’s mistakes. (baike.baidu.com) Some people say that credit crisis revealed that the credit risk was caused by the risk of investment banks’ own financial systems, which meant investment banks failed by themselves. The reason investment banks failed were the policies and weak governmental...
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