Reaction Paper

Topics: Debt, Credit default swap, Finance Pages: 3 (942 words) Published: February 26, 2013


Reaction Paper|

This crisis, the United States and the world is facing is the effect of the lack of control and regulation on certain financial activities. Because of the continuing opposition of different individuals and companies with the imposition of regulations on these financial activities, it continued to be uncontrolled under the administration of different Presidents of the United States.

Due to advances in technology, many financial products were introduced like derivatives which bankers may use to earn money through speculating. And because of the harm that this activities may bring to the economy, the Commodity Futures Trading Commission (CFTC) is established. CFTC with its head Brooksley Born, attempted to make regulations on the use of derivatives, but this was contradicted by many investment banks and individuals like Larry Summers and Alan Greenspan. = “Why do these companies and individuals oppose the imposition of regulations on the use of derivatives?” Is it really for the benefit of the economy or is it because of their personal interests. This deregulation gave rise to increase in lending activities. Lenders give loans even to those people who really do not have the ability to repay them (subprime loans). This is because lenders are confident that they can earn money with that activity by selling the loans to Investment Banks such as Lehman Brothers, Merryll Lynch and Goldman Sach. This investment banks will pay rating agencies such as Moody’s, Standards and Poors and Fitch to evaluate their Collaterized Debt Obligation (CDO) so they can sell that CDO’s to Investors, and the Home Buyers are now obliged to pay to these investors. I think that there should be a law governing this type of activities. One of the major problem here is the high ratings these rating agencies are giving to the CDO’S even though they proved to be so risky. It is questionable why very risky...
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