The Credit Crisis and the Resulting Effects on the Financial World free essay sample

All of these events are what has led to what analysts have said to be a recession. This paper will attempt to explain the causes that credit issues had on the financial crisis as well as show how liquidity played a major role in throwing debt markets into panic and in some cases failure. I will also give some insight into how the debt markets became inactive because of these issues. We will also take a look at how interest rates affected this crisis as well as how the stock market and initial public offerings (IPOs) were affected. The Beginnings of the Bubble Burst After the internet bubble burst of 2000 the Federal Reserve Bank was worried about a serious deflationary period. Because of this fear they did not want to counteract the housing bubble. The Federal Reserve Bank actually lowered the federal funds rate from 6. 5% to 1% in the period from 2000 to 2003. We will write a custom essay sample on The Credit Crisis and the Resulting Effects on the Financial World or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page This was done in order to soften the blow from the internet bubble and was encouraging people to borrow at faster rates. During this time period, banks also went through a serious transformation period where instead of holding onto debt, they used new financial innovations to bundle them and sell the risk off onto other investors. This process was named originate and distribute. In this banking model loans were put together, tranched and sold via securitization. To tranche means to slice up the pool of debt into say slices of a pie. Each pie slice has a different risk involved, credit rating and thus different amounts of interest paid. Securitization is where these slices are then sold to different investors as bonds or Collaterized Mortgage Obligations (CMOs). The principal and interest on the debt, underlying the security, is paid back to the various investors regularly. These types of new innovations led to new investors and thus access to more liquidity for banks. Banks began to thrive with all the new opportunities for them to create more liquidity. As you can see from this chart, Securitization was being exploited at alarming rates. [pic] This in turn, allowed them to be able to lend more money. The problem was not the increased amounts of loans that banks gave out, the problem lied with whom these banks were lending money. Of course the added pressures growing in the market from the government and financial institutions werent helping matters. As I mentioned earlier, The Federal Reserve Bank was lowering the federal funds rate in the years of 2000 through 2003 which encouraged people to invest in real estate. At the time the real estate market was on a tremendous upswing. However in the years of 2004 through 2006 they started increasing the federal funds rate (FFR) which made 1-5 year adjustable rate mortgages more expensive to reset for homeowners. There was another side effect of the rising FFR, generally when interest rates rise, assets fall in value. This would mean that speculation in real estate would be much riskier for investors, and this may have led to the eventual housing bubble burst. However this did not stop banks from targeting a new market. A new customer target entered the market for banking systems, Sub-prime borrowers. Originally, banks were, for the most part only lending to prime borrowers, a group of borrowers who are considered the most credit-worthy, indicated by a FICO score greater than 720. These prime borrowers were able to borrow money at the markets best interest rate and were also considered safe investments. Sub-prime borrowers on the other hand, were less than desirable potential customers to lend to. Their credit ratings were much lower than prime borrowers, meaning they were more likely to be late with payments on loans or even default all together. Now, initially banks may have strayed away from giving as many loans out to sub-prime borrowers as they did, however added pressures by the government and financial institutions were mounting. When the Securities and Exchange Commission relaxed the net capital rule in 2004, this allowed the five biggest investment banks to dramatically increase the leverage they could use and also allowed them to aggressively expand on their issuance of mortgage backed securities (an asset-backed security or debt obligation that represents a claim on the cash flows from mortgage loans through securitization). This then pressured government entities such as Fannie Mae and Freddie Mac to expand their riskier lending to sub-prime borrowers, and this led as an example for other banks that followed suit. Financial Market Begins to Feel the Pain and the Onslaught of Liquidity Issues Arise The rise of securitized products ultimately led to a flood of cheap credit, and lending standards fell. Now that banks had a way to get rid of the majority of risk involved in lending money, via securitized products being sold to financial institutions, they took an easy going approach to approving and monitoring loans. Banks came up with new ways to give out mortgage loans with no down-payments, jobs and even income! These were called piggyback mortgages (the combination of two loans to take the need of a down payment away) and NINJA (no income, no job or assets). These loans were given on the assumption that people if people needed money they could always refinance and actually horribly wrong and in fact the opposite happened. Loans started to default a domino effect began causing liquidity crisis as well as other issues. The trigger for the liquidity crisis began in early 2007, when sub-prime mortgage defaults started increasing at damageable speeds. Mortgage-backed Securities, CDOs and asset-backed securities (a security whose value and income payments are derived from and collateralized (or backed) by a specified pool of underlying assets) all took a huge hit. This dominoed into the shadow banking system (financial institutions that do not have the same regulations as banks because they do not take deposits like banks do) causing many institutions great problems. The major issue was that a lot of these shadow banks had borrowed from investors in short-term, liquid markets (such as money markets and commercial paper markets) and then took this money and lent it out to corporations or invested in long term investments, less liquid assets. In most cases these long term assets that were purchased were mortgage-backed securities. So as you can see the default on sub-prime mortgages was deeply intertwined with all that shadow banking systems were involved in. Once the mortgages defaulted and investors became weary of investing in mortgage backed securities, these financial institutions that had so heavily depended on short term monetary loans from the investors were finding themselves quickly bankrupt. Because the shadow banks are not regulated such as depository banks they are also not able to use the lender of last resort, the U. S. Central Bank. In short financial institutions were in a serious bind. They needed to sell their long term loans for cents on the dollar to be able to pay off the short term loan payments and in the end many institutions were out of business. Some notable companies in 2008 that closed down shop were Bear Stearns and Lehman Brothers. And the long and short of it is that these financial institutions were also highly leveraged. That coupled with the long term illiquid investments they held were the shadow bankers downfall. The effects of defaulted mortgages did not stop there. The effects of defaulted mortgages continued to snowball into a huge problem for such companies as AIG. AIG is an international insurance company that had heavily invested in credit default swaps. The major problem that started the downfall of AIG was the downgrade of its credit rating. When you have a credit rating of AAA you do not, by industry standards, have to give collateral when entering into credit swaps. When AIG had to start providing collateral with their trading counter parties the problem of liquidity started. This was not just a small problem either; they had backed 100 cents on the dollar to CDSs. They had engaged in over 440 billion dollars worth of CDSs of which almost 60 billion were structured by sub-prime loans. In their first half of 2008 they reported 13. 2 billion in losses. They were on the verge of what could have sent our whole financial system into chaos. Had AIG failed it would have sent a wave of bankruptcy through the financial world that would have collapsed the entire market. Because after all, they were insuring financial institutions, who were holding risk for banks who had defaulted mortgage loans. The bailout by the U. S. Government saved AIG by giving them the biggest bailout in history, 85 billion dollars (of which the US Government got an 80 percent equity stake). That was not even the end of it; AIG was given another 77 billion after that. The buck basically stopped with AIG, as they were too big to fail. They had offered a product that while markets were doing well AIG was successful, but as the market declined they entered into what analysts say was inevitable. They offered to cover all risk when offering 100 cents on the dollar, and once the defaults on prime mortgages made it through the entire financial world they had to back the product they offered in CDSs and obviously they could not. The Financial Market Freezes The collapse of the shadow banking system was an igniter of the market freezing. They had accounted for one third of all U. S. lending mechanisms leading into this crisis. The reasoning was because investors that had been supporting the financial institutions with short term money loans quickly bailed out once things started to go wrong. With this absence of monetary injection into the shadow banking systems they were no longer able to fund mortgage funds, corporations and others in need of their services. This caused banks to have a serious absence of liquidity as well, leading them to start hoarding money. This meant that instead of banks loaning to counter-parties in need they held onto the funds in fear of needing liquidity in the future. This was a serious problem and one that will not be fixed in years to come. A lot of the forms of securitization that were once available are likely gone forever. The reasoning behind them disappearing is that they were designed in a time of very loose credit conditions and that time has gone, at least for now. While banks have raised their lending standards it was the rise and fall of shadow banks that inevitably led to the inactivity of debt markets. The Stock Market Follows As I mentioned earlier, the defaults on sub-prime mortgages spiraled into many liquidity problems in the financial markets. They caused investors to start fearing that markets would continue to drop. Banking institutions bankrupted, and with AIG on the brink of disaster, matters only got worse. Investors caused bank runs (Groups of people all withdrawing money from banking institutions at the same time), Illiquidity, and massive panic in stock markets. As we can see from this table, The SP 500 index was significantly hit by these defaults. As you can see, during the crisis period volatility was 43. 6% (325% of pre-crisis period). [pic] This table reflects how the average investor was feeling about the market. As you can see in the post-crisis analysis the market volatility is still at 20. 9% and the average is actually lower than the crisis period. This next chart reflects the Dow Jones Industrial Average (DOW). As you can see here, the chart mirrors the information given in the last table. March 2009 was the low point of the market (where the crisis ended), and the market has rebounded. It has not yet returned to its previous high of 14,000 but it has steadily been on the incline since March 2009. This gives us hope in looking to the future, that even in the trenches our economy can rebound. Effects on Initial Public Offerings Initial public offerings are the first sale of stock by a company to the public. This allows companies big and small to raise capital for their firms. With the severe economic downturn in 2008, it sent a wave of negative effects worldwide, which hit the IPO markets hard. IPO markets plummeted by over 60% in both deal numbers and funds raised. Up until 2008, there had been record-setting years with IPOs. The problem lied with the illiquid markets. There was a significantly less money that investors were willing to supply for IPOs. Although IPOs were taking a significant hit, U. S. and China still led the way as far as funds raised from IPOs Companies with strong business plans and innovative products for the economy were still able to realize positive gains in the public markets. Looking towards the future, IPOs will rebound. Analysts say that signs point to new horizons for IPOs, favoring companies that offer innovative and public solutions for the changing environment. Looking Towards the Future In short, our financial world hit a wall when sub-prime mortgages were abused. Securitization multiplied the effects from default mortgages causing financial ripples that destroyed many firms. Other problems such as the relaxing of regulations and the pressures from the U. S government to give out sub-prime mortgages only made things worse. Greed ran wild and should have taught us a lesson on what deregulation and the abuse of sub-prime borrowers can do to markets. We also need to keep banks more regulated and have the government always keeping a watchful eye on the shadow banking system. Congress and the Obama Administration have taken the first step forward to preventing a repeat by putting into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. As regulators begin the rule-making process it is estimated that the act mandates nearly 250 regulations and 70 studies. Just as quickly as it was passed, however, the industry was hard at work lobbying to diminish the protections under the act by intervening as much as possible in the rule-making process that follows any such legislation. Additionally, the industry lobbyist are hard at work in an effort to get the newly elected Republican-controlled House of Representatives to weaken the legislation’s impact through low funding of the various regulatory enforcement provisions. I would hope that in the future we can learn from this crisis and realize that lending to borrowers with good credit, and income that can afford the payments of a loan, are very important aspects in lending. Equally, financial institutions must get back to seriously following their own loan policies, since most policiesthat were ignored allowed for loans to be approved that should not have been. . Works Cited 1. United States. Federal Reserve Bank of St. Louis. The Financial Crisis Timeline. Web 09 Dec. 2010.

A Neutral Perspective on Intro Writing Comparstive Essay

A Neutral Perspective on Intro Writing Comparstive Essay How to Get Started with Intro Writing Comparstive Essay? Analyze and understand the 2 texts well before you begin writing, how successful your essay will be depends on the direction you display your wisdom and opinions in a clear. For example, you can change your central concept to go together with what you've talked about in the essay. You also ought to make certain you have written the suitable number of words for your essay. Then attempt to put yourself in the shoes of somebody who has no prior understanding of the matter, and lay out your introduction as though you're explaining to them the simple intention of your essay. Understanding how to compose an essay introduction paragraph is necessary for developing a strong first impression on your paper. Simply speaking, your introduction ought to be in a position to show readers what to anticipate in the remainder of the paper in brief. 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Research Topics - Uses an Approach Based on Research Topics

Research Topics - Uses an Approach Based on Research TopicsWhen writing a research topic's paper, it is important to keep in mind the fact that the paper should always be written in a way that will assist the readers in achieving desired results. As a result, every step of the research should be analyzed and explained in such a way that the reader will easily understand the direction of the findings.In order to get ideas for research topics, the writer should first come up with a list of problems that he or she is going to tackle. In the process of coming up with ideas, it is important to consider the difficulty of the problem and the possibility of solving it. It should also be made clear to the writer that there is no such thing as a simple research topic because different people have different objectives and when they speak about a particular topic, they are all looking for different results.Then, the writer should compile and organize his ideas into a research topic paper and pre sent it to the college or university. He or she should be careful in presenting the paper because he or she should not put too much details. This will help the student in making him or her interested about the paper.Research topics are said to be required in almost every subject. For example, there will be a need for research on topics in nutrition, psychology, marketing, management, and many other fields. The research can be carried out based on the expertise of the writer or the topics may be improvised to suit the needs of the college or university.One of the key elements in writing a research topic's paper is having a good structure to go along with it. This will enable the writer to present the topic clearly and precisely. One thing that the writer should remember is that he or she should never start off by outlining the entire research topic before the actual writing even starts.In order to make sure that the research topics are concise and precise, the writer should look at t hem from the perspective of the professor's assistant. The reason for this is that if the professor does not like the research topics or if the research topics are too elaborate for the professor to understand, the writing will fail. So, this means that if the writer writes such a paper in a proper way, it will be highly appreciated by the professor.The final part of research topics paper is a list of references. This list should contain relevant books, articles, and internet sources that can be used to support the claims made in the paper. The writer should therefore make it clear to the college or university where he or she is going to submit the paper so that there will be a connection between the writer and the university.By following these simple steps, the writer will be able to come up with a good research topics paper. The writer should also remember that every research paper is different. Therefore, he or she should research for better research topics according to the parti cular subject he or she is writing about.

Homework Argumentative Essay Topics - Helpful Tips

Homework Argumentative Essay Topics - Helpful TipsHomework Argumentative Essay Topics are very important in essay writing. It is one of the best ways to demonstrate the knowledge that you have and make your essay stand out among other similar essays that are being submitted.Homework Argumentative Essay Topics can be quite complicated. There are many different topics that can be used to help you write a good essay. It will be important for you to pick the right topic that will make your essay stand out.There are a number of essay topics that you can use to help you decide what topic to use. The first is, of course, the topic of your academic work. By knowing this topic you will be able to know the type of essays that are commonly submitted and which are not. This will enable you to choose a topic that will only be used by those who are submitting similar essays as yours.The second thing that you will want to do is determine the level of topics that are acceptable. For example, it may be appropriate to use subjects like history, geography, literature, history, and others. Each of these categories contains some very different topics that you can choose from.The last thing you should do is to determine the theme of your essay. By choosing a topic that can be related to the topics of your essay you will be able to avoid having your essay turned down by a reviewer. Of course, if you know what the audience of your essay is you will be able to choose topics that will appeal to them and avoid the possibility of having your essay rejected.Homework Argumentative Essay Topics can be written at any level of comprehension. It is also necessary to keep in mind that some topics are considered to be more challenging than others. Some of the more difficult topics include history, science, and religion.You should also consider how much information you will need to cover the topic. If you are writing an essay on a subject that is very complicated then you will want to be sure that you will be able to explain every aspect of the topic. It may be necessary to use charts and graphs to further elaborate on the information.Homework Argumentative Essay Topics are important to a successful essay. Your topics should be carefully selected so that they are not only interesting but also add value to the essay. This is because if you fail to provide enough information to your readers, they will lose interest in your essay may be rejected.

Nutrition Topics For Research Paper

Nutrition Topics For Research PaperResearch papers are the best way to further your knowledge about a particular topic. There are some of the most interesting topics that you can write about, including nutrition topics for research paper.If you are interested in writing about a topic on nutrition, the first thing that you should do is to look for a good nutrition topics for research paper. The reason is because there are a lot of them. Research is often done from the perspective of academia. If you are a student and want to pursue a particular field of study, then you might have to choose between a lot of different options. This means that it is important to look for the right one that suits your needs.You will need to decide whether you would like to write your research paper as a journal article or as a book. A journal article requires less space, but they do not usually give any financial benefits. In other words, it is not easy to publish a book. In this case, you will have to lo ok for some interesting options on the internet.The Internet provides you with lots of opportunities for writing a research paper, and most of them have very reasonable fees for your work. With the help of the Internet, you will find many topics on nutrition topics for research paper.One of the best topics for a research paper is the difference between vitamin and mineral supplementation and mineral deficiency. This is actually a controversial topic. If you are studying nutrition, then you will have to find a topic that is related to the subject matter that you are interested in.This is an important area of research, so make sure that you include all the information you have available. This is the only way to gather valuable information, so think about how you can offer the best solutions to your research subjects.If you want to write a research paper about nutrition, then you should consider writing about this topic. Your choice of topics can influence the result of your research, so make sure that you are confident in what you write.