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2008 Financial Crisis Essay

614 Words3 Pages

The financial crisis intensified following the Lehman Brothers bankruptcy in September 2008. It triggered a world-wide economic downturn. There was a loss of confidence by US investors in the value of sub-prime mortgages caused a liquidity crisis. Large amount of capital were put into the financial market by the Federal Reserve. Stock markets around the world buoyed and this worsened the crisis. Financial institutions took to riskier investments as that yielded more return. Assuming that returns would exceed the investment, these institutions made it lucrative with higher profits to induce the investors in these risky borrowings. Concerns about America’s big deficit and the offsetting capital inflows from Asia’s excess savings had been the …show more content…

In 2008 the world economy faced its most dangerous crisis since the Great Depression of the 1930s. The pestilence, which began and resided in the US as the sky-rocketed house prices reached its nadir, soon spread throughout the globe. The losers in the United States included a) the entire investment banking industry, b) the biggest insurance company, c) the two enterprises chartered by the government to facilitate mortgage lending, d) the largest mortgage lender, e) the largest savings and loan, and f) two of the largest commercial banks, 'Indymac' and 'Washington Mutual Bank'. Mortgage leaders agreed on loans on terms unfavourable to most households as mmany of them ideally did not qualify for a loan. Some of these so-called subprime mortgages had low “teaser” interest rates in the early years that swelled to double-digit rates in later years. Credit Default Swaps(CDS) crept in insurance companies' deals with the specualtion that the insurers would assume any lossed caused by mortgage-lender defaults in return for a fee. Financial institutions bought or sold credit default swaps on assets that they did not

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