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Market Crash In 2008 Essay

590 Words3 Pages

In the times leading up to the financial crisis the roles of the Credit Rating Agencies (CRA) changed drastically. This is believed to be one of the key factors that actually made the market crash in 2007. Subprime mortgages were being handed out more and more. Subprime mortgages are given out to people that cannot get approved for a regular loan from the bank due to an insufficient credit score. When one gets a subprime mortgage, it comes with a much higher risk rate. The Collateralized Debt Obligation and Asset-backed Security created a “housing bubble” with subprime mortgages and this allowed for investment companies to bundle multiple subprime mortgages into one deal to give to investors (Selig 2009: 5). This market was thriving at the …show more content…

However, the housing bubble didn’t last because in 2006 the prices of houses halted and the interest rate increased. This made investors sell back their subprime mortgages and investment banks were stuck with all of the debt. Credit Rating Agencies are supposed to give people a credit rating based on how much debt they have and how they use their credit (Selig 2009: 7). During the crisis, these agencies shifted their area of work and gave the subprime mortgage bundles credit rating in order to secure them. These companies didn’t take into account how much risk they were creating for themselves because they were giving better credit ratings to people who actually had poor credit. These companies began to collapse due to this though (Selig 2009: 8). They began to work with investment banks and this started to leave the banks responsible if the credit rating was given incorrectly to somebody. These companies started going out of business do to the fact that they didn’t assess the proper ratings and all the roles were shifting and the CRAs were more concerned on market stocks and not having integrity and wanting to actually help

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If there was ever a word to describe the events that led up to the financial crisis of ’08, “Moral Hazard” would fit the bill perfectly. Moral hazard happens in financial terms when the success of a particular transaction is very heavily dependent on the performance of a particular party’s obligations, but where a particular party has no interest or incentive to carry out that obligation diligently. Let’s for instance take the example of a loan worth $720K, which was given to a strawberry picker earning around$14K/year to acquire a certain piece of property in the early 2000’s . In this case moral hazard was there and existed because the loan company intended to sell the loan forward to the credit rating agencies due to the inability of the

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486 Words | 2 Pages

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During the peak of the stock market, people became more confident, and, therefore, less cautious, about how they spent money, creating a rapid growth in bank credit and loans. At the start of the stock market, most families did not have enough money to buy shares by themselves, so many of them took out loans in order to play the game. The idea of ‘buy now, pay later’ was starting to become a possibility. Firms took out loans to expand their business, so more people would buy shares in their company. Banks were also handing out loans to those in need, but this caused a problem when the stock market crashed because people in debt from loans were counting on the system to help them get rich quick.

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