Late 2000's Financial Crisis
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Credit Crunch Explained
THE upheaval that began more than two months ago has been called not only a subprime crisis but also a banking crisis, a crisis of liquidity and a crisis of collateral. It has been each of those things, but most of all it has been a crisis of central banking. The central banks were present at the creation, as asset prices inflated and credit markets hypertrophied. Between 1997 and 2006, according to the S & P /Case-Shiller national home-price index, American house prices rose by 124%. America's was not the frothiest housing market: in the same period prices in Britain went up by 194%, those in Spain by 180% and those in Ireland by 253%.2007-2011 United States housing bubble - Wikipedia, the free encyclopedia
The United States housing bubble is an economic bubble affecting many parts of the United States housing market in over half of American states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2012. [ 1 ] On December 30, 2008 the Case-Shiller home price index reported its largest price drop in its history. [ 2 ] Increased foreclosure rates in 2006–2007 among U.S. homeowners led to a crisis in August 2008 for the subprime , Alt-A , collateralized debt obligation (CDO), mortgage , credit , hedge fund , and foreign bank markets. [ 3 ] In October 2007, the U.S. Secretary of the Treasury called the bursting housing bubble "the most significant risk to our economy." [ 4 ] Any collapse of the U.S.
Greenspan Retracts
JIM LEHRER: Judy Woodruff has our financial crisis story tonight. JUDY WOODRUFF: The former chair of the Federal Reserve and one of the best-known names in finance returned to Capitol Hill today for the first time since the financial crisis began. Alan Greenspan, who headed the Fed for 18 years, until early 2006, appeared with the chairman of the Securities and Exchange Commission, Chris Cox, and former Treasury Secretary John Snow, at a hearing examining the role of federal regulators in the current crisis. ALAN GREENSPAN, Former Federal Reserve Chairman: We are in the midst of a once-in-a-century credit tsunami. Central banks and governments are being required to take unprecedented measures. JUDY WOODRUFF: Greenspan has been criticized for decisions he made earlier this decade that some economists charge helped to foster the housing bubble.
The late-2000s financial crisis , also known as the Global Financial Crisis (GFC) or the "Great Recession" , is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. [ 1 ] It resulted in the collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets around the world. In many areas, the housing market also suffered, resulting in numerous evictions , foreclosures and prolonged unemployment. It contributed to the failure of key businesses, declines in consumer wealth estimated in trillions of U.S. dollars , and a significant decline in economic activity, leading to a severe global economic recession in 2008 . [ 2 ]
Global Financial Crisis
Bush's Bubble
The latest data on growth suggest that the economy may again be faltering, just when President Bush desperately needs good numbers to make the case for his re-election. As bad as the Bush economic record is, it would be far worse if not for the growth of an unsustainable housing bubble through the three and a half years of the Bush Administration. The housing market has supported the economy both directly--through construction of new homes and purchases of existing homes--and indirectly, by allowing families to borrow against the increased value of their homes. Housing construction is up more than 17 percent from its level at the end of the recession. Purchases of existing homes hit a record of 6.1 million in 2003, more than 500,000 above the previous record set in 2002. Each home purchase is accompanied by thousands of dollars of closing costs, plus thousands more spent on furniture and remodeling.Shadow Banking System
The shadow banking system is the collection of financial entities, infrastructure and practices which support financial transactions that occur beyond the reach of existing state sanctioned monitoring and regulation. It includes entities such as hedge funds , money market funds and structured investment vehicles . Investment banks may conduct much of their business in the shadow banking system ( SBS ), but they are not SBS institutions themselves.
Collateralized debt obligation
Collateralized debt obligations ( CDOs ) are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets. CDOs securities are split into different risk classes, or tranches , whereby "senior" tranches are considered the safest securities. Interest and principal payments are made in order of seniority, so that junior tranches offer higher coupon payments (and interest rates) or lower prices to compensate for additional default risk .The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong. Read more
CDO - Interactive Features
A mortgage-backed security ( MBS ) is an asset-backed security that represents a claim on the cash flows from mortgage loans through a process known as securitization . Mortgage-backed Security Issuances 1990-2009 The process of securitization is complicated, and is highly dependent on the jurisdiction within which the process is conducted.
Mortgage-backed security
In recent years the real-estate investment market has expanded with new ideas and new securities. One of the most innovative creations in this field is the mortgage-backed security, or MBS, which has brought mixed results to investors and the stock market. Although the concept of the MBS is simple, there are many variations in how it is structured and traded, so investors should be aware of the features and the risks before they venture any of their capital in this market.
MBS Explained
A hedge fund is an investment fund that can undertake a wider range of investment and trading activities than other funds, but which is only open for investment from particular types of investors specified by regulators. These investors are typically institutions, such as pension funds, university endowments and foundations, or high net worth individuals. As a class, hedge funds invest in a diverse range of assets, but they most commonly trade liquid securities on public markets. They also employ a wide variety of investment strategies, and make use of techniques such as short selling and leverage .
Hedge Funds
Derivatives
A derivative instrument is a contract between two parties that specifies conditions (especially the dates, resulting values of the underlying variables, and notional amounts) under which payments, or payoffs, are to be made between the parties. [ 1 ] [ 2 ] Under US law and the laws of most other developed countries, derivatives have special legal exemptions that make them a particularly attractive legal form through which to extend credit. [ 3 ] However, the strong creditor protections afforded to derivatives counterparties, in combination with their complexity and lack of transparency, can cause capital markets to underprice credit risk. This can contribute to credit booms, and increase systemic risks. [ 3 ] Indeed, the use of derivatives to mask credit risk from third parties while protecting derivative counterparties contributed to both the financial crisis of 2008 in the United States and the European sovereign debt crises in Greece and Italy. [ 3 ] [ 4 ]The commission, a bipartisan Congressional panel, has been holding hearings on the origins of the financial crisis. D. Keith Johnson, a former president of Clayton Holdings, a company that analyzed mortgage pools for the Wall Street firms that sold them, told the commission on Thursday that almost half the mortgages Clayton sampled from the beginning of 2006 through June 2007 failed to meet crucial quality benchmarks that banks had promised to investors.