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The financial crisis was caused, at its very root (as in this was the last straw), by the sudden drop in home prices. Banks held mortgages on homes that people could no longer pay. Normally, the bank forecloses on the home and sells it for either profit or break-even. But this time, home values had fallen by as much as 40%. So banks lost 40% of their original investment when people started falling behind on mortgages payments and the banks were forced to foreclose. This is easier to describe with numbers. Say a bank gives a family a mortgage for the total value of their home, say $100,000 (this is lower than most mortgages, but makes it easier to see what's going on). The home then loses 40% of its market value, becoming worth only $60,000. The family then falls behind on their mortgages payments and the bank has to foreclose. The bank can only recover that $60,000 and is out $40,000. Now imagine this happening millions of times.
Once you get into much more complex financial mechanisms, we find that banks packaged these loans as investments call CDOs (collateralize debt obligations) that they then sold to other banks or financial institutions. Sometimes they are called commercial paper. When the value of these assets plummeted, a lot of financial institutions lost a lot of money. Again, normally this really has no bearing. But some bad choices were made with a normally useful financial tool called leverage. One can leverage funds by (this is a simple description) using the cash you have on hand as a down payment on a loan and then taking that loan an investing it. A great example of this is taking $100,000 and instead of buying just one house that you rent out to someone, you take out mortgages on 10 houses and use the $100,000 has a downpayment. You now own ten houses that you can collect rent from.
As you can see, the profit possibilities when leveraging assets (in this case cash) are amazing. Unfortuntately, you also magnify your losses. Imagine if you couldn't find renters for those houses. You're stuck with a huge loan and no way to apy it off, whereas with just one house you wouldn't be in debt. The point here is that a few financial institutions (Lehman Brothers being one) leveraged cash to buy these CDOs. These CDOs then plummetted in value. Lehman Brothers was unable to sell them because no one wanted them. Thus, they had huge loans from the leverage and they couldn't repay them.
So now we have banks that are extremely scared and cash-strapped. They don't want to lend moeny for fear of losing more.
Wiki User
∙ 15y ago
Wiki User
∙ 15y agoThe Subprime Mortgage Crisis is an ongoing economic problem that has become more apparent in 2008 and has resulted in reduced liquidity in the global credit market and also the banking & financial systems. This crisis has exposed the weakness in the global financial system and also the regulatory framework that is overlooking them.
Some of the reasons for this crisis are:
1. The US Real estate market crash
2. High default rates on Subprime loans &
3. Subprime Mortgage backed securities
A Subprime loan is a loan that is granted to a borrower who does not qualify for loans owing to a variety of risk factors like low income level, bad credit history etc.
Wiki User
∙ 12y agoDebt
War
Crude
Government
Currency
Wiki User
∙ 12y agowell, according to recent studies, reckless banking policy and practice is the most probable cause for global financial crisis.
Wiki User
∙ 12y agothe main cause is the existence of free financial markes and the huge amount of stock markets
Wiki User
∙ 14y agopanam illathathu panam illathathu
paulbenn
Companies being unable to make sufficient profit.
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What is the difference between a financial crisis and an economic crisis and which of both affects the other most?
A financial crisis is when wall street and the banks are failing. An economic crisis is when there is high unemployment or a recession.
What factors contribute to a financial crisis?
Depending on what kind of financial crisis is being described for example; large scale financial crisis such as businesses and communities or small scale such as personal financial troubles. On a personal level not having enough money to live of for necessities is a crisis. For large scale like a community if the economy is bad then that is a big problem as well.
What is different between currency crisis and financial crisis?
Yes. Both refers to the same.
How do you prevent financial crisis?
You dont waste your money..
When was the following was a direct cause of the Panic of 1837?
There were a number of causes to the financial crisis known as "The Panic of 1837", including the economic policies of President Jackson and most of the banks of the area, ceasing payment in silver and gold.
Which committee would be formed to investigate possible causes of the financial crisis of 2008?
A committee similar to the Financial Crisis Inquiry Commission (FCIC) would be formed to investigate the possible causes of the financial crisis of 2008. The FCIC was a bipartisan commission created by Congress to examine the factors that led to the crisis and to provide recommendations to prevent similar events in the future.
Why did the financial crisis occur in 2008?
why financial crisis occur why financial crisis occur
What is the financial bailout package crisis?
There is no such crisis as the financial bailout package crisis. the bailout was created to overcome the financial crisis.
What were causes to the financial crisis in France in the late 1780?
bad harvest, debt, and deficit spending
What are the exact dates of the 2008 financial crisis?
There is no exact date for the 2008 financial crisis. A financial crisis is a series of mishaps that happen together to cause a crisis.
Where did the global financial crisis start?
The origin of the Financial crisis was in the United States.
When was Kingfisher Airlines financial crisis created?
Kingfisher Airlines financial crisis was created in 2004.
What southern European country is experiencing a financial crisis 2012?
Greece is the country in southern Europe that is having the biggest financial crisis in 2012. To a lesser extent Italy, Spain and Portugal also are having a financial crisis, but not as bad as Greece.Greece is the country in southern Europe that is having the biggest financial crisis in 2012. To a lesser extent Italy, Spain and Portugal also are having a financial crisis, but not as bad as Greece.Greece is the country in southern Europe that is having the biggest financial crisis in 2012. To a lesser extent Italy, Spain and Portugal also are having a financial crisis, but not as bad as Greece.Greece is the country in southern Europe that is having the biggest financial crisis in 2012. To a lesser extent Italy, Spain and Portugal also are having a financial crisis, but not as bad as Greece.Greece is the country in southern Europe that is having the biggest financial crisis in 2012. To a lesser extent Italy, Spain and Portugal also are having a financial crisis, but not as bad as Greece.Greece is the country in southern Europe that is having the biggest financial crisis in 2012. To a lesser extent Italy, Spain and Portugal also are having a financial crisis, but not as bad as Greece.Greece is the country in southern Europe that is having the biggest financial crisis in 2012. To a lesser extent Italy, Spain and Portugal also are having a financial crisis, but not as bad as Greece.Greece is the country in southern Europe that is having the biggest financial crisis in 2012. To a lesser extent Italy, Spain and Portugal also are having a financial crisis, but not as bad as Greece.Greece is the country in southern Europe that is having the biggest financial crisis in 2012. To a lesser extent Italy, Spain and Portugal also are having a financial crisis, but not as bad as Greece.Greece is the country in southern Europe that is having the biggest financial crisis in 2012. To a lesser extent Italy, Spain and Portugal also are having a financial crisis, but not as bad as Greece.Greece is the country in southern Europe that is having the biggest financial crisis in 2012. To a lesser extent Italy, Spain and Portugal also are having a financial crisis, but not as bad as Greece.
What has the author Joon-Ho Hahm written?
Joon-Ho Hahm has written: 'Causes of the Korean financial crisis' -- subject(s): Economic policy, Financial crises, Economic conditions
What is the difference between a financial crisis and an economic crisis and which of both affects the other most?
A financial crisis is when wall street and the banks are failing. An economic crisis is when there is high unemployment or a recession.
What major event was happening when Obama was president?
This is probably the US financial and mortgage crisis.
How do you stop financial crisis?
There are a few ways to stop yourself from having a financial crisis. Watching your spending, budgeting your money correctly, and having money in a savings account, can help prevent a financial crisis.
