scholarly journals Miraculous Financial Engineering or Toxic Finance? The Genesis of the U.S. Subprime Mortgage Loans Crisis and its Consequences on the Global Financial Markets and Real Economy

2008 ◽  
Author(s):  
Ivo Pezzuto
Keyword(s):  
Financial Markets ◽  
Financial Engineering ◽  
Real Economy ◽  
Mortgage Loans ◽  
Subprime Mortgage ◽  
The U.S

scholarly journals Miraculous financial engineering or toxic finance? The genesis of the U.S. subprime mortgage loans crisis and its consequences on the global financial markets and real economy.

2012 ◽  
Vol 1 (3) ◽  
pp. 114-125 ◽  
Author(s):  
Ivo Pezzuto
Keyword(s):  
Credit Risk ◽  
Financial Markets ◽  
Interest Rates ◽  
Housing Prices ◽  
The United States ◽  
Central Banks ◽  
Economic Damage ◽  
Mortgage Loans ◽  
Subprime Mortgage ◽  
The U.S

In the fall of 2008, the U.S. subprime mortgage loans defaults have turned into Wall Street’s biggest crisis since the Great Depression. As hundreds of billions in mortgage-related investments went bad, banks became suspicious of one another’s potential undisclosed credit losses and preferred to reduce their exposure in the interbank markets, thus causing interbank interest rates and credit default swaps increases, a liquidity shortage problem and a worsened credit crunch condition to consumers and businesses. Massive cash injections into money markets and interest rates reductions have been assured by central banks in an attempt to shore up banks and to restore confidence within the financial system. Even Governments have promoted bail-out deal agreements, protections from bankruptcies, recapitalizations and bank nationalizations in order to rescue banks from disastrous bankruptcies. The credit crisis originated in the previous years when the Federal Reserve sharply lowered interest rates (Fed Funds at 1%) to limit the economic damage of the stock market decline due to the 2000 dot.com companies’ crisis. Lower interest rates made mortgage payments cheaper, and the demand for homes began to rise, sending prices up. In addition, millions of homeowners took advantage of the rate drop to refinance their existing mortgages. As the industry ramped up, the quality of the mortgages went down due to poor credit origination and credit risk assessment. Delinquency and default rates began to rise in 2006 as interest rates rose (Fed Funds at 5,25%) and poor households across the US struggled to pay off their mortgages. Many of them went bankrupt and lost their homes but the pace of lending did not slow. Banks have transformed much of the high-risk mortgage debt (securitizations) into mortgage-backed securities (MBS) and collateralised debt obligations (CDO), and have sold these assets on the financial markets to investment firms and insurance companies around the world, transferring to these investors the rights to the mortgage payments and the related credit risk. With the collapse of the first banks and hedge funds in 2007 the rising number of foreclosures helped speed the fall of housing prices, and the number of prime mortgages in default began to increase. As many CDO products were held on a “mark to market” basis, the paralysis in the credit markets and the collapse of liquidity in these products let to the dramatic write-downs in 2007. When stock markets in the United States, Europe and Asia continued to plunge, leading central banks took the drastic step of a coordinated cut in interest rates and Governments coordinated actions that included taking equity stakes in major banks. This paper written by the Author (on October 7th, 2008) at the rise of these dramatic events, aims to demonstrate, through solid and fact-based assumptions, that this dramatic global financial crisis could have been addressed and managed earlier and better by many of the stakeholders involved in the subprime mortgage lending process such as, banks’ and investment funds management, rating agencies, banking and financial markets supervisory authorities. It also unfortunately demonstrates the corporate social responsibility failure and the moral hazard of many key players involved in this crisis, since a lot of them probably knew quite well what was happening but have preferred not to do anything or to do little and late in order to change the dramatic course of the events.

scholarly journals “EVALUATE THE EFFECT OF GLOBAL RECESSION ON LEADING AGRICULTURE, MANUFACTURING AS WELL AS SERVICE SECTORS OF INDIA"

2020 ◽  
Vol 3 (2) ◽  
pp. 125-131
Author(s):  
Salman Shaikh
Keyword(s):  
Financial Markets ◽  
United States Of America ◽  
Service Sector ◽  
Investment Bank ◽  
Subprime Mortgage ◽  
Global Recession ◽  
Lehman Brothers ◽  
Service Sectors ◽  
The U.S ◽  
The Web

In today’s era all the countries are interlinked with the web of globalization. Which means a small jerk in the foreign country leads to the great impact on the domestic country. The same incident happened in the history; better known as global crisis of United States of America. The crisis On Sept. 15, 2008, Lehman Brothers filed for bankruptcy. With $639 billion in assets and $619 billion in debt, Lehman's bankruptcy filing was the largest in history, as its assets far surpassed those of previous bankrupt giants such as WorldCom and Enron. Lehman was the fourth-largest U.S. investment bank at the time of its collapse, with 25,000 employees worldwide. Lehman's demise also made it the largest victim of the U.S. subprime-mortgage-induced financial crisis that swept through global financial markets in 2008. Lehman's collapse was a seminal event that greatly intensified the 2008 crisis and contributed to the erosion of close to $10 trillion in market capitalization from global equity markets in October 2008 – the biggest monthly decline on record at the time. In this paper an attempt is made to represent India being a part of globalization experienced what kind of impact on its manufacturing, agriculture and service sector.

scholarly journals The financial crisis and securitization

2020 ◽  
Vol 1 (1) ◽  
pp. 37-48
Author(s):  
Ewa Szabłowska
Keyword(s):  
Financial Crisis ◽  
Financial Markets ◽  
Financial Market ◽  
Subprime Crisis ◽  
Subprime Mortgage ◽  
Mortgage Crisis ◽  
Indirect Impact ◽  
The Impact ◽  
Near Future ◽  
The U.S

Securitization means the change of non-liquid assets into securities. This topic has become more popular, mainly due to the U.S. subprime mortgage crisis. In this article, an analysis is given of the current situation in financial markets and the changes, which were implemented from the first days of subprime crisis. Also mentioned is the impact the crisis has had on securitization development. Part of the article is devoted to the situation on the Polish financial market. It is quite a new market and it is susceptible to such crises. The Article presents the part played by securitization in the Polish financial market and the circumstances for its growth in the near future. It also covers the latest information related to financial market regulations, which could have direct or indirect impact on the quantity and value of securitization transactions.

scholarly journals The Subprime Mortgage Lending Collapse: Should We Have Seen It Coming?

2011 ◽  
Vol 6 (12) ◽  
Author(s):  
Jared E. Hojnacki ◽  
Richard A. Shick
Keyword(s):  
Financial Markets ◽  
Financial Institutions ◽  
Mortgage Lending ◽  
Housing Values ◽  
Current Crisis ◽  
Rescue Operation ◽  
Subprime Mortgage ◽  
The Great Depression ◽  
Mortgage Crisis ◽  
The U.S

The subprime mortgage lending crisis and the decline in housing values has profoundly affected the worlds’ financial markets.  Financial institutions have ceased to exist, others have come under the U.S. government’s control, the future survival of others has been threatened and the U.S. government is proposing the greatest financial rescue operation since the Great Depression.  Profound changes in the financial markets have occurred and the markets will never be quite the same again.  This paper presents the argument that this collapse should have been foreseen by tracing and comparing the development and decline in the subprime auto lending market in the 1990’s to the development and decline of the subprime mortgage lending market.   While the effects of the subprime mortgage crisis are greater and farther reaching than those of the subprime auto lending market, there is no question that the similarities are plain to be seen and that the current crisis should come as no surprise.

scholarly journals Why the Community Reinvestment Act Cannot be Blamed for the Subprime Crisis

2009 ◽  
Vol 8 (3) ◽  
pp. 346-350 ◽  
Author(s):  
Manuel B. Aalbers
Keyword(s):  
Global Financial Crisis ◽  
Community Reinvestment Act ◽  
Subprime Crisis ◽  
Mortgage Loans ◽  
Subprime Mortgage ◽  
Community Reinvestment ◽  
Foreclosure Crisis ◽  
Conservative Media ◽  
The Global Financial Crisis ◽  
The U.S

It has  become common practice—and in particular, but not exclusively, in conservative media—to blame the Community Reinvestment Act (CRA) of 1977 for the U.S. subprime mortgage and foreclosure crisis that triggered the global financial crisis. It is argued that the CRA forced lenders to give mortgage loans to high–risk borrowers. This is nonsense for at least five reasons.

scholarly journals Predictable and avoidable: What’s next?

2014 ◽  
Vol 3 (3) ◽  
pp. 134-150 ◽  
Author(s):  
Ivo Pezzuto
Keyword(s):  
Risk Management ◽  
Financial Crisis ◽  
Financial Markets ◽  
Financial Stability ◽  
Financial Regulation ◽  
Debt Crisis ◽  
Mortgage Loans ◽  
Private Debt ◽  
Subprime Mortgage ◽  
Working Paper

The author of this paper (Dr. Ivo Pezzuto) has been one of the first authors to write back in 2008 about the alleged "subprime mortgage loans fraud" which has triggered the 2008 financial crisis, in combination with multiple other complex, highly interrelated, and concurrent factors. The author has been also one of the first authors to report in that same working paper of 2008 (available on SSRN and titled "Miraculous Financial Engineering or Toxic Finance? The Genesis of the U.S. Subprime Mortgage Loans Crisis and its Consequences on the Global Financial Markets and Real Economy") the high probability of a Eurozone debt crisis, due to a number of unsolved structural macroeconomic problems, the lack of a single crisis resolution scheme, current account imbalances, and in some countries, housing bubbles/high private debt. In the book published in 2013 and titled "Predictable and Avoidable: Repairing Economic Dislocation and Preventing the Recurrence of Crisis", Dr. Ivo Pezzuto has exposed the root causes of the financial crisis in order to enables readers to understand that the crisis we have seen was predictable and should have been avoidable, and that a recurrence can be avoided, if lessons are learned and the right action taken. Almost one year after the publication of the book "Predictable and Avoidable: Repairing Economic Dislocation and Preventing the Recurrence of Crisis", the author has decided to write this working paper to explore what happened in the meantime to the financial markets and to the financial regulation implementation. Most of all, the author with this working paper aims to provide an updated analysis as strategist and scenario analyst on the topics addressed in the book "Predictable and Avoidable" based on a forward-looking perspective and on potential "tail risk" scenarios. The topics reported in this paper relate to financial crises; Government policy; financial regulation; corporate governance; credit risk management; financial risk management; economic policy; Euro Zone debt crisis; the "Great Recession"; business ethics; sociology, finance and financial markets. This paper aims to contribute to the debate about the change needed in the banking and finance industries and to supervisory frameworks, in order to enhance regulatory mechanisms and to improve global financial stability and sustainability.

U.S. Financial Markets Growth and the Real Economy

2013 ◽  
Author(s):  
Claire Y. C. Liang ◽  
David McLean ◽  
Mengxin Zhao
Keyword(s):  
Financial Markets ◽  
Real Economy ◽  
The Real

scholarly journals Profit and Risk under Subprime Mortgage Securitization

2011 ◽  
Vol 2011 ◽  
pp. 1-64 ◽  
Author(s):  
M. A. Petersen ◽  
J. Mukuddem-Petersen ◽  
B. De Waal ◽  
M. C. Senosi ◽  
S. Thomas
Keyword(s):  
Risk Mitigation ◽  
Collateralized Debt Obligations ◽  
Mortgage Loans ◽  
Main Hypothesis ◽  
Subprime Mortgage ◽  
Important Indicator ◽  
Residential Mortgage ◽  
Maturity Mismatch ◽  
Mortgage Securitization ◽  
Collateralized Debt

We investigate the securitization of subprime residential mortgage loans into structured products such as subprime residential mortgage-backed securities (RMBSs) and collateralized debt obligations (CDOs). Our deliberations focus on profit and risk in a discrete-time framework as they are related to RMBSs and RMBS CDOs. In this regard, profit is known to be an important indicator of financial health. With regard to risk, we discuss credit (including counterparty and default), market (including interest rate, price, and liquidity), operational (including house appraisal, valuation, and compensation), tranching (including maturity mismatch and synthetic) and systemic (including maturity transformation) risks. Also, we consider certain aspects of Basel regulation when securitization is taken into account. The main hypothesis of this paper is that the SMC was mainly caused by the intricacy and design of subprime mortgage securitization that led to information (asymmetry, contagion, inefficiency, and loss) problems, valuation opaqueness and ineffective risk mitigation. The aforementioned hypothesis is verified in a theoretical- and numerical-quantitative context and is illustrated via several examples.

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