In 1999 The US government passed the "Gramm Leach Bililey Financial Modernisation Act" which had replaced the "Glass Stegall Act 1933" and also broke the boundaries between investment banks, commercial banks and insurance companies. This act directly led to the 2007 Crisis. The most common assumption was that housing prices will always rise and never fall.
(2) Big investment banks see the oppurtunity and they are loaded with tons of leverage:- Here comes the oppurtunity for the big investment banks. They load themselves with tons of leverage and are ready to invest.
(3) They buy the Mortgage Papers from the commercial banks and then turn them to fancy CDO's(collateral debt oblligation):- The big Investment banks buy the mortgage papers andf turn them to the CDO's.
(4) Return hungury investors like Pension Funds buy the safe slices of the CDO's: Now come the hungury investors which are not risk taking. They take the safest slices which provide low intrest rates.
(5) OK and Risky slices are sold to more risk taking players:- The Ok slices are being sold to the average risk taking players while the risky slices are sold to therisk taking players. The risk taking players are given hingh intrest rates wihich exicte them to invest more and more.
(6) Its a Fantastic system. So everybody wants more:- The system works well so everybody wants more and the greed aks to invest more. Then the buble starts exanding and gets ready to be bursted.
(7) Hence subprime lending now starts(turning point):- Now starts the greed of the bankers. They start giving loan to the sub prime lenders. Their incapability to pay loans leads to the crisis.This considered to be the turning point and the crisis starts to build.
(8) Finally as loan takers(home buyers) start defaulting, those homes are re-posed abd are up for sale in open market. So liquidity risk begins:-
(9) As inventory piles up prices start dropping. The bubble is burst!:- Here starts the drop in house prices.The most common assumption fails which says that the prices of house never fall. But this seemed opposite this time.
(10) Many big names like Lehman Brothers, Wachovia, Washington Mutual go bankrupt, panic spread:- The Big Companies start to suffer credit defaults.
(11) Credit to normal business starts to suffer:- Now after the default their starts the default crisis and the normal business starts of suffer.Hence the credit crisis starts.
12)Because the CDO's were sold globally panic spreads globally, Iceland goes bankrupt:- The CDO's were globally sold and among them the biggest one to suffer was Iceland. Luckily ICICI from India had
(13) Both Freddie Mac and Fannie Mae need bail outs:- The bailouts to Freddie Mac and Fannie was kept the US Financial Market functioning. It was the largest bailout in th history of US. In February the tax payers were awarded with a profit of $ 7 bn as Freddie and Fannie paid back with interest to the government.
(14) The TARP(Troubled Assets Relief Program is started. It was a program to purchase the assets and equity from financial institutions to strengthen its financial sector. It gave the Treasoury purchasing power of $ 700 billion to buy illiquid mortgage securities and other assets from key institutions.
(15) US government starts fiscal stimulus programs:- It was an attempt by the government to boost the economic growth and lead the economy out of the recession and slowdown. The main aim was to instill confidence to restore economic growth. The $ 787 billion was approved by Congress in February 2009. Its main goal was to 0.9-2.3 billion jobs. It was a very successful attempt by the US government.
(16) Federal Reserve starts QE(Quantitative Easing) to end the recession:- After six years The US Federal Reserve has finally called time on its $4.5 tn bond buying program. After finding substantial growth in the labour market, The Fed finds brings QE to an end. The Fed has begam to slow its purchase of Treasury bonds and Mortgage backed securities from January.
Step wise analysis of the crisis:-
(1) Home buyers take the loan from commercial banks, brokers gets the deal done:- The primary lenders start taking loans from the banks. These homes are the collateral assets Mortgage papers remain with the commercial banks.(2) Big investment banks see the oppurtunity and they are loaded with tons of leverage:- Here comes the oppurtunity for the big investment banks. They load themselves with tons of leverage and are ready to invest.
(3) They buy the Mortgage Papers from the commercial banks and then turn them to fancy CDO's(collateral debt oblligation):- The big Investment banks buy the mortgage papers andf turn them to the CDO's.
(4) Return hungury investors like Pension Funds buy the safe slices of the CDO's: Now come the hungury investors which are not risk taking. They take the safest slices which provide low intrest rates.
(5) OK and Risky slices are sold to more risk taking players:- The Ok slices are being sold to the average risk taking players while the risky slices are sold to therisk taking players. The risk taking players are given hingh intrest rates wihich exicte them to invest more and more.
(6) Its a Fantastic system. So everybody wants more:- The system works well so everybody wants more and the greed aks to invest more. Then the buble starts exanding and gets ready to be bursted.
(7) Hence subprime lending now starts(turning point):- Now starts the greed of the bankers. They start giving loan to the sub prime lenders. Their incapability to pay loans leads to the crisis.This considered to be the turning point and the crisis starts to build.
(8) Finally as loan takers(home buyers) start defaulting, those homes are re-posed abd are up for sale in open market. So liquidity risk begins:-
(9) As inventory piles up prices start dropping. The bubble is burst!:- Here starts the drop in house prices.The most common assumption fails which says that the prices of house never fall. But this seemed opposite this time.
(10) Many big names like Lehman Brothers, Wachovia, Washington Mutual go bankrupt, panic spread:- The Big Companies start to suffer credit defaults.
(11) Credit to normal business starts to suffer:- Now after the default their starts the default crisis and the normal business starts of suffer.Hence the credit crisis starts.
12)Because the CDO's were sold globally panic spreads globally, Iceland goes bankrupt:- The CDO's were globally sold and among them the biggest one to suffer was Iceland. Luckily ICICI from India had
(13) Both Freddie Mac and Fannie Mae need bail outs:- The bailouts to Freddie Mac and Fannie was kept the US Financial Market functioning. It was the largest bailout in th history of US. In February the tax payers were awarded with a profit of $ 7 bn as Freddie and Fannie paid back with interest to the government.
(14) The TARP(Troubled Assets Relief Program is started. It was a program to purchase the assets and equity from financial institutions to strengthen its financial sector. It gave the Treasoury purchasing power of $ 700 billion to buy illiquid mortgage securities and other assets from key institutions.
(15) US government starts fiscal stimulus programs:- It was an attempt by the government to boost the economic growth and lead the economy out of the recession and slowdown. The main aim was to instill confidence to restore economic growth. The $ 787 billion was approved by Congress in February 2009. Its main goal was to 0.9-2.3 billion jobs. It was a very successful attempt by the US government.
(16) Federal Reserve starts QE(Quantitative Easing) to end the recession:- After six years The US Federal Reserve has finally called time on its $4.5 tn bond buying program. After finding substantial growth in the labour market, The Fed finds brings QE to an end. The Fed has begam to slow its purchase of Treasury bonds and Mortgage backed securities from January.