The Subprime Mortgage Crisis

Question: Discuss the impact of the financial crisis on financial institutions and businesses elsewhere including your own country. Answer: Possible causes of financial crisis: The following are the causes of the financial crisis: 1. Fall of the Lehman brothers: the collapse of the Lehman brothers shook the financial system of the world. The ensuing crunch of the credit led to the worst recession of the world. The effects of the crisis are still being felt and many European countries are still ripping through the economy of the world. 2. Failures in the credit rating and securitization: there were the failures in the credit rating and securitization that changed the bad mortgages into the toxic financial assets. The securitizers had lowered the credit quality and had termed these securities as the safe investments and the buyers failed to look and go behind the ratings and the go for their due diligence. The managers of the large and the mid-size financial institutions had a huge amount of highly correlated housing risks and this risk was amplified when they held the capital in relation with the risks and funded the exposures with the debt of the short term. They also assumed that the funds will always be available. But they both turned out to be the bad debts. (Bill Thomas and Holtz-Eakin, 2015 (economist, 2015) 3. Houses to money markets: the securities that were backed up by the mortgages had suffered a fall in the value, if they were valued at all. Soon, it became difficult to sell these assets at any price or to use them as the collateral for the short term funding so that the banks could rely on them. The sale prices increased and injured the capital markets of the banks to mark to market rules of accounting. 4. The central bankers and the other regulators mishandled the crisis by failing to keep up the imbalances in the economy in check and for failing to exercise the proper oversight of the institutions. 5. The Basel committee had not set up any rules for the share in the assets of the bank and that should be liquid. This failed to set up a mechanism so as to allow the huge international bank to go bust and caused the rest of the system to seize up Effects of the financial crisis on the banks: The banks in the developing countries had to suffer the major contractions in the lines of credit and had also reduced the flows of the capital. It was due to the failure of the leading financial institutions such as the IMF that led to the response to the Asian crisis during the second great recession. The IMF had also recommended that the fiscal policies of the different economics were also going into recession. It had failed to predict the crisis of the bank because of the reason of the currency crisis. The following is the table that shows the reduction in the jobs that occurred during the period of recession: Company Jobs cut Headcount before August 20077 Latest headcount8 Remarks PNC Financial Services 5,800 28,054 59,595 Feb. 3 Includes jobs from merger with National City Corp on Dec. 31; job cuts at the combined group due to be completed by 2011 Bank of America 45,500 195,675 243,075 Dec. 31 Includes 30,000-35,000 jobs to be cut over 3 years after the purchase of Merrill Lynch and 7,500 jobs to be cut over 2 years after Countrywide Financial Corp acquisition Barclays 9,050 127,700 150,000 Jan. 15 Includes 3,000 cuts after the acquisition of Lehman Brothers businesses Bear Stearns 1,500 N/A N/A Layoffs August 2007-April 2008, before takeover by JPMorgan Citigroup 75,000 361,000 323,000 Dec. 31 Commerzbank 9,000 35,384 42,983 Sept. 30 All layoffs announced after the acquisition of Dresdner Bank Credit Suisse 7,320 45,600 50,300 Sept. 30 Deutsche Bank 1,380 75,140 81,308 Sept. 30 Fidelity Investments 4,000 Unavailable 44,400 Nov. 12 Fidelity National 4,100 Unavailable Unavailable Financial Inc Includes 1,500 cuts after purchase of three title insurers in December 2008 First American 4,250 38,000 34,000 Oct. 309 Estimate Goldman Sachs 4,800 29,905 30,067 Nov. 28 HSBC 2,850 312,577 335,000 Aug. 4 ING Over 7,000 119,097 130,000 Jan. 27 JP Morgan 16,900 179,664 224,961 Dec. 31 Includes 7,600 cuts announced after purchase of Bear Stearns and 9,200 layoffs at former Washington Mutual Inc., bought by JP Morgan Lehman Brothers 12,570 N/A N/A Includes about 6,000 job cuts made before the bank collapsed in September and an estimated 10,500 left jobless after the bank collapsed about 8,000 others were transferred to Nomura and 10,000 to Barclays Merrill Lynch 3,300 61,900 N/A Layoffs before takeover by Bank of America closed on Jan. 1 Morgan Stanley 8,680 45,845 46,964 Nov. 30 National City Corp 7,400 32,445 N/A Layoffs before National City Corp merged with PNC on Dec. 31 Nomura 1,480 16,854 26,318 Dec. 31 Includes 1,000 jobs cut after acquisition of Lehman Brothers units Santander 2,600 135,922 170,961 Dec. 31 RBS 3,950 135,400 170,000 Nov. 14 Includes employees from ABN-AMRO, acquired in October 2007 UBS 11,000 81,557 77,783 Dec. 31 UniCredit 9,000 135,880 177,393 Sept. 30 Includes staff from Ukrsotsbank, acquired in January 2009 (ILO 2015) The main effects of the crisis were felt in the financial sector. The people were laid off from their jobs around the world and the economies had suffered strongly. The total number of layoffs were 325,000 between August 2007 and 12 February 2009. How the financial crisis affected the economies of different countries: There were many of the countries that derived low income and were vulnerable for the adverse impacts of the global financial crisis that took place. This was due to the following 2 reasons: 1. The global economies were mainly dependent upon the export of the commodities, the remittances, the assistance of the official development and security. These were hit by the global crisis and so were the economies of the countries. 2. The countries underwent the high poverty levels and the reason behind this was the weak institutions. Due to this weak institutions, the economies were unable to cope up with the crisis and were therefore, badly injured. (world Bank, 2015) 2. The United States was the country that was badly hit and the industries that were badly hit includes the banking, real estate and the industry of construction. Millions of the homes were available for sale but none of the people were there to buy them. This was the largest financial crisis in the recent years and the biggest recession from the time of the Great Recession. (Development Goals, 2015) The effects of the recession were felt across all the countries. The emerging Asia had performed better than the rest of the world but had suffered too. When it comes to the economic growth, the effects of the crisis were felt mainly in China, India, Indonesia, Philippines and Vietnam. To the contrary, the effects were also felt in Hong Kong, Korea, Malaysia, Singapore and Thailand. There were mainly 2 important channels during the times of the crisis and they were the global financial markets and the trade. (Federal reserve bank, 2015) References: Bill Thomas, and Holtz-Eakin, K. (2015). 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