Financial crises 2008 | full detail|

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2008 financial crises

During the time of financial crises 2008 more than 8.7 million people’s lost their job’s.

Key points

  1. Seed of financial crises
  2. Start of financial crises
  3. Financial crises
  4. Conclusion

Seed of financial crises

During the time of dot.com bubble burst investor’s lost their money in stock market. stock market go down .  for recover from this federal reserve take action and reduce the federal funds rate ( Rate charge on short term loan given by one bank to another bank ) from 6.5 percent to 1.75 percent . from 2000 to 2001 federal reserve changed federal funds rates fro 11 times. 

Federal reserve bank , the central bank of United States doing this for good because if more money in market then economy start growing again . just like federal reserve think people apply for loan and at that time House market is at peak .

When federal funds rates is low then  bank also reduce the intrest on loan . for this reason now people get loan in form of mortgage ( an Agreement between lender and borrower on purchased property ownership ) low interest rates . when loan available in low intrest rate then now people start applying for loans.  also those who have bad credit reputation get loan from banks ( Sub prime mortgages ) .

Share of Sub prime mortgages increase 2.5 percent to 15 percent from late 1990s to 2007 . people get loan from banks and buy House’s . also investor’s want to earn money but stock market is down after Dot com burst so they start investing in real estate . real estate growing from late 1990s and around 2005 housing bubble created in United States .

Bank’s wants to give more credits and for that they need liquidity. for liquidity they start creating bundle of CDO ( Collatralized debt obligation ) and sale it to investment banks and investor’s . investors buy this CDO and give liquidity to bank and bank now give more credits .

  CDO is risky all who invest in it know that . but when AIG ( USA biggest insurance company  ) release CDS ( credit default swap ) on CDO then investor’s start buying more CDO .

All this thing’s happen simultaneously . people get loan on low interest rates and investors earn money from real estate also banks earn money .

Start of financial crises

  During the time of 2004 to 2006 federal reserve increased federal funds rates from 1.5 to 5.25 percent .  and also in 2005 home price start falling.  now Sub prime mortgages holder refuce to pay repayment of loans .

Now situation changed completely , because the price of home is lower than loan taken by customer’s . and for that reason with Sub prime mortgages, prime mortgage holder also refuce to repayment of loans . now CDO have no value in market . ( If you have CDO than you get full loan amount and also intrest of it from borrower ) . why should investor’s invest in such things if borrower refuce to pay .

Chart show that fall of economy

Financial crises

Now situation is out of control . banks are lose their money and those investor’s who invested in real estate and CDOs they face losses. in April 2007 New century financial corporation ( largest subprime lender in USA) filled for bankruptcy . after few months american home mortgage investment corporation declared bankruptcy. 

Federal reserve wants to control situation that’s why they start reducing federal funds rates. but situation gone out of control banks lost all their liquidity and also major banks are gone bankrupt. Countrywide financial ( once the country leading mortgage lender ) purchased by bank of america in January 2008 for $4 Billion dollars and stock .

In March Bear stearns purchased by JP Morgan Chase . by the time of July fannie mae and Freddie Mac ( own half of CDOs in United States ) are collapsed . goverment want’s to maintain situation that’s why they seize them through housing and economic recovery act 2008 .  in 15 sep lehmann brothers also one of the biggest bank of USA filled bankruptcy.

Sep 16 2008 federal reserve took AIG ( american international groups ) , ( the insurance company that issue CDS for CDO ) with $85 Billion debt and equity funding . Sep 26, 2008 washington mutual wner bankrupt .

For contract all this situation and major collapse goverment release troubled assets relief program in 26 sep, 2008 with $700 Billion fund .

Effect of crisis

  The crisis was so Big that you get idea from this facts that at that time most of USA banks are bankrupt or purchased by big bank’s . around 8.7 Million people’s lose their job’s . $2 trillion loss from global economy and 3.8 million Americans lost their home .

World are gone in recession and Us economy almost collapsed . Us stock market go down and major investor face loss . unemployment rate reached 11% . whole world are

Conclusion

2008 financial crises are biggest financial crises after 1929 great depression . there is so many reasons behind it why this happen . banks and other institutions take more risk then their capabilities, housing bubble and also federal reserve low rate . also some main things like Sub prime mortgages holder default their repayment . so overall crisis happened because of all this thing’s .

 

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