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In the light of the turbulence that the US financial system has seen since August 2007, it is no longer hyperbole to say that the crisis has a life of its own. It is unfolding faster than many had expected and the recovery is not likely to be rapid
given the size of the problem. |
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The US credit crisis unfolded in earnest in July last year when the investment bank Bear Stearns declared that two of its hedge funds lost billions of dollars because of risky bets during the housing boom. The Federal Reserve immediately invoked a decades-old procedure to rescue Bear Stearns with a relief package. It did this in order to prevent a systemic crisis.
The rescue package orchestrated for America's fifth-biggest investment bank clarified that the crisis is altogether of a different kind since the depression of the 1930s. Like the Northern Rock in the UK, it was exposed to losses due to subprime meltdown in the American real estate market. The failure of the two institutions would have had a domino effect and might have led to a serious erosion of investor confidence had the Fed not acted timely.
Besides Bears Stearns, other major banks which reported losses include HSBC, Citibank, UBS, Merrill Lynch, etc. |
All these have admitted to significant losses owing to their subprime portfolios. The heads at all the leading banks had to grapple with the liquidity crisis and a probe into their accounting practices as the losses on complex financial instruments linked to mortgages and corporate loans ballooned.
With falling home prices and the growing number of foreclosures, investors were not paid their promised rates of return. The trouble soon spread to other mortgages and investors worried about all types of mortgages. Standard & Poor's estimated that the total losses due to subprime meltdown could reach $285 bn. The losses may even exceed $400 bn by the time more bad news is on the horizon.
Growing credit losses and delinquencies have caused banks to tighten credit standards, where even the borrowers with good credit histories struggled to secure a loan
Buy the Full Article (1100 Words Approx) for: 1.50 USD |
Title: Subprime Loans
Article Code: IPEB0197
Price: 1.5$ (US Dollar) |
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From: Professional Bankers,
Sep 2008, Icfai University Press |
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