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Financial Crisis 2007-08

The term financial crises is broadly used for many things means if there is great
loss happen than its called financial crisis but its mainly related to banking panics.
Other situations in which we often use this term is in stock market crashes.
The financial crisis of 2007-2009 has been called the most serious financial crisis
since the great depression of 1930 by leading economists, with its global effects
characterized by the failure of key businesses declines in consumer wealth
estimated in the trillions of U.S dollars, substantial financial commitments incurred
by governments, and a significant decline in economic activity.
Pakistan certainly has not been immune to the contagion from this crisis.
Causes of the crisis:
Following could be considered as the causes of the global crisis 2007-08:Market instability:
It is the major cause of the crisis, due to the dramatic change in the ability to create
new lines of credit dried up the flow of money and slowed new economic growth
and the buying and selling of assets. This hurt individuals, businesses, and
financial institutions hard, and many financial institutions were left holding
mortgage backed assets that had dropped precipitously in value and weren’t
bringing in the amount of money needed to pay for the loans.
Malpractices in Capital Market:
Fundamental mispricing in the capital markets is being recorded during the era of
crisis that creates the situation of crisis in all over the world.
Mistakes by the Banks:
Mistakes made by the Fed and the others banks by keeping the federal funds rate
too low for too long created bubble and housing bubble. In other words, with
artificial low fed funds target, banks filled themselves on cheap funding and made
cheap loans available.

negative amortization. Defaults in Interest Payments: With defaults in interest payments and simultaneously in the Abs. Dried Up Credit: These massive losses caused many banks to tighten their lending requirements.Disparity of Loans: There has been great disparity in the quantity and quality of loans in the recent years. assets. prices drop drastically. . Quality of Loans: In terms of quality. The worst of the lot or the unlucky ones crashed. Moreover loans that were issued were mainly given to finance leveraged buyouts.” Poor Underwriting Standards: The failure to control poor underwriting standards in the mortgage markets means no down payment. Over the same period average debt leverage ratios grew rapidly to levels never seen previously. but it was already too late for many of them… the damage had already been done. leading to a huge loss of wealth severity of the crisis. near. interest only mortgages. Exotic and risky mortgages became commonplace and the brokers who approved these loans absolved themselves of responsibility by packaging these bad mortgages with other mortgages and reselling them as “investments. and jobs. In terms of quantity. Several banks and financial institutions merged with other institutions or were simply bought out. there was also a general increase in non documentation and high loan-to-value subprime mortgages. Others were lucky enough to receive a government bailout and are still and even prime mortgages. no verification of income. and teaser rates were widespread among subprime. there was an increase in low-rated issuances of shares from 2004-2007.

albeit imperfectly. politicians from both sides of the aisle have effectively blackmailed banks into providing loans to un-creditworthy borrowers. with the introduction and proliferation of securitization. . and Moody's hadn't classified subprime securities as investment grade.Greed: Homeowners wanted to get rich quick by flipping real estate. as the ratings agencies were paid by issuers to rate the securities. Because the originating bank doesn't hold securitized loans. to underwrite loans that had only a small chance of defaulting. Ratings Agencies: The financial crisis couldn't have happened if the three ratings agencies: Standard & Poor's. Bankers were paid absurd amounts of money to securitize toxic subprime mortgages. Politics: Since the 1980s. Securitization of loans: Banks traditionally retained most of the loans that they originated. By conditioning the approval of bank mergers on the Community Reinvestment Act. Part of it stemmed from a conflict of interest. That approach went by the wayside. Regulators were focused on getting a bigger paycheck in the private sector. legal and otherwise. there is less incentive to closely monitor the quality of underwriting standards. And politicians sought to gain popularity by forcing banks to lend money to their un-creditworthy constituents. Doing so gave lenders incentive. Rating agencies raked in profits by classifying otherwise toxic securities as investment-grade. Mortgage originators went to great lengths. Part of this was incompetence. however. Home appraisers did the same. to maximize loan volumes. bankers and politicians have formed an uneasy alliance. Fitch.

 Increasing unemployment (50 million jobs lost this year according to the International Labour Organisation). The inflation rose to a record high and the impact of financial crisis on the global economy resulted in the loss of thousands of jobs and closure of many organizations. Impact of Financial Crisis 2007-09 on the Housing Market: The financial crisis was not limited to one industry or market but spread like a fire in the global economy. falling tax revenues and reduction of fiscal space  Contract action of world trade  Increasing volatility and falling prices for primary commodities  Declining remittances to developing countries  Sharply reduced revenues from tourism  Massive reversal of private capital flows  Reduced access to credit and trade financing  Reduced public confidence in financing institutions  Reduced ability to maintain social safety nets and provide other social services. Impact of Financial Crisis 2007-09 on Banks: .Consequences of Financial Crisis: The crisis has produced or exacerbated serious. such as health and education  Increased infant and maternal mortality  Collapse of housing markets  Debt levels of man developing countries are over 150% of GDP. poverty and hunger  Deceleration of growth. economic contraction  Negative effects on trade balances and balance of payments  Dwindling levels of foreign direct investment (a fall of 54% in the first quarter of 2009 according to UNCTAD)  Large and volatile movements in exchange rates  Growing budget deficits. wide-ranging yet differentiated impacts across the globe. The housing industry too suffered a great deal as the prices of houses fell for eighteen months.

Germany.The impact of the financial crisis of 2007-09 on the banks was severe. . The banks in the biggest economy of Europe. had offered the sub-prime mortgages just like the banks in US did and so the consequences were quite similar. The number of banks collapsing after the financial crisis of 2007-09 has been increasing all over the world. The people were unable to pay back the sub-prime loans leading the economy into recession.