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International Business Analysis. Financial Crisis of 2007-2010. Bankruptcy of Lehman Brothers - Essay Example

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In the year 2007, numerous banks both in Europe and in the United States (US) witnessed a sharp decline with regard to their respective securities which were mortgage-backed in nature. The banks themselves were supposed to be in charge for packaging the specified category of securities…
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International Business Analysis. Financial Crisis of 2007-2010. Bankruptcy of Lehman Brothers
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Download file to see previous pages These particular securities which were considered as poisonous resulted in making up a substantial fraction of their individual final asset base. The non-payments related to such securities promoted a significant credit crisis as every individual financial institution accumulated cash and called for the requirement for increasingly enlarged payments prior to lending it to others. The investment brokerages along with the banks situated in Wall Street rapidly lost capital of amounting to around US$175 billion between the time periods ranging from the year 2007 to the year 2008. Many large and sound financial institutions had to be rescued with the aid of huge amount of guarantees that were obtained from Federal Reserve. Numerous of the remaining ones ensured their continued existence with the help of selling large portions of their preferred stock along with assured best return rates, towards a sequence ‘sovereign funds’ that were believed to be possessed by the respective governments of Singapore, China, Abu Dhabi and South Korea among the rest (Blackburn, 2008).The financial institutions especially the banks suffered grave financial crisis owing to the apparent deeply faulty management in relation to the systematic risk. A quite significant part related to this particular issue was identified to be the fact that the central as well as a few of the prominent financial institutions made use of a obscure secondary form of banking system in order to conceal a great deal of their respective exposure. Renowned institutions such as Merrill Lynch, Barclays Capital, Citigroup, Deutsche Bank along with Hong Kong and Shanghai Banking Corporation (HSBC) were known to get engaged in huge amount of debt or due balances and as a result provided loans by employing the funds of other individuals in opposition to inadequately poor kind of collateral (The Chancellor of the Exchequer, 2009). The triggering factor behind the credit crisis was measured to be the growing payment failures among the people of the US who were believed to be in possession of the subprime mortgages during the previous quarter of the year 2006 and in the beginning of the year 2007 (Jaffee, 2008). The increasing rate of failure to make payments against the held mortgages by the individuals was identified to be the rise made with respect to the interest rates for the reason of defending the declining value of dollar. This particular scenario or condition resulted in the breakdown of numerous big and sound mortgage brokers between the months of February to March in the year 2007, however the real possibility of the issue only started to get recorded in the later periods. Fascinatingly, the initial bank that registered an issue in this regard was the Deutsche Bank who was learnt to be compelled to provide guarantee for two funds in the month of July’ 2007 that were supposed to be property-based (The Chancellor of the Exchequer, 2009). To sum up, the essential aspect that was realised regarding the financial crunch relates to the comprehension that across the globe, certain issues failed to be adequately well understood. The international standards pertaining to regulation along with the international agreement with regard to risk remained unsuccessful to carry on with the notion of financial innovation as well as globalisation. This definite mentioned aspect did not ...Download file to see next pagesRead More
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