Financial Crisis 2007-09 - Case Study Example

The Financial Meltdown What were the substantive causes of the 2007-2009 cataclysmic financial meltdown? The substantive cause ofthe 2007-2009 cataclysmic financial meltdown resulted from the boom in real estate prices. The crisis began with fall of subprime residential market in the U.S. Other causes include global financial imbalances, creation of riskier financial instruments and fall in interest rates.2. Any other factors exacerbating the financial collapse?The financial collapse was worsened by the financial institutions ability to use the loopholes existing in capital regulation.

Banks increased debt while maintaining their capital requirements. This was made possible by moving assets into special vehicles, which would be used to invest in risky assets. Other factors include surge in subprime mortgages as an answer to high housing speculation and growth of the bubble.3. Who were the key dudes/culprits? How did they contribute to the mess?The main culprits were lenders, because they were responsible for lending funds without taking into consideration the risk of defaulting.

After the central bank lowered interest rates and flooded the market with cash. The lenders, like investors, had ample capital to lend, and more willingness to undertake extra risk to increase their returns. The financial crisis commenced in the US and spread throughout the world.4. Any key events from which we [should have] learned something?The failure of Lehman Brothers teaches us the importance of risk management because this institution had invested in risky securities loosing much value after the U.

S housing bubbles. In addition, the crisis teaches us that it is important to retain the confidence of the financial market because once shattered, it becomes difficult to restore. When such confidence is shattered, it can lead to a full-blown confidence crisis in the entire word.5. How did it all happen?The housing bubble resulted from the enormous savings from developed countries, and the low interest rates that existed in the U.S. Due to the available funds, there was demand for high-yielding investments leading to the housing bubble.

Some small banks in the US reduced lending; therefore, governments and consumers could no longer borrow and spend before the crisis. Businesses also had to reduce their workforce because the recession meant less funds. The credit crunch deepened as the losses increased rapidly.6. What are the four key changes that should be made in the risk management process as a direct result of the meltdown?After the meltdown, a number of risk management procedures should be implemented. These includea) Regulation of the credit rating agencyb) Regulation of over-the –counter derivativesc) Securing retention requirementsd) Forming bureau for consumer financial protectionReferencesLA BELLA, L. (2010). World financial meltdown.

New York, NY, Rosen Central.