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FINANCIAL CRISIS, HOME MORTGAGES, CREDIT MARKETS, FINANCIAL INSTITUTIONS, MORAL HAZARD, ADVERSE SELECTIONS, - Assignment Example

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This borrowing was unsustainable, mainly because the housing industry was experiencing some unsustainable wages, and there was a high level of consumer…
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FINANCIAL CRISIS, HOME MORTGAGES, CREDIT MARKETS, FINANCIAL INSTITUTIONS, MORAL HAZARD, ADVERSE SELECTIONS,
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Download file to see previous pages Majority of the subprime borrowers were caught unawares, and they were unable to pay off their monthly payments (Bliss, 2010). Furthermore, a rise in foreclosures initiated by financial institutions was able to increase the number of houses within the market. This led to a decline in the housing prices, leading to an increase in thee defaults of mortgages.
This default had an adverse effect on financial and depository institutions such as banking organizations. Because subprime borrowers were unable to pay off their loans, banking institutions were forced to write off their debts. Furthermore, because of the defaults of sub-prime borrowers, depository financial institutions were forced to issue a margin call (Read, 2009). This led to an increase in the sale of mortgage backed securities, because of panic. Financial institutions increased their rates of margin calls, resulting to a series of defaults, eventually leading to catastrophic losses by banking organizations. It is estimated that financial institutions in the United States were able to loss approximately 1 trillion dollars, because of the effects of this financial crisis. A company such as AIG insurance was nearly collapsing, and it required a bail out from the US government, in order to sustain its businesses (Read, 2009).
AIG insurance was able to receive approximately 85 billion dollars from the federal government, in exchange of 80% of its equity (Bliss, 2010). Jones (2010) explains that one of the factors that led to the near collapse of AIG was an aspect referred to as financial innovation. This is specifically at its London offices. This division encouraged for the use of a financial tool referred to as collateralized debt obligation (CDOs). This was an example of a financial innovation, and it was very popular amongst large financial institutions. This included banking organizations that issue out mortgages, investment banks, and other financial ...Download file to see next pagesRead More
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