Finance and Accounting Job - Essay Example

Finance and Accounting Job Part I Summary of the Subprime Mortgage Crisis Subprime mortgage crisis as occurred in the year 2007 to 2009 was one of the major banking emergencies that coincided with the recession that the economy was going through at the time. The decline in the mortgage instigated by the drop in home prices led to a number of houses becoming devalued. Many of the securities lost their grounds and foreclosures followed. The recession followed by a decline in the residential investments, that occurred after the recession. These tough economic times led to the limitations in household spending and the different business investments. Many of the people reduced their household expenditures and used much debt in financing their needs limiting their debt facilities for housing. These affected the prices of housing that influenced the subprime mortgage crisis. The crisis was also associated with many defaults on the debt obligations of the people and their involvement with mortgage aspects. Considering the mortgage-backed securities and the different collateral obligations imposed on the debt, the credit quality went low affecting the general applications hence affecting the mortgage aspects. The elements of the crisis developed slowly and became more evident in 2007 followed by a major collapse in financial institutions in the following year. These effects affected the credit industry and the customers realized challenges in applying for credit facilities. The different causes of the crisis covered a wide scope with much of it based on the poor regulatory effects and the credit agencies conduct of the business, financial institutions and their irregular operations. The different housing policies that the government applied stood central to the decline and challenges in the economic times leading to the mortgage crisis. Among all these, subprime lending was proximate to the crisis as a cause. The rise in percentages in quality of these subprime mortgages with massive increases led to the difficult economic times in the mortgage industry. The risks in the field played a role in the escalation of the crisis. The many people involved in the mortgage business suffered higher risks that led to higher default rates that were all characteristics of the mortgage crisis. The decline in disposable income also played a role in leading to the crisis. The above-developed reasons among others played a role in developing the mortgage crisis that affected the filed in 2007. Considering the effects that the crisis had on the economy of the European economies and the US, one understands the reason of the more cautious consumers that sparingly consider their spending habits and their needs during shopping. More cautious measures introduced to limit the risks in the field and ensure that the risks available are taken care of or provided for as a way of ensuring that the companies do not suffer much effect in case of a recurrence of the events. Severe unemployment effects, banking impairments and below pre-crisis levels economic development all covered the remainder of the period. Role Played By Each Party in the Subprime Mortgage Crisis The subprime mortgage crisis was a result of actions of a number of players in the mortgage field that range from the mortgage companies/brokers, subprime borrowers, the money center banks, the different investment banks, mortgage credit insurers, credit rating agencies and the different investors. Mortgage companies/brokers The mortgage brokers followed economic indications that proved misleading and continued issuing the mortgage facilities to the customers despite the huge risks of default that had indicated. These played a role in guiding the subprime mortgage crisis. Subprime borrowers The challenges and risks associated with subprime borrowers played a role in leading to the weakened credit effects and reduced repayment capacities. The risks include the risks of default that remain of a high percentage in the subprime loans field. In foreclosures, payments that people make in these loans leave them owning the homes. An estimate of over $1.3 trillion during March 2007 with a huge percentage relating to 7.5 million outstanding on the subprime mortgages indicates a dangerous economic trend. Non-bank independent facilities for mortgage have played a role in increasing the mortgage aspect with over 50%. These effects played a major role in leading to the subprime mortgage crisis that occurred during that time. Money center banks These banks increased their funding of government activities in relation to funding their intentions in mortgage effects playing a role in the subprime crisis in the mortgage sector. Investment bankers Investment bankers encouraged homeowners to continue building more homes despite the signs of a crisis. These contributed to the increasing effect that the crisis caused. The investment bankers guided their clients into wrong decisions that affected their financial aspects leading to a contributive factor to the subprime mortgage crisis. Mortgage credit insurers (Freddie Mac, Fannie Mae, and Ginnie Mae) These deal with the purchase and trade of mortgage securities. These under pressure during the time purchased higher risk mortgage facilities considering the competition from the different investment banks and the different lenders of mortgage (The Economist). These actions explain the contributive effect of Fannie and Freddie to the financial crisis. Credit rating agencies (the big 3) The big three credit rating agencies Moody’d Investors Services, Fitch Ratings and Standard & poor’s developed rated agencies that covered to triple A that many of the ratings were of very risky aspects (McLean & Joe, p.111). These restricted the holding of safest agencies through which people followed as part of the bylaws encouraging the crisis. Investors (Pensions funds, hedge funds, global investors) The different investors played a role in the crisis through their continued engagement in mortgage aspects. They invested wide in the sector and engaged much of debt that played a part in creating the crisis. Their wide investment and dropping prices led to the negative effects that the crisis occasioned through higher default rates that affected the ability of the investors to pay their debts. Describe the Magnitude of the Effects to National and International Economies The effects that the crisis left on the national and international economies were of great magnitude. The whole economy suffered major setbacks with below average economic development with limited securities trading by the people due to fears of losses as those occasioned in the crisis. The banks also became limited in performing both prime and subprime mortgage facilities. For the US, the different brokers that played a role in the crisis approved large mortgage loans. These led to development of further restrictions over the mortgage aspects. During these times, the quantity of loans offered played part of the priorities. Major considerations such as debt repayment abilities and number of the debtors that the borrower had were not seriously considered. The credit standards also became weakened and the interest rates declined massively all because of the crisis that served to awake the financial field especially lenders and those handling mortgage facilities. Considering the difficulties that the financial institutions faced during this period, the central banks were put on more pressure with many banks leaning on it to continue in operations. The banks aimed at obtaining the guarantees of the state to provide them with assurance of security. Part II Summary of the Actions Taken Until Now The Federal Reserve and the federal government has taken a number of actions to ease the credit crisis. These range from the development of further restrictions for the banking sector to establishing grounds within which the banking sector can continue to operate their credit facilities successfully considering all the risks and the business prospects. The two bodies have also played role through the close monitoring of the economies to ensure any abnormalities in the economic aspects sited early and dealt with to avoid the recurrence of the crisis. The credit facilities have also developed limitations to credit facilities with regard to the interest rate charges and the level of risk calculation aspects as a way of controlling the risk involved in the credit industry. Considering the different economic activities and the slow recovery of the economy, the economic growth rate of the country will remain on a slow rate. This means that the interest rates will remain high to control the level of lending and limit the defaults. The lowering of the interest rates will encourage more debt in a situation where debt is much over stretched and the major cause of the crisis. The committee needs to consider actively the different economic activities that the people can engage in and the state to boost the economic abilities of the country. Limitations of imports to encourage exports to balance the gap will also provide support to the ailing economy and help it regain its economic performance abilities. Considering these recommendations will aid improve the economy. Considering the demand by the Ethics Committee, to identify the different parties that played a role in leading to the crisis, the proof of unethical behavior was the major concern that they aimed at. Ethical behavior in business refers to the right conduct as accepted by the business community. The misunderstanding of ethical requirements and the rights of people in business sometimes create confusion in the two (Trevino & Weaver, p.13). The different players ranging from the Mortgage companies/brokers, Subprime borrowers, Money center banks, Investment bankers, Mortgage credit insurers that include Freddie Mac, Fannie Mae, Ginnie Mae, the Credit rating agencies and the different investors. All these parties including the government prove answerable to the crisis. The European debt crisis refers to the financial debt challenges that hit the European Union because of different actions taken by the governments that included change in currency (Authers). The European debt crisis played a role in influencing the crisis in the mortgage crisis. The increased debt that the country suffered played a role in increasing the level of defaulters that ultimately increased the crisis sustenance and hence the financial difficulties persistence. The Euro zone crisis was occasioned by a number of reasons that ranged from the increased government and household debt levels, trade imbalances, monetary policy effects, inadequate confidence in the economic systems developed to favor the European Union and the different problems in the structural problems that the Euro zone suffered. Distinguishing between these and the proximate cause aids in identifying the possible solutions to the crisis (Dalanu, D’Adda, Basevi & Kumar, p.170). The Americans played none or very limited role in the economic difficulties that the Euro zone suffers. Most of these as stated in the causes above indicated the actions of the policy makers in the European Union as central to causing the crisis. The crisis will get better if well-handled and better policies are developed to ensure that the effects remain controlled. The inadequacy of the policies will make it worsen if not well thought through. Reference Authers, John. Europe’s Financial Crisis: A Short Guide to How the Europe Fell into Crisis, and the Consequences to the World. FT Press. 2012. Dalanu, Daniel, D’Adda, Carlo, Basevi, Giorgio & Kumar, Rajeesh. The Euro zone Crisis and the Future of Europe: The Political Economy of Palgrave Macmillan. 2014. McLean, Bethany and Joe Nocera. All the Devils Are Here, the Hidden History of the Financial Crisis, Portfolio, Penguin, 2010. The Economist. A Nuclear Winter. The Fallout from the Bankruptcy of the Lehman Brothers. Retrieved from http://www.economist.com/node/12274112. 2008 Trevino, Linda & Weaver, Gary. Managing Ethics in Business Organizations: Social Scientific Perspective. Stanford University Press. 2003 Read More