Cover of the 20 October 2007 issue of The Economist showing an image related to a Credit crunch caused by the subprime mortgage crisis. Events 1740 - Maria Theresa takes the throne of Austria. France, Prussia, Bavaria and Saxony The Economist is an English-language weekly news and International affairs publication owned by The Economist Newspaper Ltd and edited in London A credit crunch is a sudden reduction in the general availability of Loans (or credit) or a sudden increase in the cost of obtaining loans from Banks ^[1]

Cover of the 05 April 2008 issue of The Economist showing an image related to fixing the Credit crunch caused by the subprime mortgage crisis. Events 456 - St Patrick returns to Ireland as a missionary bishop The Economist is an English-language weekly news and International affairs publication owned by The Economist Newspaper Ltd and edited in London A credit crunch is a sudden reduction in the general availability of Loans (or credit) or a sudden increase in the cost of obtaining loans from Banks ^[2]

A diagram of the elements of the subprime crisis

The subprime mortgage crisis is an ongoing economic problem manifesting itself through liquidity issues in the global banking system owing to foreclosures which accelerated in the United States in late 2006 and triggered a global financial crisis during 2007 and 2008. Market liquidity is a Business, Economics or Investment term that refers to an Asset 's ability to be easily converted through an act of buying Foreclosure is the legal proceeding in which a mortgagee, or other Lienholder, usually a lender obtains a court ordered termination of a mortgagor The United States of America —commonly referred to as the The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value The crisis began with the bursting of the US housing bubble^[3][4] and high default rates on "subprime" and other adjustable rate mortgages (ARM) made to higher-risk borrowers with lower income or lesser credit history than "prime" borrowers. The United States housing bubble is an Economic bubble in many parts of the United States housing market including areas of California, Subprime lending ( near-prime, non-prime, or second chance lending is a financial term that was popularized by the media during the "credit crunch" In Finance, a Borrower is the party in a Loan agreement which receives money or other instrument from a Lender and promises to repay the lender in a specified This article deals with the general concept of the term credit history Loan incentives and a long-term trend of rising housing prices encouraged borrowers to assume mortgages, believing they would be able to refinance at more favorable terms later. However, once housing prices started to drop moderately in 2006–2007 in many parts of the U. S. , refinancing became more difficult. Defaults and foreclosure activity increased dramatically as ARM interest rates reset higher. In Finance, default occurs when a debtor has not met its legal obligations according to the debt contract e During 2007, nearly 1. 3 million U. S. housing properties were subject to foreclosure activity, up 79% from 2006. ^[5]

The mortgage lenders that retained credit risk (the risk of payment default) were the first to be affected, as borrowers became unable or unwilling to make payments. Credit risk is the risk of loss due to a debtor's non-payment of a Loan or other line of credit (either the principal or Interest (coupon or both Faced Major banks and other financial institutions around the world have reported losses of approximately U. S. $379 billion as of May 21, 2008^[6]. Owing to a form of financial engineering called securitization, many mortgage lenders had passed the rights to the mortgage payments and related credit/default risk to third-party investors via mortgage-backed securities (MBS) and collateralized debt obligations (CDO). Securitization is a Structured finance process which involves pooling and repackaging of Cash flow producing financial Assets A mortgage-backed security (MBS is an Asset-backed security whose cash flows are backed by the principal and interest payments of a set of Mortgage loans Payments For other subjects with the same abbreviation see CDO. Collateralized debt obligations (CDOs are an unregulated type of Asset-backed security Corporate, individual and institutional investors holding MBS or CDO faced significant losses, as the value of the underlying mortgage assets declined. Institutional investors are organizations which pool large sums of money and invest those sums in companies Stock markets in many countries declined significantly. A stock market, or (equity market is a private or public market for the trading of company Stock and derivatives of company

The widespread dispersion of credit risk and the unclear effect on financial institutions caused lenders to reduce lending activity or to make loans at higher interest rates. Interest is a fee paid on borrowed capital Assets lent include Money, Shares, Consumer goods through Hire purchase, major assets Similarly, the ability of corporations to obtain funds through the issuance of commercial paper was affected. Commercial paper is an unsecured Promissory note with a fixed maturity of one to 270 days This aspect of the crisis is consistent with a credit crunch. A credit crunch is a sudden reduction in the general availability of Loans (or credit) or a sudden increase in the cost of obtaining loans from Banks The liquidity concerns drove central banks around the world to take action to provide funds to member banks to encourage the lending of funds to worthy borrowers and to re-invigorate the commercial paper markets. Market liquidity is a Business, Economics or Investment term that refers to an Asset 's ability to be easily converted through an act of buying

The subprime crisis also places downward pressure on economic growth, because fewer or more expensive loans decrease investment by businesses and consumer spending, which drive the economy. Economic growth is the increase in the amount of the goods and services produced by an economy over time The Economy of the United States is the largest national economy in the world A separate but related dynamic is the downturn in the housing market, where a surplus inventory of homes has resulted in a significant decline in new home construction and housing prices in many areas. This also places downward pressure on growth. ^[7] With interest rates on a large number of subprime and other ARM due to adjust upward during the 2008 period, U.S. legislators, the U.S. Treasury Department, and financial institutions are taking action. The United States Congress is the bicameral Legislature of the federal government of the United States of America, consisting of two houses The United States Department of the Treasury is a Cabinet department and the Treasury of the United States government. A systematic program to limit or defer interest rate adjustments was implemented to reduce the effect. In addition, lenders and borrowers facing defaults have been encouraged to cooperate to enable borrowers to stay in their homes. Banks have sought and received over $250 billion in additional funds from investors to offset losses. ^[8] The risks to the broader economy created by the financial market crisis and housing market downturn were primary factors in several decisions by the U. S. Federal reserve to cut interest rates and the economic stimulus package passed by Congress and signed by President George W. Bush on February 13, 2008. The Economic Stimulus Act of 2008 ( is an Act of Congress providing for several kinds of economic stimulus intended to boost the United States George Walker Bush ( born July 6 1946 is the forty-third and current President of the United States. Events 1258 - Baghdad falls to the Mongols, and the Abbasid Caliphate is destroyed 2008 ( MMVIII) is the current year in accordance with the Gregorian calendar, a Leap year that started on Tuesday of the Common ^[9][10][11] Both actions are designed to stimulate economic growth and inspire confidence in the financial markets.

Background information

The term subprime lending refers to the practice of making loans to borrowers who do not qualify for market interest rates due to various risk factors, such as income level, size of the down payment made, credit history, and employment status. Subprime lending ( near-prime, non-prime, or second chance lending is a financial term that was popularized by the media during the "credit crunch" A loan is a type of Debt. This article focuses exclusively on monetary loans although in practice any material object might be lent Interest is a fee paid on borrowed capital Assets lent include Money, Shares, Consumer goods through Hire purchase, major assets This article deals with the general concept of the term credit history The value of U. S. subprime mortgages was estimated at $1. 3 trillion as of March 2007,^[12] with over 7. 5 million first-lien subprime mortgages outstanding. In Law, a lien is a form of Security interest granted over an item of Property to secure the payment of a Debt or performance of some other ^[13]Approximately 16% of subprime loans with adjustable rate mortgages (ARM) were 90-days delinquent or in foreclosure proceedings as of October 2007, roughly triple the rate of 2005. ^[14] By January 2008, the delinquency rate had risen to 21%^[15] and by May 2008 it was 25%. ^[16]

Number of U. S. Household Properties Subject to Foreclosure Actions by Quarter

Subprime ARMs only represent 6. 8% of the loans outstanding in the US, yet they represent 43. 0% of the foreclosures started during the third quarter of 2007. ^[17]A total of nearly 446,726 U. S. household properties were subject to some sort of foreclosure action from July to September 2007, including those with prime, alt-A and subprime loans. This is double the 223,000 properties in the year-ago period and 34% higher than the 333,627 in the prior quarter. ^[18] This increased to 527,740 during the fourth quarter of 2007, an 18% increase versus the prior quarter. For all of 2007, nearly 1. 3 million properties were subject to 2. 2 million foreclosure filings, up 79% and 75% respectively versus 2006. Foreclosure filings including default notices, auction sale notices and bank repossessions can include multiple notices on the same property. ^[19] More homeowners continue to receive foreclosure notices, with one in every 519 households receiving a foreclosure filling in April, 2008. ^[20]

The estimated value of subprime adjustable-rate mortgages (ARM) resetting at higher interest rates is U. S. $400 billion for 2007 and $500 billion for 2008. Reset activity is expected to increase to a monthly peak in March 2008 of nearly $100 billion, before declining. ^[21] An average of 450,000 subprime ARM are scheduled to undergo their first rate increase each quarter in 2008. ^[22]

Understanding the causes and risks of the subprime crisis

The reasons for this crisis are varied and complex. ^[23] Understanding and managing the ripple effect through the world-wide economy poses a critical challenge for governments, businesses, and investors. The crisis can be attributed to a number of factors, such as the inability of homeowners to make their mortgage payments; poor judgment by the borrower and/or the lender; and mortgage incentives such as "teaser" interest rates that later rise significantly. A mortgage is the pledging of a property to a Lender as a security for a Mortgage loan. Further, declining home prices have made re-financing more difficult. Due to innovations in securitization, risks related to the inability of homeowners to meet mortgage payments have been distributed broadly, with a series of consequential impacts. Securitization is a Structured finance process which involves pooling and repackaging of Cash flow producing financial Assets There are four primary categories of risk involved:

• Credit risk: Traditionally, the risk of default (called credit risk) would be assumed by the bank originating the loan. Credit risk is the risk of loss due to a debtor's non-payment of a Loan or other line of credit (either the principal or Interest (coupon or both Faced However, due to innovations in securitization, credit risk is frequently transferred to third-party investors. The rights to mortgage payments have been repackaged into a variety of complex investment vehicles, generally categorized as mortgage-backed securities (MBS) or collateralized debt obligations (CDO). A mortgage-backed security (MBS is an Asset-backed security whose cash flows are backed by the principal and interest payments of a set of Mortgage loans Payments For other subjects with the same abbreviation see CDO. Collateralized debt obligations (CDOs are an unregulated type of Asset-backed security A CDO, essentially, is a repacking of existing debt, and in recent years MBS collateral has made up a large proportion of issuance. In exchange for purchasing MBS or CDO and assuming credit risk, third-party investors receive a claim on the mortgage assets and related cash flows, which become collateral in the event of default.

• Asset price risk: MBS and CDO asset valuation is complex and related "fair value" or "mark to market" accounting is subject to wide interpretation. Fair value, also called fair price, is a concept used in Finance and Economics, defined as a rational and unbiased Estimate of the potential The valuation is derived from both the collectibility of subprime mortgage payments and the existence of a viable market into which these assets can be sold, which are interrelated. Rising mortgage delinquency rates have reduced demand for such assets. Banks and institutional investors have recognized substantial losses as they revalue their MBS downward. Several companies that borrowed money using MBS or CDO assets as collateral have faced margin calls, as lenders executed their contractual rights to get their money back. In finance a margin is collateral that the holder of a position in securities, options, or Futures contracts has to deposit to cover There is some debate regarding whether fair value accounting should be suspended or modified temporarily, as large write-downs of difficult to value MBS and CDO assets may have exacerbated the crisis. ^[24]

• Liquidity risk: Many companies rely on access to short-term funding markets for cash to operate (i. e. , liquidity), such as the commercial paper and repurchase markets. Commercial paper is an unsecured Promissory note with a fixed maturity of one to 270 days Companies and structured investment vehicles (SIV) often obtain short-term loans by issuing commercial paper, pledging mortgage assets or CDO as collateral. A structured investment vehicle (SIV was a type of fund in the Shadow banking system from the mid-1980's until late 2008 Investors provide cash in exchange for the commercial paper, receiving money-market interest rates. However, because of concerns regarding the value of the mortgage asset collateral linked to subprime and Alt-A loans, the ability of many companies to issue such paper has been significantly affected. ^[25] The amount of commercial paper issued as of October 18, 2007 dropped by 25%, to $888 billion, from the August 8 level. In addition, the interest rate charged by investors to provide loans for commercial paper has increased substantially above historical levels. ^[26]

• Counterparty risk: Major investment banks and other financial institutions have taken significant positions in credit derivative transactions, some of which serve as a form of credit default insurance. In Finance, a credit derivative is a derivative whose value derives from the Credit risk on an underlying bond loan or other financial asset Due to the effects of the risks above, the financial health of investment banks has declined, potentially increasing the risk to their counterparties and creating further uncertainty in financial markets. A counterparty (sometimes contraparty) is a legal and financial term The recent demise and bailout of Bear-Stearns was due in-part to its role in these derivatives. The Bear Stearns Companies Inc, based in New York City, was one of the largest global Investment banks and securities trading and brokerage ^[27]

Understanding the effect on corporations and investors

Average investors and corporations face a variety of risks owing to the inability of mortgage holders to pay. These vary by legal entity. Some general exposures by entity type include:

• Bank corporations: The earnings reported by major banks are adversely affected by defaults on mortgages they issue and retain. Companies value their mortgage assets (receivables) based on estimates of collections from homeowners. Companies record expenses in the current period to adjust this valuation, increasing their bad debt reserves and reducing earnings. Rapid or unexpected changes in mortgage asset valuation can lead to volatility in earnings and stock prices. The ability of lenders to predict future collections is a complex task subject to a multitude of variables. ^[28] Additionally, a bank's mortgage losses may cause it to reduce lending or seek additional funds from the capital markets, if necessary to maintain compliance with capital reserve regulatory requirements.

• Mortgage lenders and Real Estate Investment Trusts: These entities face similar risks to banks. In addition, they have business models with significant reliance on the ability to regularly secure new financing through CDO or commercial paper issuance secured by mortgages. Commercial paper is an unsecured Promissory note with a fixed maturity of one to 270 days Investors have become reluctant to fund such investments and are demanding higher interest rates. Such lenders are at increased risk of significant reductions in book value owing to asset sales at unfavorable prices and several have filed bankruptcy. ^[29]

• Special purpose entities (SPE): Like corporations, SPE are required to revalue their mortgage assets based on estimates of collection of mortgage payments. If this valuation falls below a certain level, or if cash flow falls below contractual levels, investors may have immediate rights to the mortgage asset collateral. This can also cause the rapid sale of assets at unfavorable prices. Other SPE called structured investment vehicles (SIV) issue commercial paper and use the proceeds to purchase securitized assets such as CDO. These entities have been affected by mortgage asset devaluation. Several major SIV are associated with large banks. ^[30]

• Investors: Stocks or bonds of the entities above are affected by the lower earnings and uncertainty regarding the valuation of mortgage assets and related payment collection. Many investors and corporations purchased MBS or CDO as investments and incurred related losses.

Causes of the crisis

The housing downturn

Further information: United States housing market correction

Subprime borrowing was a major contributor to an increase in home ownership rates and the demand for housing. A United States housing market correction is a market correction or "bubble bursting" of a United States housing bubble; the most recent one started in 2005 The overall U. S. homeownership rate increased from 64 percent in 1994 (about where it was since 1980) to a peak in 2004 with an all time high of 69. 2 percent. ^[31]

This demand helped fuel housing price increases and consumer spending. Between 1997 and 2006, American home prices increased by 124%. ^[32] Some homeowners used the increased property value experienced in the housing bubble to refinance their homes with lower interest rates and take out second mortgages against the added value to use the funds for consumer spending. A real estate bubble or property bubble (or housing bubble for residential markets is a type of Economic bubble that occurs periodically in local or global A second mortgage typically refers to a Secured loan (or mortgage) that is subordinate to another loan against the same property U. S. household debt as a percentage of income rose to 130% during 2007, versus 100% earlier in the decade. ^[33]

A culture of consumerism is a factor. In the early 2000s recession that began in early 2001 and which was exacerbated by the September 11, 2001 terrorist attacks, Americans were asked by the current President, George W. Bush, to spend their way out of economic decline with "consumerism. The Early 2000s Recession was felt in mostly Western countries affecting the European Union mostly during 2000 and 2001 and the United States mostly in President is a Title leaders of Organizations companies, Trade unions universities, and countries. George Walker Bush ( born July 6 1946 is the forty-third and current President of the United States. Consumerism is the equation of personal Happiness with the purchase of material possessions and consumption. . . cast as the new patriotism". Patriotism is commonly defined as love of and/or devotion to one's country This call linking patriotism to shopping echoed the urging of former President Bill Clinton to "get out and shop"^[34], and corporations like General Motors produced commercials with the same theme. William Jefferson "Bill" Clinton (born William Jefferson Blythe III, August 19 1946 served as the forty-second President of the United States General Motors Corporation ( GM) ( is a multinational automobile manufacturer founded in 1908 and headquartered in the United States.

Existing Homes Sales, Inventory, and Months Supply, By Quarter

Overbuilding during the boom period, increasing foreclosure rates and unwillingness of many homeowners to sell their homes at reduced market prices have significantly increased the supply of housing inventory available. Sales volume (units) of new homes dropped by 26. 4% in 2007 versus the prior year. By January 2008, the inventory of unsold new homes stood at 9. 8 months based on December 2007 sales volume, the highest level since 1981. ^[35] Further, a record of nearly four million unsold existing homes were for sale,^[36]including nearly 2. 9 million that were vacant. ^[37]

This excess supply of home inventory places significant downward pressure on prices. As prices decline, more homeowners are at risk of default and foreclosure. According to the S&P/Case-Shiller housing price index, by November 2007, average U. S. housing prices had fallen approximately 8% from their 2006 peak. ^[38]However, there was significant variation in price changes across U. S. markets, with many appreciating and others depreciating. ^[39] The price decline in December 2007 versus the year-ago period was 10. 4%. As of February 2008, housing prices are expected to continue declining until this inventory of surplus homes (excess supply) is reduced to more typical levels.

Role of borrowers

A variety of factors have contributed to an increase in the payment delinquency rate for subprime ARM borrowers, which recently reached 21%, roughly four times its historical level. ^[15]

Easy credit, combined with the assumption that housing prices would continue to appreciate, also encouraged many subprime borrowers to obtain ARMs they could not afford after the initial incentive period. Once housing prices started depreciating moderately in many parts of the U. S. (see United States housing market correction and United States housing bubble), refinancing became more difficult. A United States housing market correction is a market correction or "bubble bursting" of a United States housing bubble; the most recent one started in 2005 The United States housing bubble is an Economic bubble in many parts of the United States housing market including areas of California, Some homeowners were unable to re-finance and began to default on loans as their loans reset to higher interest rates and payment amounts. Other homeowners, facing declines in home market value or with limited accumulated equity, are choosing to stop paying their mortgage. They are essentially "walking away" from the property and allowing foreclosure, despite the impact to their credit rating. ^[40]

Mortgage fraud by borrowers from US Department of the Treasury ^[41]

Misrepresentation of loan application data is another contributing factor. Mortgage fraud is a term used to describe a broad variety of criminal actions where the intent is to materially misrepresent or omit information on a Mortgage loan application In a January 13, 2008 column in the New York Times, George Mason University economics professor Tyler Cowen wrote, "There has been plenty of talk about 'predatory lending,' but 'predatory borrowing' may have been the bigger problem. Events 532 - Nika riots in Constantinople. 888 - Odo Count of Paris becomes King of the Franks 2008 ( MMVIII) is the current year in accordance with the Gregorian calendar, a Leap year that started on Tuesday of the Common George Mason University (also referred to as GMU or Mason) is a large Public university in the United States. Tyler Cowen (pronounced /ˈkaʊˌɛn/) (b January 21, 1962) occupies the Holbert C As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default. Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers. "^[42]

US Department of the Treasury suspicious activity report of mortgage fraud increased by 1,411 percent between 1997 and 2005. A Suspicious Activity Report (or SAR) is a report regarding suspicious or potentially suspicious activity filed with the Financial Crimes Enforcement Network (FinCEN Mortgage fraud is a term used to describe a broad variety of criminal actions where the intent is to materially misrepresent or omit information on a Mortgage loan application ^[41]

Role of financial institutions

A variety of factors have caused lenders to offer an increasing array of higher-risk loans to higher-risk borrowers. The share of subprime mortgages to total originations was 5% ($35 billion) in 1994 ^[43] , 9% in 1996 ^[44], 13% ($160 billion) in 1999 ^[43] , and 20% ($600 billion) in 2006. ^[44][45] A study by the Federal Reserve indicated that the average difference in mortgage interest rates between subprime and prime mortgages (the "subprime markup" or "risk premium") declined from 2. 8 percentage points (280 basis points) in 2001, to 1. 3 percentage points in 2007. In other words, the risk premium required by lenders to offer a subprime loan declined. This occurred even though subprime borrower and loan characteristics declined overall during the 2001–2006 period, which should have had the opposite effect. The combination is common to classic boom and bust credit cycles. ^[46]

In addition to considering higher-risk borrowers, lenders have offered increasingly high-risk loan options and incentives. One example is the interest-only adjustable-rate mortgage (ARM), which allows the homeowner to pay just the interest (not principal) during an initial period. Another example is a "payment option" loan, in which the homeowner can pay a variable amount, but any interest not paid is added to the principal. Further, an estimated one-third of ARM originated between 2004–2006 had "teaser" rates below 4%, which then increased significantly after some initial period, as much as doubling the monthly payment. ^[47]

Some believe that mortgage standards became lax because of a moral hazard, where each link in the mortgage chain collected profits while believing it was passing on risk. Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk ^[48]

Role of securitization

Borrowing Under a Securitization Structure

Securitization is a structured finance process in which assets, receivables or financial instruments are acquired, classified into pools, and offered as collateral for third-party investment. Securitization is a Structured finance process which involves pooling and repackaging of Cash flow producing financial Assets Structured finance is a broad term used to describe a sector of Finance that was created to help transfer Risk using complex legal and corporate entities ^[49] There are many parties involved. Due to securitization, investor appetite for mortgage-backed securities (MBS), and the tendency of rating agencies to assign investment-grade ratings to MBS, loans with a high risk of default could be originated, packaged and the risk readily transferred to others. Asset securitization began with the structured financing of mortgage pools in the 1970s. ^[50] The securitized share of subprime mortgages (i. e. , those passed to third-party investors) increased from 54% in 2001, to 75% in 2006. ^[46] Alan Greenspan stated that the securitization of home loans for people with poor credit — not the loans themselves — were to blame for the current global credit crisis. ^[51]

Role of mortgage brokers

Mortgage brokers do not lend their own money. A mortgage broker acts as an intermediary who sells Mortgage loans on behalf of individuals or businesses There is not a direct correlation between loan performance and income. They have big financial incentives for selling complex, adjustable rate mortgages (ARMs), since they earn higher commissions. ^[52]

According to a study by Wholesale Access Mortgage Research & Consulting Inc. , in 2004 Mortgage brokers originated 68% of all residential loans in the U.S., with subprime and Alt-A loans accounting for 42. The United States of America —commonly referred to as the 7% of brokerages' total production volume. ^[53]

The chairman of the Mortgage Bankers Association claimed brokers profited from a home loan boom but didn't do enough to examine whether borrowers could repay. ^[54]

Role of mortgage underwriters

Underwriters determine if the risk of lending to a particular borrower under certain parameters is acceptable. Most of the risks and terms that underwriters consider fall under the three C’s of underwriting: credit, capacity and collateral. See mortgage underwriting. Mortgage underwriting is the process a Lender uses to determine if the Risk of lending to a particular Borrower under certain Parameters

In 2007, 40 percent of all subprime loans were generated by automated underwriting. ^[55] An Executive vice president of Countrywide Home Loans Inc. stated in 2004 "Prior to automating the process, getting an answer from an underwriter took up to a week. We are able to produce a decision inside of 30 seconds today. . . . And previously, every mortgage required a standard set of full documentation. "^[56] Some think that users whose lax controls and willingness to rely on shortcuts led them to approve borrowers that under a less-automated system would never have made the cut are at fault for the subprime meltdown. ^[57]

Role of government and regulators

Some economists claim that government policy actually encouraged the development of the subprime debacle through legislation like the Community Reinvestment Act, which they say forces banks to lend to otherwise uncreditworthy consumers. The Community Reinvestment Act (or CRA,, title VIII, et seq) is a United States federal law designed to encourage commercial Banks and ^{[58] [59]} Economist Robert Kuttner has criticized the repeal of the Glass-Steagall Act as contributing to the subprime meltdown. Robert Kuttner is the co-founder and current editor-in-chief of The American Prospect, which was created in 1990 as "an authoritative magazine of liberal ideas" The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC in the United States and included banking reforms some of which ^[60] A taxpayer-funded government bailout related to mortgages during the Savings and Loan crisis may have created a moral hazard and acted as encouragement to lenders to make similar higher risk loans. The savings and loan crisis of the 1980s and 1990s (commonly referred to as the S&L crisis) was the failure of 747 Savings and loan associations (S&Ls in the ^[61]

Some have argued that, despite attempts by various U. S. states to prevent the growth of a secondary market in repackaged predatory loans, the Treasury Department's Office of the Comptroller of the Currency, at the insistence of national banks, struck down such attempts as violations of Federal banking laws. Predatory lending is a Pejorative term used to describe practices of some Lenders. The United States Department of the Treasury is a Cabinet department and the Treasury of the United States government. The Office of the Comptroller of the Currency (or OCC) is a US federal agency established by the National Currency Act of 1863 and serves to Charter ^[62]

In response to a concern that lending was not properly regulated, the House and Senate are both considering bills to regulate lending practices. ^[63]

Role of credit rating agencies

Credit rating agencies are now under scrutiny for giving investment-grade ratings to securitization transactions (CDOs and MBSs) based on subprime mortgage loans. A credit rating agency ( CRA) is a company that assigns Credit ratings for Issuers of certain types of Debt obligations as well as the debt instruments Securitization is a Structured finance process which involves pooling and repackaging of Cash flow producing financial Assets Higher ratings were justified by various credit enhancements including overcollateraliztion (pledging collateral in excess of debt issued), credit default insurance, and equity investors willing to bear the first losses. Critics claim that conflicts of interest were involved, as rating agencies are paid by the firms that organize and sell the debt to investors, such as investment banks. ^[64]

As of April 2008, credit rating agencies had downgraded over U. S. $800 billion in highly-rated CDO and MBS, and more downgrades are expected. Since certain types of institutional investors are allowed to only carry higher-quality (e. g. , "BBB" and better) assets, there is an increased risk of forced asset sales, which could cause further devaluation. ^[65]

Role of central banks

Central banks are primarily concerned with managing the rate of inflation and avoiding recessions. They are also the “lenders of last resort” to ensure liquidity. A lender of last resort ( LOLR) is an institution willing to extend credit when no one else will They are less concerned with avoiding asset bubbles, such as the housing bubble and dot-com bubble. A real estate bubble or property bubble (or housing bubble for residential markets is a type of Economic bubble that occurs periodically in local or global The " dot-com bubble " (or sometimes the " IT bubble " was a speculative bubble covering roughly 1995–2001 (with a climax on March 10 Central banks have generally chosen to react after such bubbles burst to minimize collateral impact on the economy, rather than trying to avoid the bubble itself. This is because identifying an asset bubble and determining the proper monetary policy to properly deflate it are not proven concepts. ^[66] There is significant debate among economists regarding whether this is the optimal strategy. ^[67]

Federal Reserve actions raised concerns among some market observers that it could create a moral hazard. Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk Some industry officials said that Federal Reserve Bank of New York involvement in the rescue of Long-Term Capital Management in 1998 would encourage large financial institutions to assume more risk, in the belief that the Federal Reserve would intervene on their behalf. The Federal Reserve Bank of New York is the most important of the twelve Federal Reserve Banks of the United States. Long-Term Capital Management ( LTCM) was a US Hedge fund which failed spectacularly in the late 1990s leading to a massive bailout by other major banks ^[68]

A contributing factor to the rise in home prices was the lowering of interest rates earlier in the decade by the Federal Reserve, to diminish the blow of the collapse of the dot-com bubble and combat the risk of deflation. The " dot-com bubble " (or sometimes the " IT bubble " was a speculative bubble covering roughly 1995–2001 (with a climax on March 10 ^[66]. From 2000 to 2003, the Federal Reserve lowered the federal funds rate target from 6. In the United States, the federal funds rate is the Interest rate at which private Depository institutions (mostly banks lend balances ( Federal funds 5% to 1. 0%. ^[69] The central bank was concerned with promoting continued economic expansion after the dot-com bubble, and believed that interest rates could be lowered safely because the rate of inflation was low. The " dot-com bubble " (or sometimes the " IT bubble " was a speculative bubble covering roughly 1995–2001 (with a climax on March 10 In economics inflation or price inflation is a rise in the general level of prices of goods and services over a period of time The Federal Reserve's inflation figures, however, were flawed. Richard W. Fisher, President and CEO of the Federal Reserve Bank of Dallas, stated that the Federal Reserve's interest rate policy during this time period was misguided by this erroneously low inflation data, thus contributing to the housing bubble:

Effects

Effect on stock markets

On July 19, 2007, the Dow Jones Industrial Average hit a record high, closing above 14,000 for the first time. Events 711 - Muslim forces under Tariq ibn Ziyad defeat the Visigoths led by their king Roderic. Year 2007 ( MMVII) was a Common year starting on Monday of the Gregorian calendar in the 21st century. The Dow Jones Industrial Average ( also called the DJIA, Dow 30, INDP, or informally the Dow Jones or The Dow) is one of several ^[71] By August 15, the Dow had dropped below 13,000 and the S&P 500 had crossed into negative territory year-to-date. Events 778 - The Battle of Roncevaux Pass, at which Roland is killed The S&P 500 is a Stock market index containing the stocks of 500 Large-Cap Corporations all of which are from the United States. Similar drops occurred in virtually every market in the world, with Brazil and Korea being hard-hit. Large daily drops became common, with, for example, the KOSPI dropping about 7% in one day, ^[72] although 2007's largest daily drop by the S&P 500 in the U. The Korea Composite Stock Price Index or KOSPI (코스피지수 is the index of all Common stocks traded on the Stock Market Division—previously Korea S. was in February, a result of the subprime crisis.

Mortgage lenders ^{[73] [74]} and home builders ^{[75] [76]} fared terribly, but losses cut across sectors, with some of the worst-hit industries, such as metals & mining companies, having only the vaguest connection with lending or mortgages. ^[77]

Crisis has caused panic in financial markets and encouraged investors to take their money out of risky mortgage bonds and shaky equities and put it into commodities as "stores of value". A commodity is anything for which there is demand but which is supplied without qualitative differentiation across a market Most of the recent increases in global food prices have been the result of speculation and the collapse in the value of the US dollar. ^[78][79]

Effect on financial institutions

See also: Subprime crisis impact timeline and List of writedowns due to subprime crisis

FDIC Graph - U. In Financial economics, a financial institution acts as an agent that provides Financial services for its clients or members See also Subprime mortgage crisis The subprime crisis impact timeline includes government laws regulations and entities and their effect on private institutions Other estimates Bloomberg May 19 2008 Bloomberg August 12 2008 (commentary Table S. Bank & Thrift Profitability By Quarter

Many banks, mortgage lenders, real estate investment trusts (REIT), and hedge funds suffered significant losses as a result of mortgage payment defaults or mortgage asset devaluation. A hedge fund is a private Investment fund open to a limited range of investors which is permitted by regulators to undertake a wider range of activities than other investment As of May 21, 2008 financial institutions had recognized subprime-related losses and write-downs exceeding U. Events 878 - Syracuse Italy is captured by the Muslim sultan of Sicily. 2008 ( MMVIII) is the current year in accordance with the Gregorian calendar, a Leap year that started on Tuesday of the Common In Financial economics, a financial institution acts as an agent that provides Financial services for its clients or members The term write-off (or write-down describes a reduction in recognized value S. $379 billion. ^[6]

Profits at the 8,533 U. S. banks insured by the FDIC declined from $35. The Federal Deposit Insurance Corporation ( FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933 2 billion to $646 million (89 percent) during the fourth quarter of 2007 versus the prior year, due to soaring loan defaults and provisions for loan losses. It was the worst bank and thrift quarterly performance since 1990. For all of 2007, these banks earned approximately $100 billion, down 31 percent from a record profit of $145 billion in 2006. Profits declined from $35. 6 billion to $19. 3 billion during the first quarter of 2008 versus the prior year, a decline of 46%. ^[80][81]

Other companies from around the world, such as IKB Deutsche Industriebank ^[82], have also suffered significant losses ^[83] and scores of mortgage lenders have filed for bankruptcy. IKB Deutsche Industriebank ( is a bank based in Düsseldorf, Germany. ^[84] Top management has not escaped unscathed, as the CEOs of Merrill Lynch and Citigroup were forced to resign within a week of each other. ^[85] Various institutions follow-up with merger deals. ^[86]

In addition, Northern Rock and Bear Stearns^[87] have required emergency assistance from central banks. See also Nationalisation of Northern Rock Northern Rock plc is a British Bank, currently under public ownership The Bear Stearns Companies Inc, based in New York City, was one of the largest global Investment banks and securities trading and brokerage A central bank, reserve bank, or monetary authority is the entity responsible for the Monetary policy of a country or of a group of member states

The crisis also affected Indian banks which have ventured into USA. Banking in India originated in the first decade of 18th century ICICI, India's second largest bank, has reported mark-to-market loss of $263 million in its loans and investment exposures. ICICI Bank ( (formerly Industrial Credit and Investment Corporation of India) is India 's largest private sector bank in market capitalization and second largest Other state owned banks such as State Bank of India, Bank of India and Bank of Baroda have refused to release their figures. State Bank of India (SBI ( is the largest Bank in India. It is also measured by the number of branch offices and employees the second largest bank in the Bank of India (BoI established on 7 September, 1906 is a bank with headquarters in Mumbai. } Bank of Baroda ( is the sixth largest bank in India It has total assets in excess of Rs ^[88]

At least 100 mortgage companies have either shut down, suspended operations or been sold since 2007. A mortgage is the pledging of a property to a Lender as a security for a Mortgage loan. ^[89]

As increasing amounts of bad debt are passed on to professional debt collectors, the collection industry is projected to grow by 9. 5 percent in 2008 and will continue to experience growth as long as delinquencies continue to mount. ^[90].

Effect on insurance companies

There is concern that some homeowners are turning to arson as a way to escape from mortgages they can't or refuse to pay. The FBI reports that arson grew 4% in suburbs and 2. 2% in cities from 2005 to 2006. As of January 2008, the 2007 numbers were not yet available. PortalCurrent events International holidays January 1 - New Year's Day January 1 - Independence ^{[91] [92]}

Effect on municipal bond "monoline" insurers

A secondary cause and effect of the crisis relates to the role of municipal bond "monoline" insurance corporations such as Ambac and MBIA. Monoline insurers (also referred to as "monoline insurance companies" or simply "monolines" guarantee the timely repayment of bond principal and interest The Ambac Financial Group Inc generally known as Ambac, ( is an American Holding company whose subsidiaries provide financial guarantee products such MBIA Inc ( is a financial services company a member of the S&P 500 index By insuring municipal bond issues, those bonds achieve higher debt ratings. Bond insurance is a service whereby issuers of a bond can pay a premium to a third party who will provide interest and capital repayments as specified in the bond in the event However, these insurers used premiums to purchase CDO investments and have suffered significant losses, which brings their ability to insure bonds into question. Unless these insurers obtain additional capital, rating agencies may downgrade the bonds they insured or guaranteed. In turn, this may require financial institutions holding the bonds to lower their valuation or to sell them, as some entities (such as pension funds) are only allowed to hold the highest-grade bonds. The effect of such a devaluation on institutional investors and corporations holding the bonds (including major banks) has been estimated as high as $200 billion. Regulators are taking action to encourage banks to lend the required capital to certain monoline insurers, to avoid such an impact. ^[93]

Effect on home owners

Further information: United States housing market correction

According to the S&P/Case-Shiller housing price index, by November 2007, average U. A United States housing market correction is a market correction or "bubble bursting" of a United States housing bubble; the most recent one started in 2005 S. housing prices had fallen approximately 8% from their 2006 peak. ^[38]However, there was significant variation in price changes across U. S. markets, with many appreciating and others depreciating. ^[39] The price decline in December 2007 versus the year-ago period was 10. 4%. Sales volume (units) of new homes dropped by 26. 4% in 2007 versus the prior year. By January 2008, the inventory of unsold new homes stood at 9. 8 months based on December 2007 sales volume, the highest level since 1981. ^[35]

Housing prices are expected to continue declining until this inventory of surplus homes (excess supply) is reduced to more typical levels. As MBS and CDO valuation is related to the value of the underlying housing collateral, MBS and CDO losses will continue until housing prices stabilize. ^[66]

As home prices have declined following the rise of home prices caused by speculation and as re-financing standards have tightened, a number of homes have been foreclosed and sit vacant. These vacant homes are often poorly-maintained and sometimes attract squatters and/or criminal activity with the result that increasing foreclosures in a neighborhood often serve to further accelerate home price declines in the area. Rents have not fallen as much as home prices with the result that in some affluent neighborhoods homes that were formerly owner occupied are now occupied by renters. In select areas falling home prices along with a decline in the U. S. dollar have encouraged foreigners to buy homes for either occasional use and/or long term investments. Additional problems are anticipated in the future from the impending retirement of the baby boomer generation. Baby boomer is a term used to describe a person who was born during the Post-World War II baby boom between 1946 and 1964 It is believed that a significant proportion of baby boomers are not saving adequately for retirement and were planning on using their increased property value as a "piggy bank" or replacement for a retirement-savings account. Retirement is the point where a person stops employment completely This is a departure from the traditional American approach to homes where "people worked toward paying off the family house so they could hand it down to their children" ^[94].

Effect on jobs of the financial sector

According to Bloomberg, from July 2007 to March 2008 financial institutions laid off more than 34,000 employees. Bloomberg LP is a financial software services news and data company In Financial economics, a financial institution acts as an agent that provides Financial services for its clients or members ^[89] In April, job cut announcements continued with Citigroup announcing an extra 9,000 layoffs for the remainder of 2008, back in January 2008 Citigroup had already slashed 4,200 positions. ^[95]

Also in April, Merril Lynch said that it planned to terminate 2,900 jobs by the end of the year. Merrill Lynch & Co Inc () is a global financial services firm ^[96] At Bear Stearns there is fear that half of the 14,000 jobs could be eliminated once JP Morgan completes its acquisition. The Bear Stearns Companies Inc, based in New York City, was one of the largest global Investment banks and securities trading and brokerage John Pierpont Morgan ( April 17, 1837 &ndash March 31, 1913) was an American financier banker and art collector who ^[89] Also that month, Wachovia cut 500 investment banker positions^[97], Washington Mutual cut its payroll by 3,000 workers^[98] and the Financial Times reported that RBS may cut up to 7,000 job positions worldwide. Wachovia Corporation ( based in Charlotte North Carolina, is a diversified Financial services holding company provided via its operating subsidiaries a broad Investment banks profit from companies and governments by raising money through issuing and selling Securities in the Capital markets (both equity and Washington Mutual Inc (abbreviated to WaMu) ( is a savings bank holding company and the former owner of Washington Mutual Savings Bank, which was the The Financial Times ( FT) is a British international business Newspaper. ^[99][100]. 40,000 workers in the City of London's financial district are expected to lose their jobs.

Effect on minorities

There is a disproportionate level of foreclosures in some minority neighborhoods. ^{[101] [102]}

About 46% of Hispanics and 55% of African Americans who obtained mortgages in 2005 got higher-cost loans compared with about 17% of whites and Asians, according to Federal Reserve data. African Americans or Black Americans are citizens or residents of the United States who have origins in any of the black populations of Africa Other studies indicate they would have qualified for lower-rate loans. ^[102]

Effect on tenants

Many renters have been forced from their homes by foreclosures due to their landlords defaulting on loans. According to a January study by the Mortgage Bankers Association, one out of every seven Maryland homes that lenders began foreclosure proceedings on last summer was not occupied by the owner. The Mortgage Bankers Association (MBA is the national association representing all facets of the real estate finance industry Foreclosure voids any lease agreement, and renters have no legal right to continue renting. ^[103]

Effect on World Economy

When the crisis first came to light, many analysts called it a domestic problem-- one that would only effect US housing markets. However, almost a year later, it can be seen that this is not the case. For instance, the Bank of China (the #2 bank in China) announced in August of 2007, that it holds $9. 7 billion dollars of US Subprime debt. ^[104] In January of 2008, Korean markets fell due to the "selling spree" of shares of US mortgages. ^[105] Because of the global economy, and the huge Subprime "pool" of mortgages that was bought by investors world wide, the International Monetary Fund (IMF) "says that the worldwide losses stemming from the US subprime mortgage crisis could run to $945 billion. "^[106] It has yet to be seen if the US's stimulus plan will be enough to help the global economy too.

Actions to manage the crisis

The Federal Reserve

The U. S. central banking system, the Federal Reserve, in partnership with central banks around the world, has taken several steps to address the crisis. Federal Reserve Chairman Ben Bernanke stated in early 2008: "Broadly, the Federal Reserve’s response has followed two tracks: efforts to support market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy. Ben Shalom Bernanke (born December 13, 1953) is the incumbent Chairman of the Board of Governors of the United States Federal Reserve. "^[15]

In August 2007, the Federal Open Market Committee announced that "downside risks to growth have increased appreciably," a signal that interest rate cuts might be forthcoming. ^[107] Between September 18, 2007 and April 30, 2008, the target for the Federal funds rate was lowered from 5. In the United States, the federal funds rate is the Interest rate at which private Depository institutions (mostly banks lend balances ( Federal funds 25% to 2% and the discount rate was lowered from 5. 75% to 2. 25%, through six separate actions. ^[108][109] The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility via the Discount window. The discount window is an instrument of Monetary policy (usually controlled by Central banks that allows eligible institutions to borrow money from the Central

The Fed and other central banks have conducted open market operations to ensure member banks have access to funds (i. Open market operations are the means of implementing Monetary policy by which a Central bank controls its national Money supply by buying and selling government e. , liquidity). These are effectively short-term loans to member banks collateralized by government securities. Central banks have also lowered the interest rates charged to member banks (called the discount rate in the U. S. ) for short-term loans. ^[110] Both measures effectively lubricate the financial system, in two key ways. First, they help provide access to funds for those entities with illiquid mortgage-backed securities. This helps these entities avoid selling the MBS at a steep loss. Second, the available funds stimulate the commercial paper market and general economic activity. Specific responses by central banks are included in the subprime crisis impact timeline. See also Subprime mortgage crisis The subprime crisis impact timeline includes government laws regulations and entities and their effect on private institutions

The Fed is utilizing the Term auction facility (TAF) to provide short-term loans (liquidity) to banks. See also Federal Reserve System The Term Auction Facility is an instrument of monetary policy introduced by the Federal Reserve to increase liquidity in The Fed increased the monthly amount of these auctions to $100 billion during March 2008, up from $60 billion in prior months. In addition, term repurchase agreements expected to cumulate to $100 billion were announced, which enhance the ability of financial institutions to sell mortgage-backed and other debt. The Fed indicated that both the TAF and repurchase agreement amounts will continue and be increased as necessary. ^[111] During March 2008, the Fed also expanded the types of institutions to which it lends money and the types of collateral it accepts for loans. ^[112]

Fed Chairman Bernanke also delivered a speech March 4, 2008 titled "Reducing Preventable Mortgage Foreclosures. " He advocated several solutions, including the reduction of loan principal amounts. ^[113] This solution was highlighted to address a growing concern that an estimated 8. 8 million U. S. homeowners (10%) with negative equity (homes worth less than the mortgage principal) will have a financial incentive to "walk away" from the property, further exacerbating the crisis. ^[114]

In March 2008, the Fed also provided funds and guarantees to enable bank J.P. Morgan Chase to purchase Bear Stearns, a large financial institution with substantial mortgage-backed securities (MBS) investments that had recently plunged in value. JPMorgan Chase & Co ( is the largest Banking institution in the United States by deposits and market capitalization and is one of the oldest operating The Bear Stearns Companies Inc, based in New York City, was one of the largest global Investment banks and securities trading and brokerage This action was taken in part to avoid a potential fire sale of nearly U. S. $210 billion of Bear Stearns' MBS and other assets, which could have caused further devaluation in similar securities across the banking system. ^[115][116]In addition, Bear had taken on a significant role in the financial system via credit derivatives, essentially insuring against (or speculating regarding) mortgage and other debt defaults. In Finance, a credit derivative is a derivative whose value derives from the Credit risk on an underlying bond loan or other financial asset The risk to its ability to perform its role as a counterparty in these derivative arrangements was another major threat to the banking system. A counterparty (sometimes contraparty) is a legal and financial term ^[117]

Loan modification / Hope Now Alliance

Lenders and homeowners both may benefit from avoiding foreclosure, which is a costly and lengthy process. Some lenders have taken action to reach out to homeowners to provide more favorable mortgage terms (i. e. , loan modification or refinancing). Homeowners have also been encouraged to contact their lenders to discuss alternatives. ^[118]

President George W. Bush announced a plan voluntarily and temporarily to freeze the mortgages of a limited number of mortgage debtors holding ARMs, declaring "I have a message for every homeowner worried about rising mortgage payments: The best you can do for your family is to call (sic)" ^[119] the correct number 1-888-995-HOPE. George Walker Bush ( born July 6 1946 is the forty-third and current President of the United States. Sic is a Latin word meaning "thus" "so" "as such" or "just as that" ^[120]. A refinancing facility called FHA-Secure was also created. FHA-Secure is a Federal Housing Administration refinancing program to help borrowers avoid foreclosure ^[121] This is part of an ongoing collaborative effort between the US Government and private industry to help some sub-prime borrowers called the Hope Now Alliance. Not to be confused with the "Give Hope Now" campaign of the American Red Cross Disaster Services ^[122]

The Hope Now Alliance released a report in February, 2008 indicating it helped 545,000 subprime borrowers with shaky credit in the second half of 2007, or 7. 7 percent of 7. 1 million subprime loans outstanding in September 2007. A spokesperson acknowledged that much more must be done. ^[123] During February 2008, a program called "Project Lifeline" was announced. Six of the largest U. S. lenders, in partnership with the Hope Now Alliance, agreed to defer foreclosure actions for 30 days for homeowners 90 or more days delinquent on payments. The intent of the program was to encourage more loan adjustments, to avoid foreclosures. ^[124]

Corporations, trade groups, and consumer advocates have begun to cite statistics on the numbers and types of homeowners assisted by loan modification programs. There is some dispute regarding the appropriate measures, sources of data, and adequacy of progress. A report issued in January 2008 showed that mortgage lenders modified 54,000 loans and established 183,000 repayment plans in the third quarter of 2007, a period in which there were 384,000 new foreclosures. Consumer groups claimed the modifications affected less than 1 percent of the 3 million subprime loans with adjustable rates that were outstanding in the third quarter. ^[125]

The State Foreclosure Prevention Working Group, a coalition formed by 11 state attorney's general and bank regulators, reported in April 2008 that the increasing pace of foreclosures exceeds the ability of loan servicers to keep up. Seventy percent of subprime mortgage holders are not getting the help required. Nearly two-thirds of loan workouts require more than six weeks to complete under the current "case-by-case" method of review. The group has recommended applying a more systematic method of loan modification that can automatically be applied to a large number of struggling homeowners and slowing down the pace of foreclosures. ^[126]

Bank financial health

Major financial institutions had obtained over $260 billion in new capital (i. e. , cash investments) as of May, 2008. ^[127] Such capital is used to help banks maintain required capital ratios (an important measure of financial health), which have declined significantly due to subprime loan or CDO losses. This capital was raised by issuing such instruments as bonds or preferred stock to investors in exchange for cash. BOND (Building Object Network Databases started development in late 2000 as a Rapid application development tool for the GNOME Desktop by Treshna Preferred stock, also called preferred shares or preference shares, is typically a higher ranking stock than Voting shares, and its terms are negotiated Such capital raising has been advocated by the leaders of the U. S. Federal Reserve and the Treasury Department. ^[128] Well-funded banks are in a better position to loan at favorable interest rates, which offsets the liquidity and uncertainty aspects of the crisis. That banks and securities firms have been able to place such large volumes of debt with investors is an indication to some analysts that these firms will survive the credit crisis. ^[129]

Banks have obtained some of this capital from sovereign wealth funds, which are entities that control the surplus savings of developing countries. An estimated U. S. $69 billion has been invested by these entities in large financial institutions over the past year. On January 15, 2008, sovereign wealth funds provided a total of $21 billion to two major U. S. financial institutions. Sovereign wealth funds are estimated to control nearly $2. 9 trillion. Much of this wealth is oil and gas related. As they represent the surplus funds of governments, these entities carry at least the perception that their investments have underlying political motives. ^[130]

Certain major banks have also reduced their dividend payouts^[131] to increase liquidity and further dividend reductions are expected by some analysts in 2008. Dividends are payments made by a Corporation to its Shareholder members ^[132] Of the 3,776 U. S. FDIC insured institutions that paid common stock dividends in the first quarter of 2007, almost half (48 percent) paid lower dividends in the first quarter of 2008, including 666 institutions that paid no dividends. The Federal Deposit Insurance Corporation ( FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933 Insured institutions paid $14. 0 billion in total dividends in the first quarter, down $12. 2 billion (46. 5 percent) from a year earlier. ^[133]

Credit rating agencies

Credit rating agencies help evaluate and report on the risk involved with various investment alternatives. A credit rating agency ( CRA) is a company that assigns Credit ratings for Issuers of certain types of Debt obligations as well as the debt instruments The rating processes can be re-examined and improved to encourage greater transparency to the risks involved with complex mortgage-backed securities and the entities that provide them. Rating agencies have recently begun to aggressively downgrade large amounts of mortgage-backed debt. ^[134] In addition, rating agencies have begun taking action to address perceived or actual conflicts of interest, including additional internal monitoring programs, third party reviews of rating processes, and board updates. ^[135]

Regulation

Regulators and legislators are considering action regarding lending practices, bankruptcy protection, tax policies, affordable housing, credit counseling, education, and the licensing and qualifications of lenders. ^[136] Regulations or guidelines can also influence the nature, transparency and regulatory reporting required for the complex legal entities and securities involved in these transactions. Congress also is conducting hearings help identify solutions and apply pressure to the various parties involved. ^[137]

A sweeping proposal was presented March 31, 2008 regarding the regulatory powers of the U. S. Federal Reserve, expanding its jurisdiction over other types of financial institutions and authority to intervene in market crises. ^[138]

The U. S House passed a bill in early April, 2008 that would offer government insurance on $300 billion in new mortgages to refinance loans for an estimated 500,000 borrowers facing foreclosure and an additional 15 billion to affected states to buy and fix foreclosed homes. ^[139]

Litigation

Litigation related to the subprime crisis is underway. A study released in February 2008 indicated that 278 civil lawsuits were filed in federal courts during 2007 related to the subprime crisis. The number of filings in state courts were not quantified but are also believed to be significant. The study found that 43 percent of the cases were class actions brought by borrowers, such as those that contended they were victims of discriminatory lending practices. Other cases include securities lawsuits filed by investors, commercial contract disputes, employment class actions, and bankruptcy-related cases. Defendants included mortgage bankers, brokers, lenders, appraisers, title companies, home builders, servicers, issuers, underwriters, bond insurers, money managers, public accounting firms, and company boards and officers. ^[140]

Media

The media can help educate the public and parties involved. ^[23] It can also ensure the top subject material experts are engaged and have a voice to ensure a reasoned debate about the pros and cons of various solutions. ^[141]

Economic Stimulus Act of 2008

President Bush also signed into law on February 13, 2008 an economic stimulus package of $168 billion, mainly in the form of income tax rebates, to help stimulate economic growth. The Economic Stimulus Act of 2008 ( is an Act of Congress providing for several kinds of economic stimulus intended to boost the United States ^[11] The economic stimulus package included the mailing of rebate checks to taxpayers. Such mailings started the week of April 28, 2008. These mailings, however, coincided with unexpected all-time jumps in food and gasoline prices. This coincidence prompted some to question whether the stimulus package would have the desired effect or whether consumers would just use it to make up for the gap generated by the higher food and fuel prices. Some Congressmen even contemplated legislation for a second round of stimulus rebate checks to ensure the initial intention of the stimulus package had the expected effect. The Treasury Secretary strongly opposed such initiative. Senators McCain and Clinton, meanwhile proposed eliminating the federal gasoline tax for the summer months instead. ^{[142] [143]}

Expectations and forecasts

As early as the 2003 Annual Report issued by Fairfax Financial Holdings Limited, Prem Watsa was raising concerns about securitized products:

The legacy of Alan Greenspan has been cast into doubt with Senator Chris Dodd claiming he created the "perfect storm" ^[145]. Alan Greenspan (born March 6 1926 in New York City) is an American Economist and was from 1987 to 2006 the Chairman of the Federal Reserve of Christopher John Dodd (born May 27, 1944) is an American Lawyer and Democratic Politician, who is currently serving The phrase perfect storm originates from the 1997 book The Perfect Storm which refers to the simultaneous occurrence of weather events which taken individually Alan Greenspan has remarked that there is a one-in-three chance of recession from the fallout. Nouriel Roubini, a professor at New York University and head of Roubini Global Economics, has said that if the economy slips into recession "then you have a systemic banking crisis like we haven't had since the 1930s" ^[146]. Nouriel Roubini (born on March 29, 1958 in Istanbul, Turkey) is a professor of Economics at New York University. New York University ( NYU) is a private, Nonsectarian, Coeducational Research University in New York City.

On September 7, 2007, the Wall Street Journal reported that Alan Greenspan has said that the current turmoil in the financial markets is in many ways "identical" to the problems in 1987 and 1998. In financial markets Black Monday refers to Monday, October 19, 1987, when Stock markets around the world crashed, shedding a Long-Term Capital Management ( LTCM) was a US Hedge fund which failed spectacularly in the late 1990s leading to a massive bailout by other major banks ^[147]

The Associated Press described the current climate of the market on August 13, 2007, as one where investors were waiting for "the next shoe to drop" as problems from "an overheated housing market and an overextended consumer" are "just beginning to emerge. The Associated Press ( AP) is an American News agency. The AP is a Cooperative owned by its contributing Newspapers radio Events 3114 BC - According to the Lounsbury correlation the start of the Maya calendar. Year 2007 ( MMVII) was a Common year starting on Monday of the Gregorian calendar in the 21st century. " MarketWatch has cited several economic analysts with Stifel Nicolaus claiming that the problem mortgages are not limited to the subprime niche saying "the rapidly increasing scope and depth of the problems in the mortgage market suggest that the entire sector has plunged into a downward spiral similar to the subprime woes whereby each negative development feeds further deterioration", calling it a "vicious cycle" and adding that they "continue to believe conditions will get worse" ^[148]. MarketWatch operates a financial information website that provides business news analysis and stock market data to some 6 million people Stifel Nicolaus is the largest subsidiary of Stifel Financial Corp A virtuous circle or a vicious circle is a complex of events that reinforces itself through a Feedback loop toward greater instability

Citigroup economists stated in mid-March 2008 regarding the likelihood of a recession that “The self-feeding downturn now in place shows signs of becoming deeply entrenched. ”^[149]

As of November 22, 2007, analysts at a leading investment bank estimated losses on subprime CDO would be approximately U. S. $148 billion. ^[150] As of December 22, 2007, a leading business periodical estimated subprime defaults between U. S. $200–300 billion. ^[151] As of March 1, 2008 analysts from three large financial institutions estimated the impact would be between U. S. $350–600 billion. ^[152]

On March 20, 2008, the Organization for Economic Cooperation and Development downgraded its economic forecasts for the United States, the Eurozone and Japan for the first half of 2008. Events 1600 - The Linköping Bloodbath takes place on Maundy Thursday in Linköping, Sweden. 2008 ( MMVIII) is the current year in accordance with the Gregorian calendar, a Leap year that started on Tuesday of the Common The United States of America —commonly referred to as the Euro Enlargement of the For a topic outline on this subject see List of basic Japan topics. 2008 ( MMVIII) is the current year in accordance with the Gregorian calendar, a Leap year that started on Tuesday of the Common ^[153]

Alan Greenspan, the former Chairman of the Federal Reserve, stated: "The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U. S. economy, and the world economy more generally, will be able to get back to business. " ^[66]

See also

References

External links and further reading

• "Liquidity boom and looming crisis" by Henry CK Liu, Asia Times, May 9, 2007. Asia Times was a Newspaper launched in Thailand by Thai tycoon Sondhi Limthongkul in 1995 Events 1457 BC - Battle of Megiddo (15th century BC between Thutmose III and a large Canaanite coalition under the King of Year 2007 ( MMVII) was a Common year starting on Monday of the Gregorian calendar in the 21st century.
• "Why the subprime bust will spread" by Henry CK Liu, Asia Times, March 17, 2007. Asia Times was a Newspaper launched in Thailand by Thai tycoon Sondhi Limthongkul in 1995 Events 45 BC - In his last victory Julius Caesar defeats the Pompeian forces of Titus Labienus and Pompey the Younger Year 2007 ( MMVII) was a Common year starting on Monday of the Gregorian calendar in the 21st century.
• The US sub-prime crisis in graphics. BBC (21 November 2007). Events 164 BC - Judas Maccabaeus, son of Mattathias of the Hasmonean family restores the Temple in Jerusalem. Year 2007 ( MMVII) was a Common year starting on Monday of the Gregorian calendar in the 21st century.
• "Understanding the Subprime Mortgage Crisis", paper by Yuliya Demyanyk (FRB St. Louis) and Otto Van Hemert (NYU Stern), December 10, 2007. Events 1041 - Empress Zoe of Byzantium elevates her adoptive son to the throne of the Eastern Roman Empire as Michael V Year 2007 ( MMVII) was a Common year starting on Monday of the Gregorian calendar in the 21st century.
• "A Catastrophe Foretold", opinion by Paul Krugman in The New York Times, October 26, 2007. Paul Robin Krugman ( born February 28 1953 is an American Economist, Columnist, Author, and Intellectual. Events 740 - An Earthquake strikes Constantinople, causing much damage and death Year 2007 ( MMVII) was a Common year starting on Monday of the Gregorian calendar in the 21st century.
• "Public Cash Management and the Subprime Loan Crisis: Be Aware of Financial Investment Risks", Michel Lazare, Public Financial Management Blog, International Monetary Fund, January 4, 2008. The International Monetary Fund ( IMF) is an International organization that oversees the Global financial system by following the Macroeconomic Events 46 BC - Titus Labienus defeats Julius Caesar in the Battle of Ruspina. 2008 ( MMVIII) is the current year in accordance with the Gregorian calendar, a Leap year that started on Tuesday of the Common
• Sloan, Allan. "Junk mortgages under the microscope", The Deal, CNN Money, 16 October 2007. Events 456 - Magister militum Ricimer defeats the Emperor Avitus at Piacenza and becomes master of the western Year 2007 ( MMVII) was a Common year starting on Monday of the Gregorian calendar in the 21st century.  

• "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison", Carmen M. Reinhart and Kenneth S. Rogoff, February 5, 2008. Events 1576 - Henry of Navarre converts to Roman Catholicism in order to ensure his right to the throne of France. 2008 ( MMVIII) is the current year in accordance with the Gregorian calendar, a Leap year that started on Tuesday of the Common Analysis of Harvard economists.
• "The Rise and Fall of Subprime Mortgages". Federal Reserve Bank of Dallas (2007-11). The Federal Reserve Bank of Dallas covers the Eleventh Federal Reserve District which includes Texas, northern Louisiana and southern New Mexico
• "From Complacency to Crisis: Financial Risk Taking in the Early 21st Century". Federal Reserve Bank of Dallas (2007-12). The Federal Reserve Bank of Dallas covers the Eleventh Federal Reserve District which includes Texas, northern Louisiana and southern New Mexico
• "Heading for the rocks: Will financial turmoil sink the world economy?"—a special free report from the Economist Intelligence Unit. The Economist Intelligence Unit ( EIU) is part of The Economist Group.
• "The Next Slum", Christopher B. Leinberger, The Atlantic Monthly, March 2008. The Atlantic (formerly known as The Atlantic Monthly) is an American Magazine founded in Boston in 1857
• "The next bubble: Priming the markets for tomorrow's big crash", Eric Janszen, Harper's Magazine, February 2008. Harper's Magazine (also Harper's) is a monthly general-interest Magazine of literature politics culture finance and the arts
• "The Giant Pool of Money", This American Life, 9 May 2008 (episode #355). This American Life ( TAL) is a weekly hour-long Radio program produced by Chicago Public Radio and hosted by Ira Glass. Events 1457 BC - Battle of Megiddo (15th century BC between Thutmose III and a large Canaanite coalition under the King of 2008 ( MMVIII) is the current year in accordance with the Gregorian calendar, a Leap year that started on Tuesday of the Common A plain language examination of the history and origins of the subprime mortgage crisis and credit crunch.