What caused the 2007 financial crisis Quizlet?
The 2007 financial crisis is the breakdown of trust that occurred between banks the year before the 2008 financial crisis. It was caused by the subprime mortgage crisis, which itself was caused by the use of derivatives. This timeline includes the early warning signs, causes, and signs of breakdown.
How did they miss the early clues of the financial crisis?
Here's How They Missed the Early Clues of the Financial Crisis. The 2007 financial crisis is the breakdown of trust that occurred between banks the year before the 2008 financial crisis. It was caused by the subprime mortgage crisis, which itself was caused by the use of derivatives.
How did the housing market affect the financial industry in 2007?
Since the financial industry heavily invested in mortgage-backed derivatives, the housing industry’s downturn became the financial industry’s catastrophe. The 2007 financial crisis ushered in the 2008 Great Recession. In February 2007, existing home sales peaked at an annual rate of 5.79 million.
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What were the causes of the 2007–2009 financial crisis?
This case study examines five dimensions of the 2007–2009 financial crisis in the United States: (1) the devastating effects of the financial crisis on the U.S. economy, including unparalleled unemployment, massive declines in gross domestic product (GDP), and the prolonged mortgage foreclosure crisis; (2) the multiple causes of the financial crisis and panic, such as the housing and bond bubbles, excessive leverage, lax financial regulation, disgraceful banking practices, and abysmal rating agency performance; (3) the extraordinary efforts of the Federal Reserve, the Federal Reserve Bank of New York, and the Department of the Treasury to stem the financial freefall triggered by the crisis and resuscitate financial institutions, (4) the ethical implications of the unprecedented actions by government institutions to rescue financial institutions and drag the country back from the brink of global financial collapse, and the conduct of the various parties contributing to the financial crisis, such as the shoddy behavior of mortgage brokers, the massive securitization of mortgages into overly complex bonds, the excessive leverage of financial institutions, the disgraceful work of bond rating firms, the abysmal risk management systems employed by financial institutions, and the massive operations of the shadow banking and over-the-counter derivatives markets; and (5) the major provisions of the Dodd–Frank Wall Street Reform and Consumer Protection Act signed into law to in response to the financial crisis and for the purpose of correcting the egregious conduct of major financial institutions.
When did the financial crisis end?
economy and plunged the country into a long and deep recession officially beginning in December 2007 and ending in June 2009 (The Financial Crisis Inquiry Report [“FCI Report”] 2011, pp. 390–391).
What happened in 2007?
In early 2007, the housing bubble burst. Home prices fell. Home sales declined. Mortgage delinquencies increased and continued to do so as 2007 went on, particularly in subprime adjustable-rate mortgages (FCI Report 2011, p. 213, 217, 221–222). Rating agencies downgraded their ratings of mortgage-backed securities and collateralized debt obligations. Alarmed investors sold, and sales prices plummeted. By the summer of 2007, securitization of MBS and CDO ceased and their market vanished (p. 214).#N#Footnote#N#39 Disruption ensued as financial firms fled the commercial paper and repo markets for safer harbors. Banks became unwilling to lend to each other and scrambled to improve their own liquidity. Institutions dependent on the commercial paper and repo markets failed or would have to be rescued by the Federal Reserve (p. 255).#N#Footnote#N#40
What were the four federal regulators responsible for the financial crisis?
At the time of the financial crisis, the banking industry was subject to four federal banking regulators charged with “ensuring the safe and sound operation of banks and other financial institutions”: the Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the Federal Deposit Insurance Corporation (FDIC) (p. 57).#N#Footnote#N#22 Under the regulators’ “unwatchful” eyes, banks proliferated their SIVs, approved hundreds of billions of dollars in shamefully bad subprime mortgages (many designed to default) (Blinder 2013, p. 70), and invested vast sums of money in dicey assets “they portrayed as, and maybe even believed were, safe (p. 57).” That the banking regulators could have “slammed the door on some of the more outrageous underwriting practices, but didn’t” is perhaps the greatest tragedy of the financial crisis (p. 58).#N#Footnote#N#23 Risky subprime lending by banks expanded significantly in plain view. Subprime mortgages were only 7 % of mortgages granted in 2001. By 2005, subprime lending grew to 20 % of all new mortgages, and total outstanding subprime mortgage balances soared to about $1.25 trillion. Unfortunately, the banking regulators seemed not to notice despite warnings that matters were getting out of hand (p. 58).#N#Footnote#N#24 Whether it was the free-market ideology of banking regulatory officials or perceived political pressure to drive up homeownership among relatively low-income families in the Clinton and Bush administrations, the regulators looked the other way. Indeed, the banking regulators may not actually have seen “the complete sorry picture for what it was,” because a growing source of the “dodgy” mortgages was non-bank lenders operating beyond the purview of the federal regulatory system “with no adult supervision at all” (p. 59).#N#Footnote#N#25
What was the ratio of Bank of America to Citigroup in 2007?
Bank of America’s rose from 18:1 in 2000 to 27:1 in 2007. Citigroup’s increased from 18:1 to 22:1, then shot up to 32:1 by the end of 2007, when Citi brought off-balance assets onto the balance sheet. More than the other banks, Citigroup held assets off its balance sheet, in part to hold down capital requirements.
How much was the mortgage debt in 2001?
Overall mortgage indebtedness in the U.S. climbed from $5.3 trillion in 2001 to $10.5 trillion in 2007, and the average mortgage debt of the American household rose almost as much in the 6 years from 2001 to 2007 as it had over the course of the country’s more than 200-year history (p. 7).
When did Bank of America buy Merrill Lynch?
Although the takeover of Merrill Lynch would later run into a few speed bumps, the merger was completed on January 1, 2009 (p. 153). Footnote.
When was the book Capital Ideas first published?
thesis at Harvard in 1937. Our good friend, Peter Bernstein mentioned this book several times in his excellent Capital Ideas which was published in 1992. Why the book is interesting today is that it still is important and the most authoritative work on how ...
What is the second edition of Damodaran on Valuation?
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What are the behavioral challenges investors face?
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What are the three historical swindles in the classic survey of crowd psychology?
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How many copies of A Random Walk Down Wall Street have been sold?
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When was Common Sense on Mutual Funds published?
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When was Security Analysis published?
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What are bubbles in the financial world?
Bubbles occur all the time in the financial world. The price of a stock or any other commodity can become inflated beyond its intrinsic value. Usually, the damage is limited to losses for a few over-enthusiastic buyers. The financial crisis of 2007-2008 was a different kind of bubble.
What happened in 2007-2008?
Ireland 's vibrant economy fell off a cliff. Greece defaulted on its international debts. Portugal and Spain suffered from extreme levels of unemployment. Every nation's experience was different and complex.
How much money did Subprime make in 2006?
Subprime mortgage company New Century Financial made nearly $60 billion in loans in 2006, according to the Reuters news service. In 2007, it filed for bankruptcy protection.
Why did the housing bubble happen?
First, low-interest rates and low lending standards fueled a housing price bubble and encouraged millions to borrow beyond their means to buy homes they couldn't afford. The banks and subprime lenders kept up the pace by selling their mortgages on the secondary market in order to free up money to grant more mortgages.
What banks were seized by the government in 2008?
By the summer of 2008, the carnage was spreading across the financial sector. IndyMac Bank became one of the largest banks ever to fail in the U.S., 11 and the country's two biggest home lenders, Fannie Mae and Freddie Mac, had been seized by the U.S. government. 12
What bank went bankrupt in September?
Yet the collapse of the venerable Wall Street bank Lehman Brothers in September marked the largest bankruptcy in U.S. history, 13 and for many became a symbol of the devastation caused by the global financial crisis.
Which banks were too big to fail?
As for the biggest of the big banks, including JPMorgan Chase, Goldman Sachs, Bank of American, and Morgan Stanley, all were, famously, " too big to fail .". They took the bailout money, repaid it to the government, and emerged bigger than ever after the recession.