Credit Crisis Essay Example | Topics and Well Written Essays - 750 words

Credit Crisis - Essay ExampleWhat most people agnise is that greedy banks encouraged people to take out loans that they could not afford to pay, and now they atomic number 18 sounding at a windfall of foreclosures since the people are falling way behind their mortgages. What completely befuddles e preciseone is the circumstance that how can a singular unit of the mortgage business cause so much sanatorium How could the whole subprime mortgage business send stock markets plummeting, leave Bear Stearns in ruins, and send the countrys economic system into a rapid downward spiralApparently, the confusion is not limited to consumers alone. Even seasoned fiscal and investment professionals are seemingly in the dark as well. It seems that the financial crisis has shown Wall Street shape several hitherto un comprehend of instruments. A good example would be a liquidity do, a contract so obscure that even the best analysts in the industry had never heard of it.As it is, the housing cri sis traces its beginnings roughly a decade ago when real estate seemed like a real steal. Conditions were favorable - an influx of global investments into the mortgage business made it very easy to gravel a housing loan. The suddenly flush marketplace had mortgage rates plunging, and numerous new innovations were introduced to lure more buyers.The problem was, these same investors were demanding higher... These loans would offer low initial rates as a come-on, and would subsequent saddle homeowners with significantly higher rates as the loan progressed. These investments were then rig together into the at at once obscure Collateralized Debt Obligation - a highly leveraged instrument which promised big gains and came with tremendously high risk. Simply put, these investors were make $100 million bets with only $1 million of their own money. If their investment rose to $101 million, they clear $1 million. The risk involved was very high, and the peculiar thing was so many insti tutions ended up getting a piece of it because the U.S. housing market seemed like a sure thing. For instance, banks apparently sell very complex insurance policies on the mortgage debt. With so many parties involved, it is no surprise that once the bubble burst everyone was on the hook. Hence the freefall that has embroiled the financial markets for nearly a year now. Personally, I feel that it would be helpful for people to be well-informed about the housing crisis. It is one of the most pertinent and talked-about topics of the day, and yet it seems that oftentimes people do not know the real score. This is a very serious issue with potentially serious repercussions, and knowing what precisely is going on would be a tremendous plus in making better informed fiscal decisions in the future. As the member conceded however, given the complexity of the financial instruments involved this may be easier said than done. If Wall Street professionals are having a hard time with it, everyon e else may be hard-pressed to know what a liquidity put