Factors that Caused the Financial Crisis

Factors that Caused the Financial CrisisThe ground had set ab out(p) two major pecuniary disasters during 20th century. The first crisis happened during 1920-30, which in the first place bear on the developed countries like Europe and America. Second crisis started in 1997 and stayed till 1999, chief(prenominal)ly affected developing economies of Asia pacific. The recent financial crisis which has awakened the whole world mainly resulted from unregulated financial market. It has created serious anxiety because it f altogethers outwards from U.S, the starting point. Alan Greenspan recently called it a once-in-a-century quote tsunami, born of a pick deep inside the US housing sector. In order to avoid complete meltdown, g e reallyplacenments and central banks worked day and night. Trillions of dollars have been allocated to financial institutions by the governments to rule from the crisis in the United States aloneWho were the culprits of financial crisis? It is impossible to held just angiotensin converting enzyme factor responsible for such(prenominal) a larger mass in the absence of other factors. In my look for i want to study the contri aloneion of each factor but the questions arise in my judgment is How did Lehman Brother, the fourth largest investment bank in USA failed?Why bulk of financial institutions failed in comp be to other institutions?This surly point towards unconditional activities by financial institutions in their main business LENDING. So center on of my enquiry is to find out the dominant role of easy l extirpate in present crisis along with other factors.The effect of financial crisis 2008 was such sever that even allocating huge amount to address the issues proven depleted to resolve it. Congress approved $700 one thousand thousand in response to the problem. national reserve spend $1.3 trillion to bail out markets and institution that includes investments in risky assets, loans to bankrupt institutions, sharing suc h debt which were defaulting at faster rank (Morris, 2008). A further $900 billion were allocated as lending to large corporations (Aversa, 2008), compass the total of nearly $3 trillion as bailout package so far, without even adding the big amount of corpo fuck off out debt promised by the U.S government category before the crisis An go steadying of the root causes of this colossal failure that has put the inbuilt financial system at risk (Woellert and Kopecki, 2008) is necessary to avoid such failures in the future. Number of factors can be held responsible for financial crisis which emerged over number of years. Causes proposed include the followingsub-prime mortgages/ easy lendingPoor reference point ratingFailure of regulatorsShadow bankingSecuritizationCredit default swap owe approve securitiesAssets backed commercial report card etcAims and ObjectiveAim of this research is to view the root causes of financial crisis particularly lending practises as a major factor.O bjectivesTo explore the narration of financial crisisTo evaluate who were the victims and culprits of financial crisis meet of financial crisis on other countries (UK, USA, India, Japan)What steps are being interpreted by government to overcome crisisWhat could be done to prevent repeating of crisis in future?Literature ReviewHow did we get to this point? amazingly it all started from residential mortgages in the U.S. It had become apparent from 2004 that mortgages issued to absolute majority of consumers did not make any rational sense. Situation was more than worsted by so called mortgage brokers who issued mortgages to many in solution consumers in order to pass on outsized fees. On other hand new financial vehicles called mortgage-backed securities (MBS) rated by well know credit rating agencies were introduced by Wall Street. These gamey yielding mortgage-backed securities were bought by investors from all over the world which increase funding for new mortgages. Apprais er ignored all rules to meet the increasing entreat of mortgage applications. Federal Reserve age appointed by sexual intercourse in 1994 to regulate mortgage lenders decided to watch the game from pavilion. at long last as the bubble accelerates, in that location is necessary reckoning house prices collapsed. This is how ravenousness and irresponsibility resulted into a biggest financial crisis (Schmudde, 2008).Sub-prime mortgages which are always blamed for financial crisis is only a component of the deeper problem. The value of credit default swaps, which was primarily estimated to be $55 trillion by the securities and exchange ( 4 times higher(prenominal)er then the actual figure) are totally unregulated and majority of them were contracted over the phone without any verification, is the root cause from which all the problems of crisis started (Simon, 2008). Regulators had forecasted the problem of present crisis years in advance were not taken seriously because of the successful business by the same financial institutions which are either bankrupt or funded by the government (Associated Press, 2008).According to Bernanke (2009) and Portes (2009) world-wide imbalances are the fundamental cause of the crisis and it is not possible to fully understand present crisis without considering the issue of global imbalances. As per Jagannathan, Kapoor, and Schaumberg (2009) imbalances in labour provision can assist to understand the present crisis. Acharya and Richardson(2009), and Acharya and Schnabl (2009) argue that banks were suppose to imparting the risks to end investors while securitising, particularly in the case of asset-backed commercial paper and purchase of AAA-rated tranches but they never did which led them to huge pool of credit risks. Schmudde (2009) documents that no verification of consumers income were done while issuing sub-prime mortgages. Many of them were issued for or close to 100% of the house price. Even borrowers with bad credi t history easily managed to get mortgages. This is one of the reasons for huge growth in subprime mortgages which increased from $35 billion to $807 billion amongst1995 to 2005. According to Bartlett (2008) decline of US subprime mortgage triggered the crisis, the impact of the down fall was tremendous Mark-to-market losses on mortgage backed securities, collateralized debt obligations, and related assets through March 2008 were approximate $945 billion. He further said that it is The largest financial loss in history, in compared to $780 billion of 1990 Japans banking crisis, lost accrued from Asian crisis of 1997-98 about $420 billion.. While explaining the reason how did this crisis act into a global crisis, Khatiwada and McGirr (2008) give ind Many of these Sub-prime mortgages actually never do it on the balance sheets of the lending Institutions that originated them and such mortgages by rating them high were made attractive to world investors, when sub-prime borrowers fail ed to repay their mortgages, the originating institution needed to pay the foreclosure with their own money, bringing the asset back on its balance sheet. This remaining many banks in a financially unviable situation, in a rather short, unmanageable timeframe. According to Mian and Sufi (2008) increased demand for mortgage backed securities led to lending boom which is the root cause of present crisis.Whalen (2008) argues that trine main factors are at the root of the problem.First, many companies, banks, and government agencies were back up to increase the viability of affordable housing by introducing creative financing techniques.Second, big number of over-the counter derivatives and securities were issued by majority of financial institutions due to huge support by the regulators, led to a breakdown in gum elastic and soundness at banks and securities lenders.And the last factor is fir value method of accounting an ill-advised by Securities and Exchange Commission (SEC) a nd the financial accounting standards board (FASB) to all public company to change the reporting standards.The nations biggest subprime lender, Ameriquest Mortgage co., gave more then US$20 million as a governmental donation. Other financial institutions like citigroup inc., wells Fargo co., donated huge amount on political side and on lobbying. This donation helped these institutions to persuade legislators to pass predatory-lending laws which energy have contributed to present crisis to some extent (Simpson, 2007).According to Shiller (2008) the following factors play very big role in present crisisStrategy of cornerstone ownership which encourage even those who could not afford one.The link between mortgage originator and receiver of payments broke due to mortgage securitization. Because of this there was no reason for mortgage originator to verify the solvency of borrowers.Many loans were issued at low interest rate or even at home in rates with the use of new financial tec hniques but afterwards rate were increased too high.Research methodologyMethodology plays a very crucial role in how research lead be carried out. Methodology is an explanation of why you unruffled certain information, what entropy you collected, from where you collected it, when you collected it, how you collected it and how you analysed it (Collins, 2003). The researcher requires an interviewer or observer skills to gather data in the qualitative methods. This method requires collecting and analysing the data and applying the statistical tests (Riley, 2004). Qualitative research interprets vox populi of the people in the sample, their way of looking at the subject, what they experience about subject and the dynamic interpret feeling on the subjects (Guari, 2005). The numeric method mainly uses research instruments to gather, analyse and measure the data. Quantitative nest is more subjective approach. Quantitative approach includes analysing and reflecting on perception to understand social and human activities (Collins, 2003). The main purpose of this chapter is to explain and justify the unproblematic research method which I have chosen to carry out my research. This chapter get out too explain the significance of secondary data and state what sources of secondary data i will be using.Source of accomplishment of dataPrimary dataPrimary data collection authority to collect new data of subjects for specific purpose. The different methods of collecting radical data are questionnaire, interview and sampling (Saunders, 2003). For my research it is very authorised to get some primary data to understand the topic in practical sense. By taking interview of the head of financial institution, will add extra value to my research and will broaden my understanding of topic as a whole. I will be collecting my primary data through interview with Mr Mitesh Sheth, Deputy Head of Henderson ball-shaped Investors. The main focus of interview will be to get th eir opinion about how did this crisis started, what was there response etc. I am also trying to contact few other key people but too early to mention anything about them yet. substitute(prenominal) DataSecondary data means data collected previously for some purpose. The main sources of such data are library, internet, articles, business journals, research organization (Saunders, 2003).Methods of data analysisAfter collecting primary and secondary data the beside stage is to evaluate or analyse the collected data. To convert data into graphs will be the easiest way to analyse the data.HypothesisI will be analysing total amount of lending by US banks to solvent and insolvent borrowers and comparing their rate of default to conclude my research.Work visualizeProposal submit21st Juneliterate review31st July eagerness for interview5th magisterialInterview of selected person10th AugustAnalysis of data20th AugustStart writing reportsfifteenth SeptemberDraft report10th OctoberFinal repor tOctober endOn successfully completion of my dissertation I hope to come to a positive conclusion. I will utilise all the recourses getable to me in order to draw out conclusion. Such as charts, graphs, historic data, interview, questionnaires etc.