Banking Essay

606 words - 3 pages

Trends in the industry

Setting the Background
During the turn of the 21st century, things were looking extremely bleak for the U.S. economy. The dot-com bubble left major technology companies – and their employees, in complete financial shambles. This stock market crash caused the loss of over $5 trillion in the market value of various companies from 2000-2002. In addition, the events of September 11th accelerated this recession. Although the $40 billion insurance loss was one of the largest insured events, it didn’t even compare to the subsequent events that occurred. Most major U.S. securities exchanges closed down (even the London Stock Exchange and various others worldwide), airline and aviation suffered increased costs due to grounded flights, and massive losses were taken in the tourism industry that employed 280,000 people in New York alone. Overall losses amounted in the hundreds of billions.
Subprime meltdown
In response to these catastrophic events, the Federal Reserve began cutting interest rates dramatically, with the fed funds rate dropping down to 1% in 2003. As lower interest rates continued to become the norm, the real estate begins to look much more attractive as many home buyers were able to purchase homes that offered low introductory rates and minimal initial costs. The vast majority of these buyers were betting that they could refinance their mortgages to lower rates due to price appreciation. However, home prices soon stopped increasing at breakneck speeds. As prices of homes began to decline in early 2006, many homeowners simply could not refinance to lower rates. As interest rates slowly rose, monthly payments increased on adjustable rate mortgages. Many homeowners discovered that they could not afford these higher payments, and simply had to default on their loans.
Mortgage Backed Securities
So how did these events affect the investment banking industry, and...

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