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Project Of Financial Crisis Essay

1944 words - 8 pages

Group 7Financial Crisis in USAContents3Acknowledgments 4Background 5Subprime Mortgage Crisis 5Subprime Mortgage 6Misrepresentation of loan application data 7Mortgage-backed Securities 7Housing Downturn 8Effects on stock market 9Effect on world economy 9The Federal Reserve and the Banking Liquidity Crisis 9Case Study on Lehman Brothers 13Solution and action of the US Government 14Stagflation in the global economy should be the policy of holding elections 14U.S. Government to Invest in Banks to Boost Confidence 15U.S. government policies in the subprime mortgage crisis 18Conclusion 20Appendices 21Work Contribution AcknowledgmentsIt has been the worst financial crisis since the Great Depression of the 1930s. It contributed to the failure of key business, declines in consumer wealth of trillions of dollars and a significant decline in economic activity.The crisis can be linked back to the deregulation and securitization of real estate mortgages in the United States. Those securities were traded around the world and it is hard to assess its risk. And then the housing bubble which peaked in the United States in 2006, causing those securities loses value and leads to an impact on global market.In this research, we will first describe subprime mortgage and housing bubble crisis.Then we will study one of the investment bank failures in this incident. Finally we discuss how the US Government does to help this economic as well as a conclusion to our project.BackgroundThe Subprime Mortgage Crisis threatens to throw the U.S. economy into a recession.The reason is that the banks lend money to low credit borrowers to buy flat and once the US economy turns down and housing prices drop, the borrowers cannot repay the debt and they will default. There will have many bank-owned flats which will affect the financial health of the US financial institutions and the US economy. US will fall into recession but they seem no signs of improvement even after a series of interest rate cut in US.The U.S. and global stock markets have declined 4-5% due to the subprime mortgage crisis.But what, exactly, is that crisis about? How did it start, and why has it suddenly affected the economy?Subprime Mortgage CrisisSubprime MortgageA subprime mortgage is granted to borrowers whose credit history is not sufficient to get a conventional mortgage. Very Often these borrowers have impaired or even no credit history.Lenders usually charge higher interest rates to provide more return for the greater risk. Normally, this makes it too expensive for many subprime borrowers to even make monthly payments.Since those people are of the low credit class, it would have a large opportunity to become bad debts. Originally, bank in U.S. with bad debts won't affect globally. However, the subprime mortgage loan does provide good rate of return to the banks, so the U.S. banks issue bonds to other countries, that means borrow money from others to run their subprime mortgage service.Since most subprime...

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