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The Cause Of The Finanicla Crisis

1077 words - 5 pages

The current financial crisis which spread in 2008 had influenced the global economy in different aspects such as the GDP, labour markets, government policy(Read 2009 ). Considering the causes of the financial crisis, Greenberger, who was the director of the Division of the trading and Marketing of CFTC demonstrated that lack of information transparency was the main cause of the financial crisis. This essay would identify the lack of transparency in the securities markets led to the moral hazard which finally result in the illiquidity and disaster in the financial market.
According to the report of The Transparency International ,by transparency, institutions are required to disclose all the information which enable to ensure their accountability to the stakeholders. Transparency is really important in the financial systems since it could help the investors to fight with the fraud and corruption, avoid the information asymmetry and identify the risks accompanied with the financial products. Moreover, by transparency, the markets could act more effectively since the products prices and the hidden costs were need to be opened to the public(). Oppositely, if lack of transparency, it is easy to cause the “moral hazard problems” which means that the financial institutions could transfer the risks related to the repacked financial products to the investors. When the risks are unable to be covered at the end , the financial crisis is exposed inevitably(Niinimaki 2012).
To clarify, when the originate-to -distribution mechanism became the major model for the SPV to sell the financial products to the capital markets, CDO become the most popular financial innovation in the markets. CDO are complex financial products composed by different pools of loans such as the Residential-Mortgage-Backed-Securities, credit cards loans, auto loans and even accounts receivables(longstaff 2010). A single CDO may be formed by thousands of mortgages and 150 Mortgage- Based- Securities(Andersen et al 2011). After the profiles were formed, the issuers could convert the cash flow from mortgages to different single tranches and slides with different levels of risks and sold them to investors(Crotty 2009).However, due to non-transparency, the investors were unable to analyse the real risks and value of this complex financial products and relied too much on the overoptimistic credit rating, which led the boom on CDO markets between 2011 and 2006(Hirshlerfer et al 2012). (Table 1). Nouriel Roubini, the professor of the New York University, claimed in 2008 that CDO was such a new, complex, illiquid and marked-to-model product that unable to assess the value and price of it correctly(Roubini 2008).Meanwhile, lacking of transparency impelled the moral hazards problems become more and more serious. To clarify, as CDO issuers , they could gain the originate fees without undertaking the risks of the loan defaults since they have already ...

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