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What is the Subprime Crisis? Research Team | Posted On Tuesday, October 07,2008, 03:26 PM

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What is the Subprime Crisis?



Subprime Crisis Summary:

I’ve almost lost the count on the number of articles been written about the losses incurred in the sub-prime crisis. By now, many biggies of the Wall Street have felt the jitters. The implications have been witnessed in the form of Society General to Bear Stern. The written down figures have only grown bigger ever since the news had hit the market. The event has kept the news channels, auditors, real estate agents, CDOs, hedge fund managers and investors busy for a long time now. B-school students also seem tired discussing it in their group discussion rounds. But the story goes on. So I thought, its time that I give this clip another shot with an attempt to cover it in a layman’s term. Though the topic would mark pessimism, being the first in this New Year, the popularity of the event would match the need for the post.

The event was basically a fall-out of the 2000 dot com bubble burst. The mild recession subsequently led the Federal Reserve to cut rates low enough. This action invited many to borrow the cheap money, fuelling the asset inflation as well as the housing prices. Things started to go out of proportion, once the credit was on the loose. Even the people, devoid of any credible financial background, became heavily leveraged home owners- the sub primers!!!

What eventually followed was a series of interest upheaval that made credit seeking tougher. The sub primers started defaulting at random, triggering the panic button for most of the money pouring banks. And as they say, rest is history. But the history continues to frighten people gulping down the assets of many prized US possessions. Citigroup, Salomon, Lehman Brother, UBS AG and many more continued underwriting the losses, while the emerging markets take the stick as FIIs get short.

A similar situation was confronted by the Japanese economy in the 1980s. After a long boom, the Japanese economy in the 1990s, as in the US today, was struck by a plunge in the real estate market. In Tokyo, the government and bankers were slow in estimating the size of the problem. Bad loans piled up eventually. The financial troubles gathered momentum and ripped through the economy as consumer spending and job growth fell. Japan’s fate came as a warning for the United States, as 18 years after the bursting of the bubble, Japan’s main stock index (the Nikkei 225) is still only worth about 33% of what it was at its peak.

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