The Sub Prime Mortgage Sector Crisis in the U.S created a credit vacuum across the world that sucked down all major American Investment Banks, Lending houses and Mortgage agencies. The Black Hole that erupted in America also Impacted on the Global Financial Institutions from Europe to Asia to Australia.
But come September 2008 and things went from bad to worse.....
The Collapse of the American Financial Giants Bear Sterns and Merrill Lynch was still ripe and another huge American Savings and loaning giant Washington Mutual is closed down, the American International Group or AIG as it is known world wide is saved by the U.S Federal Reserve by a life line of 85 billion $. It is widely seen as a policy to save the face of American Capitalism from International Shame.
Lehman Brothers collapse in this month is widely seen as the worst instance of an American Bank going Bankrupt, It was shred down and sold off to the best buyers. Bain Capital LLC and Hellman & Friedman LLC agreed to buy most of the asset-management units of Lehman Brothers for 2.15 billion $, London-based Barclays purchased the rest of Lehman's North American investment-banking business. Asian Banks are largely taking the lead in buying out the crippled American Financial Institutions shattering the American dominance on a once colossus empire.
The American government tries to pass a 700 billion $ financial bail out plan which most experts see as something that will just slow down the risk of a systematic collapse but does not cure the disease, The plan is rejected by the U.S congress putting more strain on a already wobbling economy. Public view of the plan was more than unfriendly as people believed it would result in higher taxes.
Wall Street faces the biggest brunt with it seeing the worst financial crisis since the Great Depression of the 1930's.
Stocks are collapsing by the hundreds and the fire is not contained as Stock Market across the globe are still in red and trillions of dollars are wiped off in minutes.
European Central Banks are on a contingency plan where by large sums of money are pumped into their economies to bail out or save ailing banks and lending firms.
-British Govt. announces nationalization of Bradford and Bingley, selling off its savings business to a Spanish bank.
-Fortis is rescued by Belgian, Dutch and Luxembourg Governments with 16 billion $.
-Iceland Govt. buys a 75% stake in a leading bank Glitnir for 860 million $.
-Japanese Central Bank Injects 17.8 billion $ into the economy to slow the effect of the crunch.
To help you understand how all this started as a Commerce student I will try to explain the issue in my own words in a few sentences.
America follows a system of credit rating where in each and every individual has a specific credit worthiness. Those with low credit worthiness or a are not very firm financially are also given loans, these loans are known as Sub Prime loans.
Now During the previous housing boom in America large amounts of loans were given in the sub prime category. Keeping in mind that Sub Prime Mortgage bears a higher risk American banks get these risks reduced by either transferring the risk on payment of Interest or getting the risk insured by other banks. Now when the Mortgages finally collapsed and there were no means to recover the bad debts the American Banks fell because of the huge nature of so many debts coming around at one single time. Now when the American banks fell they took with them the banks that had shared the risk or had insured it with them, creating a Global Crisis.
The Federal Reserve of The United States of America is highly to be blamed for the chaos as although it is not a regulatory authority when it comes to Investments Bank in the country, It still could have taken concise decisions when the clouds of an credit collapse where in the sky. It is Important we see how the things turn out in the future as it has a major Impact on the lives of millions of people worldwide and I will surely keep my readers updated of how this Crisis takes shape in the days to come.
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