Credit Crisis Essay Example | Topics and Well Written Essays - 750 words

Credit Crisis - Essay ExampleWhat most people check is that greedy banks encouraged people to take out loans that they could not afford to pay, and now they ar looking at a windfall of foreclosures since the people ar falling way behind their mortgages. What completely befuddles e reallyone is the fact that how can a singular unit of the mortgage business cause so much crazy house How could the whole subprime mortgage business send stock food markets plummeting, leave Bear Stearns in ruins, and send the countrys economy into a rapid downward spiralApparently, the perplexity is not limited to consumers alone. Even seasoned financial and investment professionals are seemingly in the dark as well. It seems that the financial crisis has shown Wall Street form several hitherto unheard of meanss. A good example would be a liquidity put, a contract so obscure that so far the best analysts in the industry had never heard of it.As it is, the housing crisis traces its beginnings rough ly a decade ago when real estate seemed like a real steal. Conditions were favorable - an influx of global investments into the mortgage business made it very easy to get a housing loan. The suddenly flush grocery store had mortgage rates plunging, and numerous new innovations were introduced to entice more buyers.The problem was, these same investors were demanding higher... These loans would offer low initial rates as a come-on, and would subsequently saddle homeowners with significantly higher rates as the loan progressed. These investments were then put together into the formerly obscure Collateralized Debt Obligation - a highly leveraged instrument which promised big gains and came with tremendously high risk. Simply put, these investors were making $100 million bets with only $1 million of their own money. If their investment rose to $101 million, they earn $1 million. The risk involved was very high, and the peculiar thing was so many institutions ended up getting a piece of it because the U.S. housing market seemed like a sure thing. For instance, banks apparently sold very complex insurance policies on the mortgage debt. With so many parties involved, it is no surprise that in one case the bubble burst everyone was on the hook. Hence the freefall that has embroiled the financial markets for nearly a year now. Personally, I feel that it would be helpful for people to be well-informed about the housing crisis. It is one of the most pertinent and talked-about topics of the day, and yet it seems that oftentimes people do not know the real score. This is a very serious issue with potentially serious repercussions, and knowing what precisely is going on would be a tremendous plus in making fracture informed fiscal decisions in the future. As the article conceded however, given the complexity of the financial instruments involved this may be easier said than done. If Wall Street professionals are having a hard time with it, everyone else may be hard-pres sed to know what a liquidity put