Mini Essay About The Global Crisis 2007-2009

Topic: The 2007 – 2009 Global Financial Crises

The financial crisis which began 2007 in the United States and quickly became a global phenomenon had its core three central factors: Financial innovation, agency problems and asymmetric information.

Bank failures, billions of dollars gone, global growth lowered, governments powerless. Financial capitalism was in crisis. Media were always showing the numbers of the crisis, the stock market has fallen, huge losses for some international banks. At this period there was not necessarily actually explanation what was happening in simple terms. But what are the causes of the global financial crisis? In this assignment we are going to describe and understand the factors of this world crisis.

First it is important to know what a subprime is: indeed this crisis is called “the Subprime crisis” in the entire world. So let’s have a short overview of subprimes.

This crisis began in the summer of 2007 because of "subprime" mortgages made to the American middle class (so lots of people). Usually, when someone wishes to acquire an apartment or a house, he can borrow a loan based on his salary and his ability to repay. Drawback of the system: the loan is proportional to salary. If you do not win a lot, you cannot borrow a lot, so you cannot buy your house or apartment. The Americans have created subprime. But before going into the factors of the crisis, what is subprime: it is a financial innovation which means that everyone was able to borrow what they wanted (even if the salary is not high or just enough to have the loan). And so everyone was able to buy their own houses. Finally it was an emission of liquidity. Normally, if you cannot pay, the bank gets the house and sells it (kind of mortgage). But when property prices have fallen, the banks have panicked. And then it was a classic scenario: a borrower who fails to repay more the bank decided to sell his house and all recovered. But as we have seen the property prices have declined, the bank loses money on the sales of houses. That was the subprime crisis: some banks have made too much “subprime” loan and then they found themselves in a critical financial situation. And more than 2 million people were ruined in the United States, unable to repay loans.

After that, to reduce the risk of these new loans, bankers have used securitization. They transformed these loans as debt securities on the financial markets. These debt securities were traded on the stock exchanges markets. What is the benefit to buyers of these titles? If the purchaser buys a title, he knows he will receive the value of the security plus the interest. Here, was a big problem: these titles had no value because of the inability of the borrower to repay the loans. Every banks was buying these titles without knowing the non-value and so the future debt of these titles. When the foreign banks realized these titles did not have any value, it was too late: everyone has bought these titles. This phenomenon was global and of course was due to asymmetric information

In a first time, foreign banks were reassuring. For example in France, the director of the BNP initially claimed that the bank did not make risky investments of this type. But a few days after this announcement, an analysis has showed that BNP had subprime. Thursday, 9 August 2007, the BNP decides to freeze the listing of three

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