Fed Financial Crisis Case Study

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Introduction
The main reason behind the crisis was the consideration that the prices of houses cannot decline that lead to providing mortgage to subprime customers who were not worthy of the loan. As soon as the customers defaulted, the crisis started. According to E&Y report (2012), the impact was so intense that number of IPO’s and the amount of funds exchanged between the financial institutions declines by as much as 50% of the number before the crisis.
Even though the financial institutions were in need of money, it was not the right time to raise equity or debt since there was scarcity of capital in the market. Most of the financial institutions had huge funds as bad debt and there were no menders at the time. Uncertainty in the market
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There have been many actions taken for the same. Many central agencies have been formed and regulators created to manage and regulate the CDS. Different regulators have started spreading awareness about the security. Shadow banking is a new concept in the economy.
Fed has also started monitoring the mergers and acquisitions activity to prevent any fraudulent transactions in the economy. Still there are concerns related to the transparency of the Federal Reserve. There is a general belief that the accounts of the Fed are not at all audited and there is no accountability of the agency.
When the government pays as a part of the bailout ($20 billion), the credibility is still doubtful since the recovery is done by the government and not because of the operations. Also the bank has to leave a huge part of ownership to the government. Also the recovery may or may not come even after the bailout. They had a total loss of over $21 billion.
B of A had to face a credibility issue during the time of financial crisis. There were concerns raised on the transparency of the bank and with the increased liability customers started withdrawing money from the bank leaving them stranded. The number of customers for the bank declines by over 40% in a small period of 2 years. This proved the credibility issues for the
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Based on this belief the banks started giving loans to anyone and everyone applying for a home loan, even to the subprime clients. Mortgage rates were very low and hence everyone got a house in installments. As soon as the interest rate increased, the installments increased for the borrowers. There comes a time when some borrowers were unable to pay the installments for the home. They started defaulting. When default rate increased because of this, banks realized that they have many homes to be auctioned but the buyers are going away from the market because of rise in interest rate. The process started falling and the banks lost huge amount of money in the process. Now since, securitization is a way by which banks had converted their homes loans into liquid assets, they had no funds left to pay for the securitized assets and they

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