2007_2008 Financial Crisis

2007_2008 Financial Crisis - 1 2007 - ? Financial Crisis As...

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Unformatted text preview: 1 2007 - ? Financial Crisis As in all past crises, at the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets. ~ Ben Bernanke. Oct 15, 2008 Origins and Fallout 2 Origins Originate-to-distribute (OTD) approach to credit extension Liquidity Risk sharing Reduces financing costs Easier for investors to manage credit exposure Creates a Moral Hazard problem 3 Origins contd In 2007, weaknesses in application of OTD became apparent Incentives at origination Problems created for sub-prime mortgage borrowers disguised for years by rising house prices House prices fell borrowers trapped in poor contracts CDOs, etc. meant associated risks permeated the financial sector 4 Origins contd During the early 2000s, easy money and search for risk led to excessive credit extension Even as spreads became tighter!!! Investors were too reliant on ratings agencies Conflict of interest problem Money fled the market, financing dried up Banks have to take loans onto balance sheets deteriorating capital ratios 5 House prices during easy money/global imbalances 6 What does it look like when investors lose confidence?...
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2007_2008 Financial Crisis - 1 2007 - ? Financial Crisis As...

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