World-financial-crisis.docx - Charles Carpentier World Financial Crisis 2008 The crisis began in the summer of 2007 because of the\"subprimes mortgage

World-financial-crisis.docx - Charles Carpentier World...

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Charles Carpentier World Financial Crisis 2008 The crisis began in the summer of 2007 because of the "subprimes", mortgage loans granted to the American middle class. Normally, an individual who wishes to acquire an apartment can borrow according to his salary and his ability to repay. Disadvantage of the system: borrowing is proportional to salary. If you don't earn a lot, you can't borrow a lot, so you can't buy. The Americans have therefore created subprimes: you borrow what you want (even if the salary is not very high) but it is the house which is in guarantee. Clearly, if you cannot repay, the bank collects the house and sells it. But when property prices fall, the banks panic! Classic scenario: a borrower no longer repays, the bank therefore decides to sell his house and recover everything. But as house prices have gone down, the bank is losing money on the sale. This is the subprime crisis: some banks that had used this type of loan too much found themselves in a critical financial situation. And more than 2 million people find themselves ruined in the United States, for lack of being able to repay the loans. In an attempt to limit the risks of these new types of credit, the bankers resorted to securitization. They turned these loans into securities on the stock markets. Concretely, if an individual borrows 1000 euros, he must reimburse 1200 euros to the bank with interest. To make money more quickly, the banks issued debt securities, that is to say a paper giving right to these 1,200 euros. These debt securities were traded on the stock exchanges. What is the interest for buyers of these titles? If the purchaser buys his title at 1100 euros, he knows that he is guaranteed to receive 1200 euros. However, once the person who has to repay the loan to buy his house can no longer pay, the title has no value. It is these complex financial arrangements that explain the fall of the stock market because all the foreign banks, in particular European, realized that they had subprime securities which were no longer worth anything. Everyone had them, but no one really knew how many.
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  • Fall '13
  • Subprime mortgage crisis, Bank run

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