2 pages/≈550 words
Mathematics & Economics
Global Financial Crisis (Essay Sample)
This is an account of the global Financial crisis(Sub prime crisis) that covers Lehman Brother’s bankruptcy as well as the Primary reason for AIG needing a bailout.source..
Global Financial Crisis (subprime crisis)
Global financial crisis was a period of wide spread economic catastrophe, which impeded financial and capital among other markets across the world. The crisis started in 2007 where it began with the breakdown of the United States financial system and extended spontaneously to other nations across the World. The instant cause of the global financial crisis began when the prices of basic commodities such as fuel, food, and fertilizers started to rise. This paper is systematic analysis-covering questions 6 and 9, which deals with issues associated with the 2007 global financial crisis.
Lehman Brother’s bankruptcy
With the short-run widespread of the global financial crisis, where prices of basic commodities began to skyrocket housing prices declined. This is because financial institutions gave loans to commercial property developers at low interest rates. Coupled with the low interest rates many loans were approved to investors and in the long run construction of real estates’ increased leading to a higher supply than the demand for houses. Consequently, prices for houses declined and this dampened the housing market and investors were unable to pay the loans. In connection to this, Lehman Brothers had acquired several mortgage subprime lenders such as BNC Mortgage and Aurora loan Services which specialized on Alt-A lending criteria. Initially, the Lehman Brothers acquisition seemed profitable and the revenues from the sale of real estate made Lehman’s capital market portfolio to grow.
However, as the 2007 financial crisis began to experience cracks, loan defaulters increased and Lehman Brothers experienced financial turmoil that led to bankruptcy as Alt –A criteria did not provide enough documentation thereby making it difficult for the bank to follow up its debtors. In addition, Lehman Brother’s bankruptcy occurred due to their hedging strategies that backfired. Repots reveal that Lehman Brothers had intended to raise $ 6 billion in capital where two thirds was expected to come from sale of common shares at a predetermined price of about $ 28 per share (Ellis, 2009). However, the New York Investment bank incurred a loss of $2.8 that led to its bankruptcy.
Primary reason for AIG needing a bailout
During the global financial crisis, AIG’s role was to provide insurance services to investors who bought multifaceted debt securities. AIG main aim was to cover losses suffered by the buyers of insurance contracts in case of defaults. The major reason for the American International Group (AIG) needing a bail out was overconfidence and risk measures such as credit risk that were executed to meet unrealistic expectations. This made the Insurance Company to sell insurance policies to investors and assured them of treatment to their losses to an extent, which is not required by insurance policies.
With this, AIG lacked internal understanding of corporate decision-making. When investors defaulted due to the housing price crisis, AIG was caught in a hook of billions of dollars’ worth of risky securities that were initially considered safe. After the government realized the weakness displayed by insurance companies such as AIG, and Freddie Mac among others, there was a need to intervene to bail out and nationalize...
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