![]() People were buying new homes at record rates, and companies were completing a record number of deals. In this expansionary cycle, many individuals and corporations were lent money they should not have been, which led to a massive amount of supply in the new-issue securities markets, most notably the mortgage market and the credit markets. This led to a significant expansion in corporate growth from personal spending. First, over the previous few years, consumer and corporate borrowing reached record levels due to low interest rates and friendly borrowing conditions. How do you think the credit crisis happened?Īlthough this can't be summed up in a sentence, paragraph, chapter, or even a book, there were a number of important events that caused and/or fueled the crisis. As we saw in late 2008, this can cause a panic, where people seek to move large amounts of personal investments into cash and are willing to sell at any cost.Ģ. Selling naturally depresses market values further, causing a ripple effect: As more and more is sold, more and more value is lost. Secondly, as assets are marked down, investors are often likely to sell (and/or forced to sell) their assets so that they don't keep losing value. As the value of the assets declined, so did the amount these investors and banks could borrow. For example, many banks and investors used these assets as collateral to borrow against, in order to make other investments. This had a dramatic impact for a multitude of reasons. As the credit crisis unraveled, many banks and investors were forced to write down assets to current market values. Mark-to-market is the process by which securities are recorded on financial statements using current market prices, as opposed to purchase prices or accounting values. What is meant by mark-to-market? Why is this important to hedge funds, banks, etc.? Why is it relevant now, more than ever? ![]() All of these are designed to test your knowledge rather than assess your past behavior.ġ. ![]() ![]() Below are some examples of questions you might expect. A solid understanding of subprime and other credit-related products, write-downs, and leverage is key to answering these kinds of questions. In light of the credit crunch of late 2008, students are going to see the same "How did we get here?" question masked in a variety of forms. ![]()
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