Financial Crisis 2007-08

Introduction:
The term financial crises is broadly used for many things means if there is great
loss happen than its called financial crisis but its mainly related to banking panics.
Other situations in which we often use this term is in stock market crashes.
The financial crisis of 2007-2009 has been called the most serious financial crisis
since the great depression of 1930 by leading economists, with its global effects
characterized by the failure of key businesses declines in consumer wealth
estimated in the trillions of U.S dollars, substantial financial commitments incurred
by governments, and a significant decline in economic activity.
Pakistan certainly has not been immune to the contagion from this crisis.
Causes of the crisis:
Following could be considered as the causes of the global crisis 2007-08:Market instability:
It is the major cause of the crisis, due to the dramatic change in the ability to create
new lines of credit dried up the flow of money and slowed new economic growth
and the buying and selling of assets. This hurt individuals, businesses, and
financial institutions hard, and many financial institutions were left holding
mortgage backed assets that had dropped precipitously in value and werent
bringing in the amount of money needed to pay for the loans.
Malpractices in Capital Market:
Fundamental mispricing in the capital markets is being recorded during the era of
crisis that creates the situation of crisis in all over the world.
Mistakes by the Banks:
Mistakes made by the Fed and the others banks by keeping the federal funds rate
too low for too long created bubble and housing bubble. In other words, with
artificial low fed funds target, banks filled themselves on cheap funding and made
cheap loans available.

Disparity of Loans:
There has been great disparity in the quantity and quality of loans in the recent
years. In terms of quantity, there was an increase in low-rated issuances of shares
from 2004-2007. Moreover loans that were issued were mainly given to finance
leveraged buyouts. Over the same period average debt leverage ratios grew rapidly
to levels never seen previously.
Quality of Loans:
In terms of quality, there was also a general increase in non documentation and
high loan-to-value subprime mortgages. Exotic and risky mortgages became
commonplace and the brokers who approved these loans absolved themselves of
responsibility by packaging these bad mortgages with other mortgages and
reselling them as investments.
Poor Underwriting Standards:
The failure to control poor underwriting standards in the mortgage markets means
no down payment, no verification of income, assets, and jobs, interest only
mortgages, negative amortization, and teaser rates were widespread among
subprime, near- prime and even prime mortgages.
Defaults in Interest Payments:
With defaults in interest payments and simultaneously in the Abs, prices drop
drastically, leading to a huge loss of wealth severity of the crisis.
Dried Up Credit:
These massive losses caused many banks to tighten their lending requirements, but
it was already too late for many of them the damage had already been done.
Several banks and financial institutions merged with other institutions or were
simply bought out. Others were lucky enough to receive a government bailout and
are still functioning. The worst of the lot or the unlucky ones crashed.

Greed:
Homeowners wanted to get rich quick by flipping real estate. Mortgage originators
went to great lengths, legal and otherwise, to maximize loan volumes. Home
appraisers did the same. Bankers were paid absurd amounts of money to securitize
toxic subprime mortgages. Rating agencies raked in profits by classifying
otherwise toxic securities as investment-grade. Regulators were focused on getting
a bigger paycheck in the private sector. And politicians sought to gain popularity
by forcing banks to lend money to their un-creditworthy constituents.
Securitization of loans:
Banks traditionally retained most of the loans that they originated. Doing so gave
lenders incentive, albeit imperfectly, to underwrite loans that had only a small
chance of defaulting. That approach went by the wayside, however, with the
introduction and proliferation of securitization. Because the originating bank
doesn't hold securitized loans, there is less incentive to closely monitor the quality
of underwriting standards.
Ratings Agencies:
The financial crisis couldn't have happened if the three ratings agencies: Standard
& Poor's, Fitch, and Moody's hadn't classified subprime securities as investment
grade. Part of this was incompetence. Part of it stemmed from a conflict of interest,
as the ratings agencies were paid by issuers to rate the securities.
Politics:
Since the 1980s, bankers and politicians have formed an uneasy alliance. By
conditioning the approval of bank mergers on the Community Reinvestment Act,
politicians from both sides of the aisle have effectively blackmailed banks into
providing loans to un-creditworthy borrowers.

Consequences of Financial Crisis:

The crisis has produced or exacerbated serious, wide-ranging yet differentiated
impacts across the globe.
Increasing unemployment (50 million jobs lost this year according to the
International Labour Organisation), poverty and hunger
Deceleration of growth, economic contraction
Negative effects on trade balances and balance of payments
Dwindling levels of foreign direct investment (a fall of 54% in the first
quarter of 2009 according to UNCTAD)
Large and volatile movements in exchange rates
Growing budget deficits, falling tax revenues and reduction of fiscal space
Contract action of world trade
Increasing volatility and falling prices for primary commodities
Declining remittances to developing countries
Sharply reduced revenues from tourism
Massive reversal of private capital flows
Reduced access to credit and trade financing
Reduced public confidence in financing institutions
Reduced ability to maintain social safety nets and provide other social
services, such as health and education
Increased infant and maternal mortality
Collapse of housing markets
Debt levels of man developing countries are over 150% of GDP.
Impact of Financial Crisis 2007-09 on the Housing Market:
The financial crisis was not limited to one industry or market but spread like a fire
in the global economy. The inflation rose to a record high and the impact of
financial crisis on the global economy resulted in the loss of thousands of jobs and
closure of many organizations. The housing industry too suffered a great deal as
the prices of houses fell for eighteen months.
Impact of Financial Crisis 2007-09 on Banks:

The impact of the financial crisis of 2007-09 on the banks was severe. The banks in
the biggest economy of Europe, Germany, had offered the sub-prime mortgages
just like the banks in US did and so the consequences were quite similar. The
people were unable to pay back the sub-prime loans leading the economy into
recession. The number of banks collapsing after the financial crisis of 2007-09 has
been increasing all over the world.