Financial Crisis Understanding From the Ground Up (part 4)
Financial crisis understanding from the ground up (Part 4) By George C (www.finance-database.com) The current financial crisis The public have a common understanding that the subprime mortgage crisis has leaded to a far more serious consequence, so called ?the financial crisis? recently. To be exact, It has been going on for seven months. But how will that be happened? This is the question. The subprime load crisis is relatively simple to understand. People bought homes they couldn?t afford, and now they are falling behind on their home loans. This has caused the loss of related financial institutions. However, the amount of loss is not the major cause of the financial crisis. US government has already announced to take over Fannie Mae, Freddie Mac and AIG, and have injected the capital over that amount into the market. Besides, the majo Mis Sold PPI rity of homeowners are still doing just fine. The conventional mortgage market is still healthy. So, how is it that a mess concentrated in one part of the mortgage business: the subprime loans, has frozen up the whole credit markets in United States? How would that crisis caused such a big impact to the stock market, causing the collapse of Bear Sterns, lehman brothers, etc, and left the economy on the brink of the worst recession in a generation and forced the Federal Reserve to take its boldest action since the Depression in 1923? In order to have a big picture of this incident, I think this could be explained in this way. First of all, behind the whole financial crisis, there are actually 3 major components: the subprime mortgage, Leverage (or gearing), and the Credit Default Swap(CDS). We have mentioned about subprime mortgage before.