The Financial Crisis Of Lehmann Brothers - 1379 Words

The 2008 financial crisis, also known as the U.S. Subprime Mortgage crisis, is considered by many economists to be the most perilous crisis faced by the modern day world economy since the 1930s Great Depression (Krugman, 2009). The collapse of Lehmann brothers, one of the world’s leading investment banks before declaring bankruptcy, in September 2008 almost took down the world’s financial system. Many factors such as U.S. Home ownership policies, consequential securitisation, irresponsible lending by banks, deregulations of banks were pointed out as major contributing factors that precipitated the financial crisis. The 2008 financial crisis eventually resulted in an inevitable global economic meltdown despite aggressive bailout efforts by†¦show more content†¦Banks and financial institutions aggregate and compile similar loans such as mortgages and place them into a fund. These loans will subsequently be issued as securities, such as mortgaged-back securities, that are tied to the fund’s assets to investors, which can also be known as collateralized debt obligations (CDO) (Choudhry and Baig, 2013). CDO, which initially began with corporate forms of debts, were highly favoured by banks as the process of securitisation and selling on would allow more capital to be freed up to facilitate more future lending (Lanchester, 2010). Securitisation first emerged during the 1980s as investment banks attempt to turn the loans on their books into bonds and sell the bonds into the institutional investor market. The process usually involves the setting up of a new company, known as Special Purpose Vehicle (SPV), by the bank, which will be typically based in a tax haven, and the bank will subsequently sell its loans to the SPV. The SPV then repackages the loans into interest-bearing tradable securities and issue it to investors. Revenues received will be later on passed through to the bank as the purchase price for the loans. The interest the bank receives on these loans it passes back to the SPV to pay the investors (Choudhry and Baig, 2013). Earliest securitisations take form in mortgaged-back securities with the idea that the last thing people