Subprimes

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Samir Aguenaou
FIN 3301
Hamza Badih

Finance Paper #2 : 2008 financial crisis.

The 2008 subprime crisis also known as the mortgage subprime crisis has been an earthquake in financial world that result in billion of losses and pushed the states to intervene on the free market to prevent its total collapsing. The subprimes have generated a loss of 500 billion dollars between 2007 and 2008, drying the banks reserves in cash, and pushing those companies to inject 300 billion in fresh money. This drying of financial institution cash reserves turned them to risk averses, lowering the amount of loans given and therefore slowing down the whole economic development. Lehman Brothers, a huge company in terms of assets, had to be bankrupted and many others have been either nationalize (Fannie Me and Freedi Mac) or sold to bigger companies (Bear Stearns, Merrill Lynch). This crisis had to be managed not only in the US, but also in european financial institution which speculated on billion worth of this subprimes. The worldwide economic slowdown had lowered significantly the growth of countries GDPs, making the crisis not only affect the financial sector but every globalized segments, where Morocco has invested a lot on the last decades.

The subprimes refers to “dynamical” financial products called ABS and CDO where the interest rate of loans wasn’t fix but changeable over time. Those was sold very cheap at the beginning, but the interest was growing quickly, making many unable to pay back the amount of the monthly settlement. Since those financial products were mainly offered to buy real estate, many houses were put back on the market, the prices fall down quickly, making the real value of those financial product inferior to the money lend. Moreover, those financial products were sold to other banks and insurances around the world to speculate, wide spreading the effect of this US crisis on the world.

Facing this unprecedented crisis, government had to find...
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