Tuesday, March 25, 2008

The reason and the aftermath of sub-prime crisis

The sub-prime crisis which started in July 2007 has taken a heavy casualty of the credit markets and spreading its tentacles. Because of this, the credit markets across the globe have literally come to standstill and the stock markets are frequently checking their bottom range.

This sub-prime crisis contributed a lot to the unprecedented volatility on the movement of stocks. The fall of the mighty Bear Stearns was attributed to this crisis.

The move by the US government to reduce the interest rate 0.75 percentage points literally brought the bench mark interest rate to 2.25 per cent. The reduction is sixth since the year 2007, September.

It is known to every one that the Federal Reserve played a major role in the takeover of Bear Stearns by the JP Morgan Chase by favoring the underwriting of transaction. Another example that caused havoc in UK due to sub-prime crisis is the fall of Northern Rock and has since been nationalized.

What is the reason for the sub-prime crisis?

1. The American banks and other financial institutions adopted some highly questionable practices while advancing loans.

2. Borrowers with poor track record were in fact awarded the loans or so to say, were forced to take loans.

The policy adopted by these institutions were called innovations that time when the picture was rosy. Many of the leading banks fail to assess the risks in the products they sold. There was a difference in the interest rates for those who had a poor track record. When the problem with the defaulters became unmanageable, the risk was manifested and it affected not only the gUS companies but hugged the global markets including the stocks.

Latest News :

There have been reports that the Asian markets have bounced back and it was a magnificent start for the Indian stock markets on the Monday and exemplary on Tuesday, 25th March, 08, i.e. today. However, one has to wait and watch about how far the bulls can run and when the bears will interfere.

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