Finance Essay

3024 Words 13 Pages
Outlining the major objectives of your essay • Analyse the major factors causing global financial crisis • Analyse the role of OTC derivatives in triggering the global financial crisis • Recommend the ways to control the OTC market in the future

The origins of the global financial crisis
There are several factors causing global financial crisis: 1. Growth of housing bubble & Subprime lending o particular advantage of low long-term interest rates was the US mortgage market. American households traditionally took out fixed-rate mortgages, often guaranteed by the government-sponsored enterprises, the GSEs. As rates fell, households refinanced in large numbers, but this extra origination business dried up once
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o o The result of all that mortgage borrowing was, as shown in Graph 6, an increase in leverage, defined to be the ratio of home mortgage debt to the value of the housing stock. This measure had been quite stable in the United States for a number of years. But it increased in those last couple of years of the boom, reaching around 45 per cent by the time prices peaked sometime in 2006. (The exact date depends on the price series used.) In Australia, the equivalent ratio is below 30 per cent. Since many home owners own their homes outright, the US figure implies that many Americans had very little equity in their homes by the time the boom peaked. And of course, this measure of leverage has increased a great deal since US housing prices started to fall. o o But you can’t borrow your way to a good time forever, and this recent example of a credit-fuelled boom was no exception. The first signs of trouble were in the US mortgage market. Lending standards had eased so far – and outright fraud had gotten to be such a problem – that arrears rates started to rise more than lenders and investors expected. Graph 8 shows that the rise started in around 2006 for both prime and sub-prime mortgages, but became more obvious through 2007. The extraordinary thing was

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