Financial Analysis : The 2007 Financial Crash Essay example

1839 Words May 18th, 2016 8 Pages
The 2007 financial crash was the most impactful financial event since the Great Depression. Many of its effects are still being felt today; however many people do not understand what actually happened or how it happened. The Causes of the financial crash were a combination of mortgage-backed assets and debt. Following the second world war, housing prices have been on an upward trend. It started in the 1980s when financial institutions realized that mortgages had a greater potential. These traders were looking to expand the bond markets and found that mortgages could be placed into bonds and sold to investors. This became extremely popular starting in 1990. “Investment banks were buying mortgages from mortgage issuers, repackaging them and then selling off specific tranches [slice or portion of something] of the debt to investors. As time went on, there were less and less new mortgages to securitize so the structured products groups at banks started repacking MBS 's (i.e. taking the unsellable tranches of lots of MBS 's, repackaging them and then selling the new product - called collateralized debt obligations or CDOs).” (wall street journal) The pooling of the various mortgages was thought to be safe and would reduce risk but the mortgages that were securitized were subprime, meaning that they were of poor quality. The rating agencies that tell people investing were or not securities are safe to invest in, based on the degree of exposure, didn’t comprehend the risk of…

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