ok so this whole global financial crisis has got my attention!!
i set out to understand this and tried to capture it in bullet points!!
and this is what i have come up with...
 
starting point:
"subprime" definition: loan given to a borrower who would not be eligible if one were to have used traditional credit risk diligence
 
over the last ten years or so, to increase the economic growth rates, the Federal Reserve lowered the mortgage interest rates.
This led to a trend of rising housing prices.
borrowers who were lower on their creditworthiness rating were charged higher rates of mortgage interest (rates were variable).
Because of the housing bubble and the high demand for loans, supply of loans was made to meet the demand!
These loans were in turn sold as mortgage backed securities to investors.
This business picked up across companies in the financial industry (read Lehman, AIG, Merrill Lynch, etc)
everything seemed fine... then the bubble burst.
 
When the interest rates reached a level where it was too high to afford by many borrowers, lot of the loans went bad.
This in turn had an impact on the investments in mortgage backed securities.
The demand for Fannie and Freddie guaranteed securities decreased.
Foreclosures increased, real estate prices plummeted,
the lenders incurred huge losses as they now had possession of houses valued way lower than the amount lent...
conclusion: liquidation.
 
where merrill and others lost out was on the securities... this makes our very own securities scam seem like a school fight...
Fannie Mae & Freddie Mac have more than $5 trillion in outstanding mortgage backed securities
Merrill Lynch incurred app. 51 billion US$ in losses due to investing in mortgage backed securities that went bad
we all know AIG, Lehman, and a few others who have not yet become official... the weeks ahead will be interesting to watch.
 
needless to say, lack or depth in regulations on the mortgage backed securities is perhaps the starting point.
 
I am thinking- what else could be out there?? Something that is similar in nature and is about to be unleashed upon the global economy?
for now, as a cartoon recently sent to me said... we have had the dotcom bubble, and now the mortgage bubble... what next??
Whatever it is, i hope it doesn’t happen too soon though!! That might be too much for this world to take.
 
my next note (or if i can instigate a collegue to investigate this further) will be to try and make sense in a nutshell of what the impact of subprime crisis has been in india.