Flashback to year 2001

WTC attack: Economic aftermath.

Flashback to year 2003-2004: Low interest rates and large inflows of foreign funds created easy credit conditions for a number of years prior to the crisis, fueling a housing market boom and encouraging debt-financed consumption. Almost anyone could dream of owning a house in the US.

Ironically, it was not the low prices as the obvious reason for increasing demand for a house but an ever low interest rate, at an increased risk!

Suprime: Among the two distinct types, namely prime and Suprime mortgage, the latter indicates the mortgage lent to borrowers with a not so good credit record and falling credit scoring. To further boost up Housing, mortgage companies take up lending, at lower teaser interest rates; precisely ARM (adjustable rate mortgage), which would, in due course be increased. However, the crisis did not end there but actually marked the beginning of the so called Suprime Crisis.

The US investment bankers purchase the home loans from US banks to sell out to global investors.

Global investors purchase the Insured High Grade Structured Credit Enhanced Leverage Fund, on the bottom line: House prices will always rise.

For commission from investment bankers, banks started lowering the qualification criteria for availing a home loan and aggressively used agents to source new loans called NINA (no income no asset).

Flashback to year 2006: Burst of housing bubble.

ARM caused increasing interest rates, higher EMIs and thence, defaulters.As a result of foreclosure, there were more houses in market, with no buyers and hence, falling prices.

Flashback to year 2007: Global Financial Cobweb wherein Borrowers, the US banks, Investment banker, Global Investors and the Insurance companies, all inevitably got trapped.

A few of the remedies: Capital Injection

Deposit guarantee

Derivatives, the financial instruments of mass destruction: Warren Buffet