It was in February 2007 that the current financial market crisis was revealed to the United States. Institutions specializing in subprime loans announced their first losses and provisions. The financial experts compiled several scenarios. Was this a temporary crisis that would correct the excesses of the US mortgage market? Was it a crisis of long run that might affect actors other than the US banks? Will it tackle the European market? The answers were varied. Some players remained optimistic that the crisis would not last. Others spoke of a global systemic crisis that would affect the world economy as a whole.
"What we see in the narrow segment of the subprime lending is the beginning of a wave and not its end", said Susan Bies. But before explaining this phenomenon, and trying to find answers to these questions above, it is important to situate the subprime crisis in the historical context. In March 2000, the internet bubble which had started in 1995, burst. For five years, American investors did not hesitate to invest huge sums in start-up internet organizations. They were not only attracted to new technologies, they also saw in the 'Web' an economic revolution. Indeed, the rise of the internet was accompanied by considerable development of all information technologies.
Characterized by speed flows and ease of communication, the revolution was not only technological but also economic. Investors saw it as an inexhaustible source of profitability. In this euphoric atmosphere, between 1995 and 2000, the NASDAQ grew five fold from 1000 to over 5000 points. The IPOs of these startups would succeed in the course of time, in exceeding all expectations. An example is the range of introduction of the Netscape Corporation, known for its internet browser, which was valued at 12dollars - 14 dollars per share. The shares were eventually sold at 28 dollars at their introduction, and reached 58.25 dollars by the end of the first trading session, an increase of 108 %. eBay is another very striking example of what could amount to a success story without end. Its IPO in 1999 was valued 8600 times its profits for the year 1998.
This sector had grown too fast, welcomed a too large amount of capital in a space of time too small. March 10, 2000, the bubble burst and the NASDAQ experienceda fall that was as impressive as its rise from 1995 to 2000. Several factors are behind this "downward spiral". On the one hand the competition in this market had become too strong, there was not room for everyone.
On the other hand, higher interest rates in the U.S. Federal Reserve weighed on the accounts for these technology companies and start-up internet-indebted. Finally, capital made available by the investors was used too quickly and international developments were not always controlled.
To limit the extent of damage, the U.S. Federal Reserve decided in 2001 to provide liquidity to the market. At the same time lower interest rates is determined to avoid too slow consumer spending and investment, and therefore does not suffer too much growth. Economic agents and households in particular, began to invest heavily in real estate sector that they felt best able to accommodate capital that would be more secure. It was in this context that the subprime market got formed, extending to the less affluent populations, the possibility of home ownership.
Tags: Subprime crisis in US; impact on European financial markets; creation of the term subprime
[...] housing bubble," Le Grand Soir, September Pascale Besse-Boumard, "The financial markets affected by a crisis of confidence," La Tribune, August Vidal, François "Subprime: In search of lost trust", Les Echos, September "Property loans at risk: losses on the CDO f $ 52 billion," Les Echos July 2007 Kacimi AIT-Nessim "The ‘subprime' segment of the monetary dynamics", Les Echos July 2007 Mazier, Helen, "Banks will want reassurance on the credit crisis," La Tribune, August "Subprime: the suspension of three BNP Paribas funds revives concern for markets," Les Echos, August " German Finance draws the first lessons of the banking crisis," Les Echos, September Morawski, Andrea, "The Bank of England flies to the rescue of Northern Rock," La Tribune, September Cones, Elsa, "Markets are questioning the exposure of French banks to "subprime", Les Echos, September "The direct impact of the crisis will be very limited for BNP," Interview with the CEO of BNP, Baudouin Prot, La Tribune, October "Societe Generale reassuring despite quarterly results down," Les Echos, November "The benefit of Crédit Agricole SA fell by in the third quarter," Les Echos, November Sophie Rolland, "The rating agencies questioned", The Tribune, August "The subprime crisis shakes the strategy of central banks," Le Devoir, September This list of press clippings is not exhaustive. [...]
[...] This recovery is a testament to the financial health of corporations and risk aversion following the crisis of confidence in the markets solely responsible for the woes of the financial players The first lessons Need for greater transparency and market regulation On the initiative of Nicolas Sarkozy, the G7 has quickly seized the subprime issue in order to learn lessons and to devise solutions so that such a situation does not happen again. Transparency, monitoring and regulation of financial markets appear indeed as one of the keys not to revive this type of crisis. [...]
[...] We see that the sequence of these failures can lead to a crisis, we will explain more precisely the origins, before assessing the possible impact on the banking system, particularly in Europe, and finally examine, while the subprime crisis is not over, what lessons regulators, and politicians have learnt. http://www.cagle.com/news/HousingMarket07/images/matson.jpg 1. Subprime crisis Characteristics and functioning of U.S. housing Overview of the U.S. housing market To find a starting point for the subprime crisis, attention should be paid to the state of the U.S. [...]
[...] But these practices, especially from institutions partly owned by the public (which is the case of Landesbanken) have finally convinced the authorities of the urgent need to combine them into larger units, both to promote synergies and economies of scale, also for their better financial footing, and most importantly, requiring them to focus on their core business - corporate finance, and more generally of the German economy Confidence in Bern The uncertainties in the analysis of rating agencies are not without impact on the European financial centers. [...]
[...] We will investigate further three particular cases: that of IKB and Sachsen LB in Germany and that of Northern Rock in Britain Crisis of confidence on the quality and the valuation of assets It is in the accumulation of these failures and difficulties in a series of announcements that we find the reasons for the crisis of confidence affecting financial markets today. Indeed the spread of the housing crisis to the banking sector and to financial markets has raised a wave of panic and raises the specter of a severe financial crisis. [...]
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