(4) – Consequences of the U.S. credit crunch

The year 2006 started to experience warning signals of the U.S. housing sub-prime mortgage crisis. Forecasted housing demand index consecutively dropped from 128.2 (8/2005) to just 89.9 (7/2007). From 3/2007, plenty of financial holdings announced total revenue losses of approximately 150 billion dollars mainly due to bad loans (50 % of which was caused by housing loans). (Bill Hampel, Mike Schenk, and Steve Rick, 2008). However, The U.S. government and financial institutions paid little attention to such very first signals. Only until a series of “big” banks and credit institutions staggered could the situation probably be so far out of control.

Reputable Wall Street banks such as Merrill Lynch (currently owned by Bank of America), Citigroup, Morgan Stanley, and Lehman Brother made consecutive announcements about their losses of billion dollars. In addition, the worst occurred by 9/2008, Lehman Brother holdings, one of the biggest banks in the US, declared bankruptcy with roughly 613 billion dollars in debts. The collapse of Lehman Brother was mainly from lots of its borrowed money pumped into “too risky” investments such as housing projects and mortgage-backed securities (MBS) trading. (Lawrence G.McDonald, “A Colossal Failure of Common Sense”, 2009).

The number of home foreclosures for 2008 increased by 53% if compared to that of 2007. (RealtyTrac Press Releases of “U.S. Foreclosure Market Report”).

The shadow of crisis not only covered America but also spread to Europe. As of 9-10/8/2007, BNP (the French biggest bank) closed three investment funds worth about 2.2 billion dollars in the U.S., which led the world stock market as a whole to decrease rapidly. (Bloomberg News). In the first 3 months of 2008, HSBC reported a sub-prime related loss of 3.2 billion dollars. (BBC News)

According to IMF, U.S. and European banks’ losses due to toxic assets and bad loans were up to greater than 1 trillion dollars from 1/2007 to 9/2009. By 11/2008, total subprime-related losses of financial institutions around the world were roughly 750 billion dollars, which cancelled out much of global banking system’s capital.

In summary,  the U.S. credit crisis had spread and devastated the global system of finance.


FED - What did they really do???

:) Let's come and see me in the final part. Thanks.