(5) - What did the FED do?

In order to stabilize the market and prevent the shadow of the crisis from spreading, Federal Reserve System (FED) immediately pumped lots of money into the banking and credit systems. They would have been even committed to supply more funds if needed. However, despite hundreds of billions of dollars provided, the thirst for funds from banks and credit institutions still could not be quenched. Until March in 2008, there were more than 300 billion dollars injected into the system but still many financial institutions (banks and credit companies) were queuing up for loans. (Robin Blackburn, 2008). The financial systems still suffered from the shortage of capital. 

Another plan was also proposed simultaneously in order to support the housing market which was still on ice (freezing) and also to tighten lending standards. Specifically, mortgage borrowers needed to meet requirements as follows: (1) credit risk might be acceptable; (2) loan contracts were made between a period of time from 1/1/2005 to 31/7/2007; (3) those borrowers needed to prove themselves that they were living in their own houses and in cases of high level loan interest rates adjusted the fixed rate would have been applied instead for 5 years. (Bill Hampel, Mike Schenk, and Steve Rick, 2008). 

FED with the U.S. Congress were also involving in alternative supporting measures such as refinancing or guaranteed mortgage loan programs. 

Though the U.S. government and FED as well had attempted to make positive moves, in circumstances of oil price escalation (new consecutive records), severe dollar devaluation there would be still more concerned that global financial market could get further worse.      




PS: Through my research, I tried very hard to bring you the best view of the credit crunch occurred in America. Because of time and knowledge restrictions imposed on my work, I find it hard to avoid facing problems. In the near future, I will continue investigate more this field...& if you leave on my blog your own comments I am definitely very happy. 


                                                                                   
                                                                                  
                                                                                   Thanks. 




                                                         

(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.