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No Money, No Honey

September 17, 2008

It was a complete shocker to learn that Lehman Brothers a 150 yr old financial-services firm was bankrupt. To think of a sort of my dream company (yeah.. it offers loads of money as salary) was unbelievable.. So much so, that no one is yet willing to buy it out also owing to the fact that it has around a whopping sum of $613 milliion in debt… Gosh thats a lot of money… Also it wasnt the only firm alone to break its backbones; even Merrill Lynch crippled under the ongoing US mortgage subprime crisis with AIG next in line.. Whats happened suddenly?? First it was Bear Stearns, then Fannie Mae and Freddie Mac. One by one financial institutions seems to be toppling.. Well, we know that there hasnt been a spring in US lately but the autumn also seems to be pretty harsh.. Infact the performance of these are affecting the stock markets all over the world.. So, what is this SUBPRIME CRISIS that has rocked the world?? Lets have a look..

Usually, banks do not lend money for homes to people who have low credits (determined by the no. of times they have default on credit card payments, their other loans) i.e. they do not lend money to people whom they consider have low probability of paying back the loans on time.. But these subprime loans were just meant for those people.. Risky investment but high returns – approx 2% higher interest rates than normal ones. The reason was obvious – GREED. What they thought was that even these people do not manage to payback the loans, riding on high property rates around that time, these banks can always get their money back by selling out those properties. What actually happened was this… The higher interest rates obvioiusly increased the probability of defaulting by those class borrowers having dodgy credentials. Also with such high availability of property, prices started falling and people werent willing to pay through their nose for these properties. A demand in properties started decreasing along with the prices setting up a vicious cycle. This left the lenders with comparatively lesser value of loans thus booking huge losses. Coupled with slowdown in US economy, what we are witnessing is an outcome of that.

THE MOTTO THAT LED TO THE SUBPRIME CRISIS

Reason For subprime crisis Had those banks been bold enough to say “No Money, No Honey baby!!” to these people , maybe they wouldnt have ended up hearing this themselves!! [:-p]

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