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Sub-Prime Crisis and its Impact
Introduction:
Sub-prime lending means companies making loans to risky borrowers who do not qualify for market interest rates due to the customer's poor credit history, unemployment or other causes. Sub-prime lending occurs in many financial markets, including mortgage, automobile and credit cards. With the much higher risk comes a much higher payout.
Current Impact:
The sub-prime mortgage crisis has shocked and rocked the world of Wall Street and has been on front page news in recent months. Sub-prime mortgages totaled $600 billion in 2006, accounting for about one-fifth of new mortgages last year and may account for up to 60 percent of all foreclosures in 2007.
Experts say we may feel the repercussions of these events in the financial world for years to come. The sub-prime lending crisis has led to restrictions on the availability of credit for prime lenders and may lead to a US recession.
Impact on Financial Institutions:
Financial institutions effected by sub-prime mortgage crisis included Swiss Bank hedge fund arm Dillion Read Capital Management, reported (May 2007) a loss of $122 million from bad investment related to U.S. sub-prime mortgage market.
In June 2007, Bears Stearns announced one of their managed funds - High Grade Structured Credit Strategies Enhanced Leverage Fund reported a substantial financial loss. Bear Stearns will provide $1.6 billion (previously Bear Stearns said it would provide up to $3.2 billion in financing) of financing to save its High - Grade Structured Credit Strategies Fund. The infusion of capital prevents investors from a sizable loss. The financing is supposed to help stabilize the depreciating collateralized ...