Question

• What lessons can be learned from the subprime mortgage meltdown?
• Could a similar crisis occur (perhaps in the student loan market) in the future?
• Were the big banks the only ones responsible?
• Do you think the fines levied by the government were too much or too little?

Answer 1

Lessons of subprime mortgage meltdown

1.An AAA rating is no assurance of anything. It is a subjective opinion by rating agencies who compete based on what answers they gave to a client.

2. The magnitude of a financial miscalculation such as the CDOs represented is amplified by the use of leverage to create risks not contemplated by the securities’ owners, the rating agencies, or the bond insurers. Leverage was present both within the structure of the CDO and in the capital structure of many of the buyers, i.e., hedge funds.

3.The  deficient accounting rules exacerbated the crisis. A rule requiring securities to be marked to market value is sensible in normal times. In the current crisis, where there is no real market, the rule forced massive write downs which precipitate solvency and counterparty-creditworthiness concerns that caused further write downs. This self-feeding effect is an exercise in neither truthfulness nor transparency and should not be allowed to get started.

4.Don’t be driven by crowd opinion.

5.Diversify within asset classes and individual instruments.

Similar Crisis (Student Loan Market)

There's no doubt that we're all still a little sensitive when it comes to the economy. Although it's been nearly four years since the start of, what we now call, The Great Recession, the world still hasn't let down its guard. The new warning making its way through the financial media is the rising student loan burden. Some believe that this could bring down the economy in much the same way as the 2008 and 2009 mortgage crisis.

Student loan debt in 2019 is the highest ever.

The latest student loan debt statistics for 2019 show how serious the student loan debt crisis has become for borrowers across all demographics and age groups. There are 45 million borrowers who collectively owe more than $1.5 trillion in student loan debt in the U.S. Student loan debt is now the second highest consumer debt category - behind only mortgage debt - and higher than both credit cards and auto loans. Borrowers in the Class of 2017, on average, owe $28,650, according to the Institute for College Access and Success.

Were the big banks the only ones responsible?

When it comes to the subprime mortgage crisis, there was no single entity or individual at whom we could point the finger. Instead, this mess was the collective creation of the world's central banks, homeowners, lenders, credit rating agencies, underwriters, and investors. Read on to find out more about each individual player and what role they played in the crisis.

Do you think the fines levied by the government were too much or too little?

The question will keep on switching answer as it passes through various persons since the question is purely subjective.The reality is that rather than thinking too much or too little,the methodolgy of fine fixing should be analysed.Actually fines are imposed to curtail an activity that should be done repeated or to stop an activity for which outcome is expected to be adverse.It will do no good if fine keeps on charged on a person who is bankrupt.Rather the lending to such persons should be checked or his business should be undertaken by the financial institutions at the stage of financial instability so that the resource management can be done at the best manner and the financial institution can ensure its payback.