Reccession of 2008 and Great depression Essay Example | Topics and Well Written Essays - 2000 words

Reccession of 2008 and Great depression - Essay ExampleHSBC which is the global largest bank wrote passel its holdings of subprime mortgage backed securities by $ 10.5 billion while more than other 100 mortgages companies were either leave off down or suspended their operations.US and European Banks lost more than $ 1 trillion on poisonous assets during the pecuniary crisis. Northern Rock which was a British bank, was highly leveraged could not obtain credit in the financial markets. Bear Stearns collapsed in March 2008. Other financial institutions made bad losses and were proceeds to government take over. Lehman Brothers, Fannie Mae, Freddie Mac and AIG made a lot of losses during the crisis (Halm-Addo 4).Various limits to arbitrage bed help explain why assets were selling below their fundamental level at the height of the financial crisis. Constrains to short selling does not account for the assets selling below their fundamental prices. Short selling was unequivocal since investors made speculative short sale bets against the financial assets which made the prices to decline. For instance, short selling led to strike down in the value of Lehman Brothers stocks. US Securities and Exchange Commission imposed at temporary ban on short selling since it this method of trading reduced the market confidence and the stability of financial assets (Halm-Addo 40).The as well as big to fail notion led to clean hazards, bail outs and increased the Feds sleep sheet. Adverse selection was not caused by the notion of too big to fail. The notion created moral hazard since the financial institutions engaged in predatory lending like Countrywide Financial which advertise low interest rate loans for home refinancing. The notion made banks to borrow short term in liquid markets and purchase long term illiquid assets which were risky. The notion led to the bail out where $ 700 billion degraded Assets Relief Program was created to rescue the