This week, I will write my article based on three (+) articles because the news of the sub-prime lending crisis in the US has many aspects covered in different news articles. I hope this can be excused as a one time thing because the sub-prime crisis seems to be a very serious problem. This was a completely new topic for me so I had to look up a lot of words (please excuse the use of brackets which contain the simple explanations for people who may read this article):
“Sub-prime mortgage lenders who give loans to people with bad credit records account for more than 70% of all repossessions, a BBC investigation has found.”
This US sub-prime crisis appeared to be a major crisis going on at the moment in the business world, but I did not know what it was, so I used Wikipedia to search it up:
“Subprime lending (also known as B-paper, near-prime, or second chance lending) is lending at a higher rate than the prime rate.”
As soon as I read the definition of sup-prime lending, I realized straight away that this crisis probably started off from excess lending and my assumption was supported by the last article that I read – reckless lending has been going on. Sub-prime loans have been marketed at people with poor credit records (in other words, loans that do not meet Fannie Mae or Freddie Mac guidelines). The sudden or unexpected numbers of repossessions (used to refer to a financial institution taking back an object that was either used) among such borrowers in the United States triggered a global financial crisis over the summer. Years of reckless lending caused the financial markets to lose trust in sub-prime loans. This triggered the credit squeeze (when interest rates rise and new credit is difficult to access) that resulted in a run on Britain's Northern Rock bank.
This US sub-prime crisis appeared to be a major crisis going on at the moment in the business world, but I did not know what it was, so I used Wikipedia to search it up:
“Subprime lending (also known as B-paper, near-prime, or second chance lending) is lending at a higher rate than the prime rate.”
As soon as I read the definition of sup-prime lending, I realized straight away that this crisis probably started off from excess lending and my assumption was supported by the last article that I read – reckless lending has been going on. Sub-prime loans have been marketed at people with poor credit records (in other words, loans that do not meet Fannie Mae or Freddie Mac guidelines). The sudden or unexpected numbers of repossessions (used to refer to a financial institution taking back an object that was either used) among such borrowers in the United States triggered a global financial crisis over the summer. Years of reckless lending caused the financial markets to lose trust in sub-prime loans. This triggered the credit squeeze (when interest rates rise and new credit is difficult to access) that resulted in a run on Britain's Northern Rock bank.
The second article I read explained the spread of the crisis in the US to the effect that it had in the UK (the Northern Rock bank). I am not sure if I understand the article properly, but it appears that because the Northern Rock bank was facing financial problems, Lloyds TSB was trying to execute a Northern Rock takeover bid (takeover is the purchase of one company by another). In other words, Lloyds TSB was planning to purchase the Northern Rock bank and asked for a £30bn loan from the Bank of England. However, the governor of the Bank of England said that governments should not provide financial help to one company so that it could take over another. Lloyds were not able to takeover the Northern Rock bank, and when its bid collapsed in September, Northern Rock had to go to the Bank of England and ask for emergency funding. This event/crisis (Northern Rock's need for emergency cash) sparked the first run on a UK bank for almost 150 years. However this was not the end of the problem. It would be several months before banks could return to normal after the crisis, because it would take that long for banks to disclose all the losses from financial instruments linked to US sub-prime mortgages.
This is not the end, because the third article forecasts that 10,000 finance jobs will be cut. A survey showed that most companies thought the credit squeeze (explained above) would get worse in the next six months. The report/survey predicts that the UK will avoid outright recession, but says that finance jobs are already being cut. CBI chief economist Ian McCafferty said that "Some have suggested it's the worst financial crisis since the Second World War," and he also stated that "I think one of the key characteristics is that it will go on for quite some time to come."
This huge financial crisis and losses of jobs affects everyone worldwide and their families (especially those who have lost jobs) and it is ironic (funny?) to realize that the start of these major financial setbacks started from reckless lending in the US. Although I am not familiar with the term sub-prime lending, it just seems that if the lending processes were more carefully thought through and if they met the guidelines (eg Fannie Mae or Freddie Mac) a crisis with such a big scale as this could have been avoided. I have learnt from this sub-prime crisis that very small or insignificant factors can lead to global distress, and it seems that this theory can also be understood in other aspects of life.
20600392
Entry number 4
Word Count 760 words
Source :3(+) articles
http://news.bbc.co.uk/2/hi/business/7079520.stm
http://news.bbc.co.uk/2/hi/business/7321948.stm
http://news.bbc.co.uk/2/hi/business/7030723.stm
http://news.bbc.co.uk/2/hi/business/7321948.stm
http://news.bbc.co.uk/2/hi/business/7030723.stm
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