The current credit crisis that engulfed first the financial industry and then entire economies, has been termed as the biggest financial market turmoil ever since the Great Depression of the 1930s. The consequence has been an increased number of bank failures, a temporary freeze on money markets and sharp drops in equity markets worldwide. Banks’ shares lost market value significantly and broad segments of global financial markets stopped working. With the crisis spreading to a wider range of asset classes and institutions, governments and central banks around the world were forced to step in with strong measures.
Low interest rates, search for yield, financial innovation and new mortgage products, combined with often imprudent (and at times fraudulent) policies pursued by mortgage lenders over the past few years, were the signs of a crisis waiting to happen. Lenders’ originate-to distribute business model, the securitization of risky mortgage loans, and the use of financial derivatives and financing vehicles to off-load these risks from balance sheets of regulated institutions acted as an amplifier to an already volatile situation.
