SUBPRIME MORTGAGE CRISIS-

The US subprime mortgage crisis may have taken the global losses beyond 300bn USD but it also as a sequel leaves behind certain unjustly enriched people. These people gaining in the whole process are the cause or the effect of the crisis is debated and far from clear. Groups of people who maintain the glint in their eyes irrespective of global failures stand as anathema to financial markets as they invest in shares, securities or quarters inversely correlated to each other. This kind of diversification of the portfolio helps them ride the wave in the face of any economic crisis whatsoever.
The ouster of Merrill Lynch's Stan O'Neal followed by the resignation of Chairman and Chief Executive of financial giant Citigroup Charles in face of fresh losses from distressed mortgage assets leading to a $5-billion write-down and sharp drop in profits has heralded a new era of mutual mistrust between the government and the people, wherein lately people have started complaining of the Government’s social security contributions in the wake of the crisis.
The crisis basically happened because of rising interest rates which caused people with adjustable rate mortgage to see significant increase in their mortgage payments and declining property values as the real estate market began making corrections.
Lately Joseph Stiglitz’s taunt, ‘that we all share the same planet’ seems to be haunting the native country and people have started criticizing the government of making the rich, richer by allowing them to function under fraudulent and deceptively welfarist regulations. However, not to forget that the US is probably the only country to have the Government backed Freddie Mac to opt for financial bail out provisions of the bad and written down assets.
The US’s financial history is replete with instances including the Long Term Capital Management disaster of 1998, wherein the Federal Reserve of New York along with the creditors had to arrange a bail out provision and hence, another economic catastrophe was partly prevented.
The subprime crisis has been widely alleged as a stunt and consequence of the acts of the Hedge Fund Managers, but the roots of the story protrude long back. In 1986 Japan had created a terrific and robust economy with excessive surplus in banks and thus, started lending at very low rates and without any security.
The market that was sensitively fragile reacted and an asset price bubble i.e. disproportionate relative pricing of assets was created. Properties were evaluated for much higher prices than their actual values. Estimates projected the price of the land beneath the palace in Tokyo to be worth of the whole of the city of California. Interestingly, the Japanese ego was exhibited in the contemporary texts, like the one that wase tactically and purposefully titled “The Japan That Can Say No”.
Thus, the expected happened, the markets hit back, creating liquidity crunch in the banks and helped a small number of people to rake in fortune out of this global mispricing of the alternatives.
Contrary to Japan, the liquidity crisis in US was limited to the Real Estate, and the people who can stir the markets at their whims and fancies had done the damage yet again. Speculations are creating turmoil in the markets globally. The impact is also not far from obvious – an empty house in the Californian suburbs leaves the prices in an eight mile periphery, down by 2%.
Now where the problem lies, is not the mystery but the concern, because if the economic turbulence is high, realty stocks and real estate can not be stable. The markets now days are being exploited at more tiers than one and hence, the road ahead is rutted and needs to be treaded cautiously to avert any further reparations.
So, where are we headed? - is a question that stands answered, unfortunately though. The crisis, which claimed the jobs of top chief executives and prompted more than $45 billion in write-downs at the world's biggest banks, may end up spilling into 2009.
"These events tend to become deeper and play out longer than most people initially expect," said Michael Mayo, an analyst covering securities firms at Deutsche Bank in New York.
The tumbling U.S. housing market will continue to inflict the damage and mortgage-backed securities and collateralized debt obligations containing those securities will keep falling in price and will not find their footing anywhere in near future.