Well, me I no sabi this one O! so I reached out to an up and coming Financial guru to break it down in afriko terms. What the hell is going on with yankee and banks closing left and right? how is this similar to Naija's version? what does the future hold?
Here's his insight
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The U.S. Financial Crisis/credit crunch
For many years, financial institutions have found many ways to make money. The rise of derivative trading and securitization has lead to this financial mess. Basically, financial institutions bought or acquired millions or even billions of dollars worth of loans which were known as mortgage backed securities.
Now, many of these loans that make up these packages were known as sub-prime loans. The rise of sub-prime loans (lenders provide loans to individuals of firms deemed as “sub-prime” and have a higher rate of risk) lead to the rise of riskier packages. The rise in defaults or foreclosures lead to the rise in riskier packages. As people began to default on these loans, the loans became a burden to the balance sheets of many institutions. Look at it this way: you lend someone, who you know MAY not pay you back, money and then they indeed default on the loan. The loan that you now have is worthless or toxic as you may never get your money back. Now, multiply this by billions of dollars and thus, you have institutions that owned toxic assets that are currently very illiquid. As a result, banks are strapped for cash and are unable to raise any either. The key issue here is that banks do not have capital, or can not raise capital to meet their obligations and run their businesses.
Hence, the credit crunch of 2008!
The trickle down effect is also another issue because with a “credit freeze” or restrictive credit practices, many Americans, ordinary Americans will be affected. Small business may not be able to meet payroll, you may not be able to buy a car or get a student loan.
But you knew that and I now sound like a politician!
So, in summary: the mortgage back securities, owned by many wall-street banks, that were tied to sub-prime loans have caused a liquidity contraction, which, restricts the free flow of credit that serves as the cog in the engine of the American economy.
It is important to note that there are other “bad” or “toxic” assets out there as well. For example, credit-card debt.
The U.S. Bailout
This is a bill, that if passed, will assist various Wall Street banks and institutions by buying toxic assets known as mortgage-backed securities that are tied to sub-prime loans from them and freeing up their balance sheets.
What does this mean?
The core of the bill provides that the government will acquire, in stages, over $1 trillion worth of these mortgage-backed securities for $700 billion. Hence a “discount.” The idea is that the government, through its proxy, the FED, will be able to give the banks more room to operate and start releasing credit which stimulates the economy. The FED also hopes to be able to sell these securities at some point in the future, hopefully for a profit.
Key Provisions:
The bill includes a stipulation that the Treasury set up an insurance program - to be funded with risk-based premiums paid by the industry - to guarantee companies' troubled assets, including mortgage-backed securities, purchased before March 14, 2008.
The bill also provides that the FDIC will temporarily increase the insurance on individual bank accounts from $100,000 to $250,000.
Another provision of the bill is to provide tax payers, ostensibly through the FED, to acquire equity in any of these financial institutions that participates in the bailout plan.
The establishment of two oversight committees.
The Nigerian Finance House Crisis in the 1990s
This crisis was actually quite comical when I think about it, especially since I now have a Smith MBA. Anyway, it was one precipitated by greed and ignorance. My understanding of what happened was that you had institutions, in a heavy deregulated industry, springing up all over the place. Unqualified individuals began to open these "Finance Houses" which differ from conventional banks and can be described as investment vehicles. Outlandish promises on returns were made through conniving and criminal individuals whose sole purpose of these schemes was to get investor money and scram. People lined up to invest their life savings on promises that they would receive astronomical returns.
News Flash people- If it sounds too good to be true, it probably is! Even during the recent glory days of the Nigerian Stock Exchange, these types of returns were unheard of.
It is important to stress that this crisis was one which was "man-made" and not one caused by free-markets. People simply invested money with incompetent individuals or criminals. To come full circle, this was a crisis of the greedy and the ignorant.
http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSLU22546420080930
AUTHOR: Thandi MBA, Future Commodities Trader Millionaire (in naira)
A vilf side note
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