Subprime Mortgage Crisis - a Case Study on Morgan Stanley
1. Introduction
The US Subprime Mortgage Crisis in 2007 has had a severe impact on the global financial system. The collapses of Bear Stearns and Lehman Brothers, the acquisition of Merrill Lynch by the Bank of America and the conversion of Morgan Stanley and Goldman Sachs into bank-holding companies have all resulted from this subprime crisis that shocked the world and directly triggered the greatest global financial crisis since the Great Depression.
The underlying factors leading to the crisis were in fact the new inventions in the US housing market – the subprime mortgage lending and securitization technology that significantly magnified the impact of the default risk of these loans on the whole financial system.
This report, hence, aims to provide an understanding of how the subprime mortgage lending and securitization played a part in bringing about the Subprime Mortgage Crisis in 2007. A case study would follow our discussion to provide a further look into one of the financial institutions that was a casualty of the crisis but has nevertheless survived, Morgan Stanley. Besides, external influences such as actions by the government and the central bank as well as the possible impact of the 2009 Financial Regulatory Reforms would also be addressed.
2. Subprime Mortgage Crisis – How did it all happen?
2.1 Credit Risk and Default Risk
Credit risk refers to the risk of loss arising from borrower or counterparty default when a borrower, counterparty or obligor does not meet its financial obligations .
However, default risk, which is also known as credit risk, is often attached with subprime mortgage loans. Thus, we will use default risk instead of credit risk to describe the risk that borrowers of the subprime loans may fail to repay the principal and interests in a timely manner.
2.2 New inventions in the US mortgage market
a. Subprime mortgage lending
Subprime mortgages loans were invented more than a decade ago to target at people who could not qualify for
The US Subprime Mortgage Crisis in 2007 has had a severe impact on the global financial system. The collapses of Bear Stearns and Lehman Brothers, the acquisition of Merrill Lynch by the Bank of America and the conversion of Morgan Stanley and Goldman Sachs into bank-holding companies have all resulted from this subprime crisis that shocked the world and directly triggered the greatest global financial crisis since the Great Depression.
The underlying factors leading to the crisis were in fact the new inventions in the US housing market – the subprime mortgage lending and securitization technology that significantly magnified the impact of the default risk of these loans on the whole financial system.
This report, hence, aims to provide an understanding of how the subprime mortgage lending and securitization played a part in bringing about the Subprime Mortgage Crisis in 2007. A case study would follow our discussion to provide a further look into one of the financial institutions that was a casualty of the crisis but has nevertheless survived, Morgan Stanley. Besides, external influences such as actions by the government and the central bank as well as the possible impact of the 2009 Financial Regulatory Reforms would also be addressed.
2. Subprime Mortgage Crisis – How did it all happen?
2.1 Credit Risk and Default Risk
Credit risk refers to the risk of loss arising from borrower or counterparty default when a borrower, counterparty or obligor does not meet its financial obligations .
However, default risk, which is also known as credit risk, is often attached with subprime mortgage loans. Thus, we will use default risk instead of credit risk to describe the risk that borrowers of the subprime loans may fail to repay the principal and interests in a timely manner.
2.2 New inventions in the US mortgage market
a. Subprime mortgage lending
Subprime mortgages loans were invented more than a decade ago to target at people who could not qualify for