Why the subprime crisis?
03 November 2008 à 14h55
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The US subprime crisis began in early 2007. Subprime loans are property loans granted to modest American households. To become owners of their home, these households did not hesitate to have debts widely superior to European levels. As a guarantee, they gave the possibility to the bank to repossess their house. Since 2002, the Federal Reserve Bank encouraged this system of easy credit to reflate the economy.
At the end of 2007, a lot of households were unable to pay their debts back because of the spectacular rise of interest rates (they could reach 18% three years after). The main reason is the lack of transparency of the banks. They often neglected to warn the borrower that the interest rates might increase two years after. Moreover, these rates became more dependent on the interest rates of the Federal Reserve Bank, which rose from 1% to more than 5% between 2004 and 2006.
Meanwhile, the housing market had burst because of the recklessness of the banks. Contrarily to the “traditional model“, the banks –in the case of the subprime- sold the mortgages to the bond markets. An extremely profitable business, because they earned a fee for each mortgage they sold. They also urged brokers to sell more and more of these mortgages.
The stocks nevertheless quicky lost their value because of the inability of the households to pay theirs loans back. The hedge funds became bankrupt. Short of liquidity, the banks also were in trouble. They asked other banks to lend them money, but these banks refused or agreed under very harsh conditions. The selling of the banks to foreign sovereign wealth funds or nationalization became their last option.
At the end of 2007, a lot of households were unable to pay their debts back because of the spectacular rise of interest rates (they could reach 18% three years after). The main reason is the lack of transparency of the banks. They often neglected to warn the borrower that the interest rates might increase two years after. Moreover, these rates became more dependent on the interest rates of the Federal Reserve Bank, which rose from 1% to more than 5% between 2004 and 2006.
Meanwhile, the housing market had burst because of the recklessness of the banks. Contrarily to the “traditional model“, the banks –in the case of the subprime- sold the mortgages to the bond markets. An extremely profitable business, because they earned a fee for each mortgage they sold. They also urged brokers to sell more and more of these mortgages.
The stocks nevertheless quicky lost their value because of the inability of the households to pay theirs loans back. The hedge funds became bankrupt. Short of liquidity, the banks also were in trouble. They asked other banks to lend them money, but these banks refused or agreed under very harsh conditions. The selling of the banks to foreign sovereign wealth funds or nationalization became their last option.
