The financial crisis of 2007/8 reviewed the worst crisis after many
years, one of the main reason for the financial crisis is because of different
issues occurred during the period. One of the factors is financial innovation
and subprime mortgage markets. The function of financial innovation is creating
new financial instruments, technologies, organization, and markets. The outcome
of financial innovations is mortgage-backed securities products and
collateralized debt obligations (CDOs) implemented during the period of financial
crisis. The amount of subprime mortgage in US market was estimated at $ 1.3
trillion and over 7.5 million subprime mortgages is remaining to be paid. Collateralized
Debt Obligations (CDOs) did a big effect on the crisis, its special purpose vehicle
(SPV) had created securities from those purchased assets and then sell it to
investors. Many subprime mortgage bundle together sold and dependent on US
federal government support and guarantees. It had led to a moral hazard to
happen when one party behave inappropriately after the financial transaction
has engaged while another party needs to suffer for the costs of moral hazard.
The banking crisis is another main factor that led to the financial crisis. For
instance, bank runs occur is when a large number of bank customers withdraw
their deposits because they believe the bank might fail and it could affect the
banking activity. Besides that, banking crisis includes banking panics and systemic
banking crisis, which could lead many banks and a country happened a large
number of defaults. Numerous of the financial institution and the government gave
their assistance during the crisis to avoid the financial system collapse. On
September 2008, Lehman Brother filed for bankruptcy, Merrill Lynch had sold to
Bank of America at low prices and AIG had faced the liquidity issue. In
addition, one of the factors contributed to the financial crisis is agency
problems and asymmetric information. Agency problems happened when mortgage originators
did not hold the actual mortgage but they sold the notes on the secondary
market and they gained the commissions from the amount of the loans produced. During the financial crisis, originators had sold a number of loans to
banks and they got information that many of borrowers from these loans about to
default. Asymmetric information occurs when the parties engage in a transaction,
there do not have the same information in between the different parties and it could
exist between investors and companies or investment corporate. Because when investors
are evaluating companies, companies may have good or bad information while investors
or stock analyst is lack of the information lead the risk exists between investment
firms and investors. For instance, the investment firm may advice their
customer to buy a company’s stock while they knew the stock’s price is going
down. Banks have to estimate the exact of riskiness with intelligence that
precise in order to do a rational decision. 

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