Financial Institution Management (global Crisis 2008)

Table of content

PART 1

1.0  FEDERAL RESERVE BANK

When the global financial crisis occured, the Fed has taken aggressive action to combat the global financial crisis using various strategies in response .The Fed's response is to stabilize the financial system and address the wellbeing of banking institutions . (The Federal Reserve Bank of San Francisco, n.d)

1.1 Provided liquidity

As fleeting markets solidified, the Federal Reserve extended its own collateralized giving to financial institutions to guarantee that they had entry to the basic financing required for everyday operations. Regularly, the Federal Reserve only provides loans to establishments that take deposits, for example, commercial banks, a procedure known as discount-window giving. Nonetheless, in the midst of a boundless breakdown of trust in mid-2008, investment banks, including those that were essential merchants of government securities, additionally experiencing difficulty in acquiring fleeting subsidizing and got to be defenceless against credit shorts like bank runs. In March 2008, the Federal Reserve promoted two projects to provide short term loans to essential merchants such as discount- window. Conditions in these business sectors have enhanced significantly in 2009. (Monetary Policy in the Crisis: Past, Present, and Future, 2010)

1.2 Supported impaired financial markets

The Fed acted to enhance conditions in two imperative markets that separated amid the frenzy in the fall of 2008 that the currency market shared finances and fleeting loaning to organizations. Currency market shared finances gathere reserves from financial specialists and placed cash into transient ventures, for example, Treasury bills and unsecured fleeting advances to organizations, known as business paper. The business paper business sector is a key wellspring of stores for some organizations. In any case, when the venture bank Lehman Brothers opted for non-payment, speculators expected that more disappointments could make some business paper almost useless. They started hauling cash out of currency business sector common finances that held business paper. Interest rates on business paper soar. The Federal Reserve gave secured advances to organizations in these business sectors, guaranteeing that satisfactory subsidizing was accessible. From that point forward, rates on business paper have tumbled to low levels and these businesses are at the end of the day working great. (The Federal Reserve's Balance Sheet: An Update,2009 )

1.3 Supported systemically important financial institutions

In 2008, the venture bank Bear Stearns about fizzled, which gambled a domino impact that would have seriously upset money related markets. To contain the harm, the Federal Reserve encouraged the buy of Bear Stearns by the bank JPMorgan Chase by giving credits sponsored by certain Bear Stearns resources. A while later, nonetheless, the venture bank Lehman Brothers broken down in light of the fact that no privately owned business was willing to secure the pained speculation bank and Lehman did not have satisfactory insurance to meet all requirements for direct advances from the Federal Reserve. Subsequently, budgetary frenzy debilitated to spread to a few other key monetary organizations, including the goliath insurance agency American International Group (AIG). AIG assumed a focal part ensuring money related instruments, so its disappointment could prompt a course of disappointments and an emergency of the worldwide budgetary framework. The Federal Reserve gave secured loans to AIG to contain this danger. (American International Group, 2009)

2.0 INVESTMENT BANK

Role of Goldman Sachs in crisis are dealing in subprime mortgage securities, earning profit on the downturn in the U.S housing market, and exposing foreign institutions to subprime risk.

2.1 Subprime mortgage securities

In the U.S. mortgage market, Goldman Sachs and Deutsche Banks are the two largest leading banks. Interest rates in the US rose from 1% to 5.35% during 2004 to 2006, activating a slowdown in the housing market of the US. Homeowners who are struggling to pay their mortgage payments when the interest rates are low were starting to default on their mortgages when the interest rate went up. Delinquency rates on sub-prime loans, high risk loans to customers who are underprivileged with no credit histories- hit the record levels. The blow of these delinquencies were felt all over the financial system as many of the mortgages has been stacked up and sold to investors and banks.

Total of $12.9 billion worth of this bonds were sold in 2006. Goldman Sachs known as the largest sellers with a 59% subprime bonds business over the year. (Adrian, A, 2007). Goldman and Wall Street firms converted subprime-mortgages to securities and created a secondary market for subprime mortgages named as “colossal”. (McClatchy newspaper group, 2009). From the year 2004 to 2008, nearly $2.5 trillion in residential mortgage-backed securities (RMSB) issued by United States and in CDOs there are over $1.4 trillion backed mainly by products related to mortgage. From 2001 to 2007, 135 billion of bonds sold by Goldman Sachs was backed by risky mortgages. (McClatchy newspaper group, 2009). US Federal Reserve Bank and central bank from European cut down interest rates in order to boost lending from publics. They make funds available by boosting the money markets.