Understanding the Current Financial Crisis

Financial markets suffered their one of the worst decline as the cost of borrowing for corporations continued to rise and some investors urged policymakers to help. Economists predicted that the tightening credit market would be a drag on the economy. Signs were emerging that the nation's credit problems were spreading in unpredicted ways due to the financial credit risk instruments used. The aim of this final management project is to provide an understanding of the current financial crisis. It evaluates the fundamental causes which have lead to this crisis including a discussion of the main type of financial instruments which have been used, pricing issues, risk involved with those instruments, the economic impacts and some suggestions to rebuild market confidence in current financial downturn. Causes proposed include the inability of homeowners to make their mortgage payments, speculation, risky mortgage products, financial products that distributed, inaccurate credit ratings, affordable housing via the use of creative financing techniques, lack of transparency, unregulated over-the-counter (OTC) derivatives and fair value accounting This paper recommends a strategy for this crisis resolution. Foremost, is to rebuild market confidence in structured assets by going back to "first principles" on issues such as market transparency, standardisation of contracts, accounting treatment, enhancement of the credit ratings system, securitization improvement and regulatory reform By reducing complexity on the trade of structured assets through simple deal structures and providing investors with the information they need to analyze collateral, for example by requiring SEC registration and public pricing of assets, much of the current liquidity problem is ameliorated