Subprime Loans and Crisis Management Part.2

In recent past the two assumptions above are not true:

* Declining housing market reduces the value of the mortgaged property falls below the debt
* Rising interest rates makes debt burden too heavy for a fragile population.

Moreover, these loans were sold with an initial period of 2 or 3 years with a fixed prime. Loans issued in 2004 and 2005 (time of highest award) so arrive at the end of this period and must be reattached in 2007, triggering a wave of defaults.
If the mechanism occurs on a large scale, the financial institution as a whole is threatened.


To optimize their use of capital, banks that granted these loans have securitized all or part of their subprime loans primarily through CDO or RMBS and this, with the blessing of most credit rating agencies.
Yields offered have attracted all investors: hedge funds but also the more traditional asset managers. Funds that meet today's challenges are mainly dynamic money market funds, which could offer higher yields, not more sophisticated hedge funds.

Defects increasing the sub primes, the value of credit derivatives is greatly reduced. The managers are then unable to calculate the value of their background, including lack of exchange of the instruments. They then suspend trading, causing investor panic. They wish to sell then all turn, forcing managers to temporarily close the funds until better days.

The funds that have affected not closed had to find cash to meet withdrawals; they then sold the only liquid assets, the shares resulting in lower market share.

Finally, some banks are highly exposed through their funds (including the German bank Sachsen LB, IKB, BBW, etc...) Must meet their losses and introduce and suspicion on the entire area causing tensions in the interbank market.