MS&E 147 Chapter Notes - Chapter 5: Financial Institution, Global Financial System, Money Market Fund
6 Apr 2017
School
Department
Course
Professor
Document Summary
Global financial crisis: attributed to excessive mortgage lending and excessive securitization of subprime mortgages. Subprime mortgage securities were all held in very indebted banks. Initial losses on subprime mortgage securities triggered chain reaction the eventually threatened to take down entire financial system. When tech bubble burst, losses mainly borne by final investors. Many financial institutions worldwide held mortgage backed securities, which then the interconnectedness triggered a wave of losses between institutions. When borrower goes into bankruptcy creditors suffer from having claims frozen until bankruptcy procedure complete. Money market fund reserve primary fund, which lent heavily to lehman brothers, was making a loss on its loans to lehman brothers because they were insolvent. Reserve primary not affected by insolvency, because funded by shares, but couldn"t be paid back, so closed immediately. Triggered run on money market mutual funds because investors believed that it wasn"t safe anymore, but stopped by the the us treasury which offered government guaranteed deposit insurance.
