What Was the Main Cause of the Financial Crisis in 2007-2009

The intention of this essay is to provide an in depth and critical analysis of the financial crisis that took place between 2007-2009, in particular focusing on some key issues raised by the Foote, Gerardi and Willen paper ‘Why did so many people make so many Ex Post bad decisions?’ Whilst there were many contributing factors, it is clear that a specific few played a particularly dominant role, primarily the ‘Bubble Theory’, irresponsible regulation, toxic CDO’s and $62 trillion of CDS’s. ‘That’s what bubbles are: they’re examples of mass delusions’ (Norcera, 2011). Bubble theory’s are by no means a new school of thought, in fact they date back to the Dutch Tulip bubble in the 1630’s and it is these types of bubble that are believed, by†¦show more content†¦Even the largest of investment banks such as Goldman Sachs and Morgan Stanley were so confident in their products that they too maintained large holdings of ‘super senior’ tranches on their balance sheets, thus wiping billions of dollars of their balance sheets too. However whilst it is true that the bankers over zealous nature and thirst to maximise profits lead to the breaching of standards and forfeit of reliable credit checks, they were still allowed to do it. This leads to the plausible involvement of the credit rating agencies and the Governments lack of regulation and in some cases irresponsible regulation. A major concern surrounds the actions of US credit rating agencies, namely Standard Poor and Fitch. Whilst they may not have anticipated the financial crisis, they, to a large extend suffered from institutional failure. The mathematical models that had been developed and used by the credit rating agencies were inadequate to deal with and provide accurate data concerning the riskiness of sub prime mortgages. The mathematical modelling teams continued to use traditional out-dated 30 year mortgages to asses the likelihood of default. Mortgages issued after 2004 were based on a different credit rating tool, know as FICO. A FICO score takes into account 5 factors to help determine a borrowers credit risk, length of credit history and the various types of credit used, the currentShow MoreRelatedImpact of Financial Crisis on Gulf Area Essay1732 Words   |  7 PagesThe global financial crisis that was experienced in 2007/2008 affected many nations of the world. Some countries such as Amer ica and most European countries were hard hit since they were directly affected by the crisis. 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