The subprime crisis is seen as the interplay of several causes, most notably – the proliferation of numerous, often highly complex financial instruments such as residential mortgage-backed securities, credit default swaps and collateralized debt obligations; – the worldwide spread of the originate-to-distribute strategy; – the market entry of new and often hardly or not at all subject to supervision companies such as hedge funds – even as offshore funds – and special purpose vehicles; – the strong increase in the importance of investment banking; – the asymmetric information, reinforced by the globally operated securitization business, which is not only limited to banks, and at the same time spread worldwide, leading to ignorance about the actual distribution of risks; the chain between the originator and the (end) investor became longer and longer in some cases and thus less transparent; – the inadequate risk management at many institutions; in many cases, risk management had not kept pace with financial innovations; – the granting of subprime loans in the wake of the Community Investment Act of 1999 in the U.S., which led to a significant increase in loans to households with poor credit ratings and was, as it were, the direct trigger of the crisis; – the payment of bonuses to bankers even if the corresponding commitment leads to a loss in the future (at medium and long term). – The bonus systems were generally geared only to short-term success. Therefore, it was perfectly rational for a banker to take the highest risks in order to achieve high returns and receive corresponding bonuses. In case of failure, the banker merely fell back to his basic salary. This is a prime example of how a limitation of liability brings forward irresponsible business behavior, and – last but not least – the twenty-year low interest rate policy of the Federal Reserve in the USA: whenever there was a threat of an economic downturn – for example, after the stock market crash in 1987, in the Asian crisis of 1997/98, after the bursting of the dotcom bubble and after the Islamic terrorist attacks of September 11, 2001 – the Federal Reserve countered this by lowering the key interest rate. – Most of the above-mentioned and other causes are interrelated and are interrelated in ways that are difficult to assess in detail. – Another explanation of the causes is based on the attitude of suppliers and consumers in the market. Seven mortal sins are then named, which bankers and their customers have fallen into: Greed, immoderateness, presumption, vanity, exaggeration, unreasonableness and ineptitude. – See risk culture. – Cf. Annual Report 2007 of BaFin, p. 9 ff. (very good presentation; p. 22 ff.:
chronological overview of events).
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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