The story of financial crisis began with the two stated owned companies Fannie Mae and Freddie Mac morgage companie (housing-mogarge) which provide loan to some subprime borrower since this twin companiese depend much from government subsidy making it less cost in raisng it fund and its went beyond its role of faciliating liquidity in housing morgage to buying bond and securities (providing loan).
Also noted that the bank play role in financial credit. Since bank need money for providing loan. Where bank get deposit? Well from interbank market which include central bank as main player. Since bank borrow from other bank it has to pay for its borrow (interest). If the interest is high then when it provide loan to borrower which included companiese and household the interest rate must be higher.
First, the rates on loans paid by many consumers (adjustable-rate mortgages, for example) and companies are set with reference to the money markets. Higher rates for banks mean higher rates for everyone. Second, if the markets are blocked for more than a week some companies may find it hard to get any finance at any price. That could mean more bankruptcies and job losses. Third, more banks could go bust if the blockage continues, making investors even more risk-averse. The downward spiral would take another turn.
This is one reason for Bush government to interven with bail-out progarm to support bank credit crunch and all main companies in U.S from bankrupt. Aslo avoiding deposit queuing to withdraw their deposit- something about rebuilding belief and new expectation.
For more detail on this point I would suggest the two links:
http://www.economist.com/finance/displaystory.cfm?story_id=11751139
http://www.economist.com/finance/displaystory.cfm?story_id=12342237
the following article explain what is “subprime” means?
Specialist lenders:Home run
Serving subprime borrowers requires specialist skills
THE word “subprime” may now send shudders down bankers’ spines. But a number of listed lenders that specialise in making loans to people with poor or no credit histories are proving that money can be made from even the riskiest customers. The way they operate may explain why mainstream lenders find it hard to descend the credit ladder.
Last month, Provident Financial, a British lender to what it calls “non-standard” borrowers, and International Personal Finance (IPF), a spin-off from Provident that operates in eastern Europe and Mexico, both issued relatively upbeat trading statements. Both reported growth in customer numbers, as other lenders have drawn in their horns. More impressively, they also said that customer arrears had remained stable.
Specialist lenders are not immune to the effects of the crisis, of course. Funding concerns have roiled the share price of Cattles, another British lender: it is seeking a banking licence so that it can gather deposits. The severity of the economic downturn will set a stern test of lenders’ credit management. But they have a number of things in their favour.
One is the frequency of their contact with customers. Both Provident Financial and IPF collect loan payments from borrowers’ homes each week, giving them instant information if a customer is struggling. Another is the incentive scheme they operate for their agents, the bulk of whose earnings is based on how much they collect. “It is better for agents to lend less and collect more than to lend more and collect less,” says Christopher Rodrigues, IPF’s chairman. IPF’s employees habitually offer less money to borrowers than the firm’s automated credit system says they can.
Mainstream lenders cannot easily follow this approach. IPF and Provident loan out smaller sums of money (the equivalent of a few hundred dollars, typically) at shorter durations and higher rates. Banks do not have teams of agents to knock on people’s doors. Specialists make a virtue of lending to people who cannot get credit elsewhere, because that means they are not loaded up with debt. But that is the point. The shift in Cattles’ business model over the past few years, to bigger loans and remote servicing, has increased its risk profile, says Robert Self, an analyst at Credit Suisse. When serving subprime borrowers, acting like a bank can be a hindrance, not a help.
Source:http://www.economist.com/finance/displaystory.cfm?story_id=12609781
Just a blog 