many time i have been watched in TV news that bank are down or business for bank are down in US but of some prime and sub prime deal. so m not commerce student so pls people let me know what is this at all. why those ppl took home loan didn’t pay back and make world difficult? wht is core side of this market demolition? if that happened only in US then why rest of world also in that picture now? I am hopping some details on this if possible. why world following down on US economy only. thanks
The more business you do, the more profit you make and the more bonus you ern.
Fianncial intermediaries in the US such as banks, finance companies, mortgage agencies, wanted to lend maximum and make maximum profit.
The y lent to everyone for real estate pieces, mainly houses.
Its natural to look at the cpability of the borrower to repay. That is his cash flow – from business or employment. If it is good, he will be a prime customer.
When the customer does not have any specific cash flow plans, his repayment could be only out of liquidation of the property bought by him.
Naturally, real estate price always tended to move up.
In the US, DUE TO THE REASON THAT THE DEMAND AND SUPPLY GAP IN HOUSING WAS LESS, THE PRICES DID NOT MOVE AHEAD. Rather, it moved down heavily.
Banks are supposed to mark their assets to market value of the underlying assets. In the above described scenario, they suffered heavily.
on: 6th April 10