<p>Can anyone please explain to me why Investment Banks failed??? I understand the bad economy/bad mortgage, but really what REALLY happened...</p>
<p>It was basically because of the deregulation of the economy and banks freely giving out money and charging high interest rates and consumer's inability/incompetency to pay their mortgages. Now, the government is trying to buy this bad credit, bailout bill, but if it fails in Congress I doubt things will get better, only worse. Eventually, I see this country getting more fiscally liberal. There will definetly be more regulation just like commercial banking, I doubt investment banking will even exist because it'll probably combine with commercial banking, it already has so that's pretty much it.</p>
<p>Too much debt and not enough equity in deals. When the value of the deals went south a little their entire equity was wiped out and nobody would lend to them anymore. No loans no business.</p>
<p>Research subprime, mortgage back securities, and credit linked notes and how banks as well as other firms utilized it. Good studies include lehman brothers, countrywide financial etc.</p>
<p>I'm sure a question of this nature will pop up in an interview for fall recruiting.</p>
<p>haha, thats possible. So the reason why commercial banks are failing is same? Im assuming?</p>
<p>What do you guys really think about the bailout, I mean I dont think there can be right or wrong answer unless we can tell the future.</p>
<p>Well, the reason for a lot of thrifts failing is because of all the bad loans they had on the books. They couldn't unload the risk, and eventually many faced runs which made the situation even worse.</p>
<p>There is no explanation ... in the word of Perot, VOODOO ECONOMICS ... :)</p>
<p>From the Chairman of the Blacstone Group, if you have WSJ online
Maybe</a> Someone Does Have a Clue - WSJ.com</p>
<p>
[quote]
Stephen Schwarzman. The chairman of Blackstone Group was part of a roundtable of roughly 30 finance luminaries at the Waldorf-Astoria on Tuesday afternoon, hosted by the Yale School of Management and co-sponsored by The Wall Street Journal, and he kicked off the audience-participation segment with a nearly all-in-one-breath summary of the causes and effects of the credit crisis:</p>
<p>"It's a perfect storm. It started with Congress encouraging lending to lower-income people. You went from subprime loans being 2% of total loans in 2002 to 30% of total loans in 2006. That kind of enormous increase swept into the net people who shouldn't have been borrowing.</p>
<p>Those loans were packaged into CDOs rated AAA, which led the investment-banking firms [buying them] to do little to no due diligence, and the securities were distributed throughout the world, where they started defaulting. </p>
<p>When they started defaulting, out of bad luck or bad judgment, we implemented fair-value accounting....You had wildly different marks for this kind of security, which led to massive write-offs by the commercial-banking and investment-banking system. </p>
<p>In the face of those losses...you needed to raise new equity...which came from sovereign-wealth funds, in part, which then caused political resistance to sovereign-wealth funds, who predictably have withdrawn from putting money into the system....It seemed pretty obvious that would happen. We now find ourselves with a liquidity crisis where fundamentally the cost of money for financial intermediaries [such as investment banks] is significantly in excess of their cost of lending it. So several institutions found themselves in a structurally impossible position. ...Goldman reverted to a banking charter for a lower cost of funds, which today is still not low enough for the business.
[/quote]
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