Fair Value Accounting and Subprime Crisis - Essay Example

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Fair Value Accounting and Subprime Crisis

A decade of house price increase up to 2006 soon saw a sharp fall in housing prices and the rise in foreclosure (Healy et al, 3). The benchmark for financial instruments was provided by the Mortgage Bankers Association that soon reported the foreclosure and collapse of mortgage securities as well as the Federal Reserve. The mortgage-backed securities were discovered held in portfolios in banks and hedged in funds all over the world. This greatly affected the other commercial instruments. The stock in the US fell around 13% in fears of collapse of these banks. Investors soon withdrew their money from these banks which led to liquidity problems for the banks. In three days’ time customers had drawn ?2 billion. The crisis spread fast to investment funds and management funds that had been exposed to subprime debt. Most of the funds lost value of their assets e.g. Global Alpha hedge Fund lost 26% value; while others stopped valuing their funds due to complete evaporation of liquidity. With attempts by the Federal Reserve to stem the crisis by imputing more money into lending institutions and with the aim of gaining investor confidence, 2008 saw a complete turn of events. Loss of investor confidence in financial institutions spread to credit markets. A decline by 30% prices of market prices for commercial papers was felt. ...Show more

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Name Institution: Tutor: Subject: Date: Fair Value Accounting and Subprime Crisis Part a: The subprime market and its collapse into crisis and the resulting liquidity crisis The subprime market was composed of the strong financial institutions who lent money for mortgages at started lending rates…
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