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Discussion on Sub-Prime Crisis

In: Business and Management

Submitted By Hank77
Words 420
Pages 2
Prior to the Subprime Crisis, accounting standards allowed certain subprime-related debt to be kept off the balance sheets of financial institutions. If standards required subprime debt exposure to be included on balance sheets, it would have allowed a more transparent view into the financial health of a given institution. If such exposure were made public during the Housing Bubble, it may have had a sobering effect, turning the trend that dominated Wall Street away from a carefree hunger for risk, back toward the conservative contentment of risk-aversion. It is possible that this could have slowed the pace of the U.S. Subprime Crisis from turning into a global financial crisis, but it remains to be seen if more stringent accounting could have prevented the Subprime Crisis from occurring.
Obviously, a host of destructive factors propelled the calamity: easy credit, lax lending standards, historically low interest rates, a belief in the permanence of ascending home values, and the cult-like following that Wall Street formed around a mathematical formula known as the Gaussian Copula function, which was used to assess risk on tranches within collaterized debt obligations. (The Wired magazine article is worth a read: http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all )
The sheer existence of mortgage backed securities has been blamed for the crisis, the question of what to do with them remains. Are accusers looking to the suspects for answers? Liberal accounting standards were cited as one of the causes of the crisis; it seems that we’ve come full circle now that rigid Fair Value Accounting policy has been accused of exacerbating bank losses by “forcing companies to record financial losses that would eventually be at least partially reversed once market liquidity was restored.”* Prominent bankers have “criticized the use of fair-value accounting…...

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