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For a definition of the term "credit crunch," see Credit Crunch (definition)
For example, the market for auction rate securities failed in February 2008, when Citigroup, UBS, and the other two banks that auction these securities declined to act as bidder of last resort, driven by the scope of the market's failure and their own need to minimize risk after widespread MBS write-offs.[1] This was bad news for the cities, schools, and hospitals that issued these bonds, as well as the companies (including Intuit and Monster Worldwide) that owned them. The freezing of the auction rate securities market is one example of the wide, deep impact of the credit crunch - while its catalyst can be traced to a single source, mortgage investment, its impact cannot be as easily contained.
[edit] Who's affected by the credit crunch? Most Wall Street banks have taken significant hits. Data as of April 14 2008.[2] [edit] Investment banks and other financial services firmsSeveral large investment firms have seen their stock prices plummet as a result of the subprime bust and credit crunch. While the companies below have suffered the biggest losses as of the first quarter of 2008, firms across the industry have been negatively impacted by the crisis.
[edit] Home construction and improvement companies
[edit] Mortgage lenders
[edit] Monoline bond insurers
[edit] Collection agencies
[edit] Companies that depend on credit to finance growthThe impact of the credit crunch isn't limited to a few specific sectors of the economy. Any firm, in any industry, that needs to borrow money to continue growing is hurt by the credit crunch. Even more, the industries that are directly impacted can affect other, secondary industries that may not be connected to the credit markets at all. Some (less obvious) examples of companies that have been hit by the credit crunch in one way or another are: [edit] What caused the credit crunch? [edit] Subprime mortgage bustMany of the subprime mortgages originated since 2000 had adjustable interest rates as opposed to fixed rates. In 2006, an estimated 80% of all subprime loans originated featured "teaser" rates as low as 1% during the introductory period.[15] When the introductory periods ended, borrowers found themselves with monthly payments that were much higher, often substantially so. One 2007 study stated that monthly payments for 60% of all adjustable-rate mortgages made since 2004 will jump by 25% or more.[16] With rising payments, more than 24% of subprime loans were either delinquent or in foreclosure by February 2008.[17] Securities backed by these mortgages, in turn, began to fall in value, hitting investors and the banks that package mortgages into securities. [edit] Mortgage-backed securities and collateralized debt obligationsOne of the main features of the subprime boom was investment banks' extensive use of mortgage-backed securities, collateralized debt obligations, and other complex financial instruments to spread risk and free up additional capital to be lent out. Typically, subprime debt was too risky to be considered investment-grade, but the advent of MBSs and CDOs let banks spread the losses from any single default over a large pool of mortgages, presumably minimizing the risk of significant losses for investors. The perception of security, along with the potential for higher returns than on prime-backed securities, made these subprime MBSs very popular among investors, including hedge funds, investment banks, and asset management firms. As subprime defaults rose and banks began posting large losses on subprime-related securities, they had to cut back on their other investments to build up capital and cover the losses. Since financial services firms bankroll much of the economic growth in the U.S., this prevented companies in nearly every industry from obtaining the money they needed to keep growing, spreading the impact of banks' credit losses throughout the economy. [edit] Falling home pricesAs the number of subprime defaults rose, so did the number of homes repossessed. Combined with a general slowdown in the U.S. housing market, this led to an increase in the available supply of homes on the market, pushing down prices. As of April 2008, there was a 10.7-month supply of single-family homes on the market, which helped explain the 14.1% drop in existing home prices during the first quarter of 2008 from the same period in 2007.[18][19] Before this, millions of homeowners had borrowed against the soaring value of their homes, which boosted overall consumer spending; in fact, such "home equity withdrawals" were estimated to account for more than 9% of the U.S.'s total disposable income in 2006.[20] When the value of their homes started to fall, however, people found themselves unable to keep pulling money out of their homes, resulting in an estimated $350 billion decrease in consumer spending in 2007 from the previous year.[21] Since consumer spending makes up about 70% of all economic activity in the U.S., even slight changes can have a huge impact on the country as a whole. [edit] References
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