The evolution and spillover of the subprime crisis

A recent headline in a United Kingdom (UK) newspaper may have said it all. The headline read, "UK banks preparing to access BoE's emergency liquidity scheme" (Aldrick, 2008). The article describes how UK bank liquidity has been affected by the subprime mortgage crisis that was perpetuated primarily by Wall Street firms in search of higher profits. The article highlights how global the financial world has become and how banking institutions in the UK can be affected by actions taken by financial firms halfway around the world. Many analysts believe that the industry is facing a financial crisis as defined by such notable economists as Minsky and Krugman. A financial crisis as defined by Hyman Minsky is a situation brought about when money demand and money supply are out of whack, particularly when the demand for money exceeds the money supply in a relatively quick manner. This is especially true in today's global economy when financial firms routinely depend on each other for financing and liquidity no matter where they are located. Thus a financial crisis taking place in the United States will likely have an immediate effect on other financial firms around the world. Minksy also hypothesized that as capital markets mature they became increasingly unstable. He espoused that investments that become more speculative also leads to a heightened instability. Ultimately, the instability culminates in a market correction. In this case the market correction took place in Japan.

"This decade's great credit bubble really got underway the morning of Jan.2. That's when Asian markets began selling off as investors worried that the fallout from the relatively obscure sub-prime sector had spread into the broader economy" (Sanford, 2008, p. 53). The effects of the Asian market sell-off quickly spread in dramatic fashion to stock indexes from "Tokyo to Toronto, where Canada's national exchange plunged 605 points" (Sanford, p. 53). The severity of that correction is in direct correlation to the severity of the excess brought about by the speculative nature of the investments, and in this case, according to the market's reactions, the speculative nature was very speculative indeed. Minsky focused his research on understanding financial crisis and how it takes place. "Minsky claimed that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis" (Tan, 2008). According to Minsky, the financial crisis is the result of banks and lenders tightening credit availability even for companies that can afford the loans and subsequently the economy contracts. Minsky's core model is known as Financial Instability Hypothesis" (FIH), which simply declares stability is inherently destabilizing. In a nutshell, Minsky believed that there were three stages that business and industry goes through in order to reach a financial crisis. Those three stages include the hedge, speculative and Ponzi phases.

The hedge phase is the most conservative and takes place with business and banking ventures of a very conservative nature. It points to the buyer's cash flow being sufficient to paying interest and principal for any amounts borrowed to purchase an asset. The loans are fully hedged in nature. The second phase is when those loans become more speculative. The bankers and the business owners project increasing profits to cover increasingly speculative loans that are for assets that are appreciating in value. The third phase is the harbinger of financial crisis. It is during this phase that the business owners see assets that are steadily and rapidly increasing in value, the owners speculate that their profits and margins will continue to expand, and bankers follow along those speculations by offering higher and higher loans to value. The financial crisis can be precipitated when a business owner (or home owner as the case might be) defaults on the loan. Interestingly enough, the bankers are usually caught with their collective pants down, not having anticipated that their speculative actions will have any dire consequences. Observing the current financial crisis as defined by Minsky displays an excellent example of how this crisis followed those patterns he set forth. What Paul Krugman would have us believe in the case of financial crisis just might ring true in this particular case. He has long espoused the fact that it is the new technology being created primarily in the United States that creates opportunities for such events to take place.

One recent report espoused the opinion that "We are faced with a major financial crisis inflamed by the subprime mortgage meltdown, which will have a negative impact on companies, particularly those with weak financials that depend extensively on borrowing to meet their expansion and operating needs" (Gomez, 2008, p. 28). Wall Street would probably agree with him on this case, at least if they were honest with themselves they would. Wall Street has always been on the forefront of creating investment opportunities and vehicles that create additional profits, not necessarily for the investors, but most definitely for themselves. Some of those investments are the core of the current debacle and may ultimately have a rippling effect on many individuals, communities, countries and governments. "Thanks to the Great Mortgage Panic of 2008, your home value is tumbling, credit is harder to get and the job market may turn a lot tougher" (Regnier, 2008, p. 138). Krugman would espouse all this is due to the home-grown technology used to extrapolate new investment vehicles. These vehicles include such items as collateralized debt obligations (CDO's), collateralized mortgage obligations (CMO's) and real estate mortgage investment conduits (REMIC's). These investment vehicles were initially created during the 1980's and marketed to investors throughout the world as fixed income opportunities that were relatively safe in nature. Investors snapped many of them up because they offered regular and consistent distributions of income coupled with the fact that they were 'collateralized' by mortgages that were being paid on a monthly basis.

Many of the investors believed that the mortgages were made on properties that were constantly rising in value, so not only did they receive a regular dividend, but their investment holdings were rising in value as well. This was all fine and dandy until (of course) the mortgages that were being made were made to an increasingly more risky borrower. Not only was there a higher risk assumed by the investor due to the creditworthiness of the borrower, but the underlying property was oftentimes overpriced or inflated in value. This was a prescription for disaster according to Krugman, and according to Minsky it was the third phase of three stages leading to a financial crisis. During a financial crisis, bank liquidity is affected due to the tightening of standards that always follows investor's realizations that properties and real estate used as collateral on loans is not worth as much as what they thought. Developers are unable to finance or refinance construction costs and have to curtail construction. Foreclosures rise, and even good creditworthy individuals find it difficult to qualify for a mortgage. Homes depreciate in value and people lose confidence in the financial industry and the economy. Many of these problems could have, and probably should have, been foreseen by those very experts who created such investment vehicles to begin with. However, during a Minsky 'ponzi' phase many of those same investors become euphoric over their ever increasing profits, and fail to recognize any of the impending events that can spell disaster.

One recent article states, "from 2004 to 2006 subprime originations rose from $300 billion to $600 billion. By 2006, these loans made up 21.8 percent of the market and the bulk of the $1 trillion in subprime mortgages in today's collateralized debt obligations" (Risk, 2008, p. 26). These types of investments are typically difficult to price due to the underlying collateral, and due to that difficulty can often be priced much higher than the true worth of the investment. The same article continued by stating, "it's become clear that the market vastly mispriced the value of these risky assets and could have used a healthy dose of paranoia, though even many conservative investors did not include such a radical liquidity scenario in their models" (Risk, p. 27). It is easy, of course, to see why the firms that were garnering such profits from the investments would find it easy to overlook the warning signs. Now those same firms are scrambling to stay afloat in some cases, and are completely going under in others. It is not just the little firms that are having trouble either, but some of the biggest firms on Wall Street are writing off billions of dollars, as are many insurance companies. One recent report showed that "the subprime mortgage crisis will be a significant insurance issue, with significant coverage issues. Insurers should now prepare to handle these claims" (Rutkin, 2008, p. 102). Such reactions have effects around the world and in a variety of manners. Companies are not the only entities that will be hurt, individuals are seeing their stock holdings, 401(k)'s and real estate net worth dropping precipitously as well.

"Forecasts by Moody's Economy.com now use a 20 percent drop in median existing-home prices from their 2005 peak as a baseline, with prices weakening through at least mid-2009" (Shinkle, 2008, p. 44). Moody's director of housing economics Celia Chen, states in the same report that the 20% decline is the good news and that the bad news is that it could easily be more than that. The worst-case scenario is a lot more than that. "You want the darkest? Forty percent, she says. There's your apocalypse" (Shinkle, p. 45). Websites that track foreclosures indicate that "the US-wide total of loans foreclosing was running at 2.5 million in 2007, up by 70% from about 1.5 million in 2006" (Dumas, 2008, p. 23). The problem is that the teaser rates that were initially set in 2006 will reach their peak in 2008, ultimately affecting another approximate 1.5 million mortgages, with another round in 2009. The spring 2009 cumulative total of over 4 million foreclosures is a reasonable expectation. "At roughly $200,000 per defaulting household, the total of mortgages going under could be $800 billion" (Dumas, p. 24). Many people are asking the same question of 'how did this all happen?' The finger pointing is just beginning and it is being pointed at Wall Street for creating the investment vehicles, the bankers for being willing to make the loans, the underwriters for rating the investments so highly, and even the individuals who purchased the properties and then defaulted on the loans. According to one investment guru, "it all started with low interest rates, which made homes affordable for more people" (Altfest, 2008, p. 24).

Altfest states that lenders were much more willing to make loans in the subprime market because they had an outlet to rid themselves of those loans once they had been made. That outlet was Wall Street who had created the REMIC's, CDO's and CMO's and were more than willing to purchase the loans for placement in those investment vehicles. The problem came about when "thousands of buyers who normally wouldn't have been able to get a mortgage on their own were able to realize the American Dream" (Altfest, p. 24) but these borrowers with questionable credit eventually began to default on the loans and "many mortgage companies found themselves in serious financial trouble, stuck with loans they couldn't sell to private investors or other lenders" (Altfest, p. 24). With property prices falling and no one to sell them to, the glut in the housing market affected the builders who were no longer able to build houses that would sell. The oversupply of houses on the market hit a 16- year high in July 2007 and there continues to be a huge number of unsold houses on the market today. As if to add insult to injury, many insurance companies are raising their rates on the very same consumers who are in danger of losing their homes, or are already in foreclosure. Insurance companies often run credit checks on individuals requesting insurance but base the premiums being charged on how good (or bad) the individual's credit is. This is causing some angst in Washington and the practice may 'reignite insurance scoring battles in state legislatures and in Congress" (Gusman, 2008, p. 12).

According to Gusman, some consumer groups expect lawmakers to aggressively look again at the rating factors used by insurance companies to determine premiums. "With millions seeing their credit standing threatened and many at risk of foreclosure, penalizing them further with higher insurance rates would be unfair, these groups contend" (Gusman, p. 13). Some experts are saying that, as with every financial crisis, this too will work itself out. However, one expert says "this is different from, say, the Internet bubble because the financial industry needs our help (taxpayers' help, that is)" (Regnier, p. 138). The bursting of the internet bubble was different in other ways as well. The internet bubble was brought about in a similar manner to many of the other financial crisis suffered by Wall Street. That is that many investors bought into the hype of a particular industry and bought up the common stock of the companies in that industry. The various stocks were not created by Wall Street and touted as safe, fixed-income investments as CDO's and similar investments were. As Regnier put it; "over-exposed Wall Streeters are having a crisis of confidence" (p. 138) and when investors lose confidence in their brokers the immediate response is often to pull their money from any and all investments. That type of response is what leads to volatility in the marketplace, and a general downturn in value. This downturn does not affect only stocks and bonds, but all types of investments, including the underlying securities or security used to back loans, etc.

As one investment guru recently stated; "as a value-oriented investor, I'm salivating over the prospect of eventually purchasing distressed real estate for both current income (through rents) and potential long-term gains (through sales)" (Altfest, p. 24). Of course, Altfest is not buying yet, he would prefer to wait until the dust has settled. He said, "over the next few years, I'll also look to buy more shares of homebuilders, like Toll Brothers, Pulte Homes, and Lennar, but only after their prices fall to half or less of their book value per share" (Altfest, p. 24). Other firms and industries are feeling the pain as well. Since builders are not building as many homes, suppliers are not selling as much product as was previously being sold. Workers are being let go which only exacerbates the problem, especially if the worker is one of the borrowers who has purchased a home with relatively little creditworthiness. A recent article stated what is happening in the financial world in the following manner; "One domino toppling the next. It's been a convenient metaphor for how troubles in the American subprime mortgage market have cascaded into a global financial mess" (Mullins, 2008, p. 42). Whenever an event, or series of events, such as these take place, there are always those individuals who will attempt to manipulate circumstances so that they will benefit from the fallout. Many times these individuals are politicians who wish to be seen as doing something productive to help their constituents.

"In the case of the subprime debacle, the political pendulum was in full swing before any practical understanding was fully developed as to [lie facts surrounding the origination of tie related loans and which homeowners were in need of, or otherwise deserving of, assistance" (Pardes, 2008, p. 119). It did not matter if the politicians recognized what was necessary or even prudent, they wanted to be seen as 'take charge' individuals and therefore proposed a number of measures they felt would be helpful. Some of those proposals included; "freezes in interest rates, bankruptcy reform a moratorium on foreclosures or a taxpayer bailout" (Pardes, p. 120). According to Pardes one politician even called for a creation for a new agency similar to the Resolution Trust Corporation (RTC) that was formed during the savings and loan crisis. Many of these attempts to control the situation were taken by American officials, while worried bankers, lenders and investment officials in other countries kept a close watch on what was taking place in America. The foreign stock markets are all closely tied to what happens on the American exchanges and this fallout from this financial crisis would effect many more firms and industries than any other crisis had ever done. Along with the advantages touted by numerous so-called experts concerning the global economy now come the disadvantages as well. With so much information now at the individual's fingertips, the question of why no one seemed to notice what was happening comes to mind.

This is especially true since by "September to October 2005 the worsening of affordability reached the stage of stopping the rise in house prices actually transacted -- that is, the median prices of new home sales and existing home sales. The most comprehensive measure of US house prices leveled off then but managed another 2% increase before its peak in June 2006" (Dumas, p. 23). The financial industry is a mess and no one wishes to take the blame, or even to figure out what went wrong, how to correct it, and how to prevent it from happening again. It is easy for the pundits to point fingers but few of them had the financial savvy to warn of impending disaster. One of the so-called experts laments the fact that he did not realize what was happening writing, "an article on why home prices could not go up forever and the possible consequences of a reversal in prices would have been simple to present, but it could have changed the course of people's lives" (Bernstein, 2008, p. 1). No matter how much Bernstein laments the fact that no one said a word about what was happening, the world is still facing a financial crisis that needs to be solved. The effects of this crisis will wear on and on and will ultimately hurt the individual much more so than any of the financial institutions. Bernstein writes, "just a few nice articles in the popular press -- and especially in the "how to invest" kinds of columns and the high-speed TV commentaries -- might have spared millions of people terrible pain" (Bernstein, p. 1), and he is correct in his writing. There are plenty of other areas of financial concern that are coming under fire and some of them have nothing to do with the housing or investment industries.

One of those areas is education. Students who wish to borrow money to attend school are finding that the lenders are not as willing to loan money as they were in the recent past, even if it is being used for education. "Many parents and students lining up college financing this spring will find fewer companies offering loans and, for private loans, more stringent lending criteria and higher interest rates and fees" (Marquardt, 2008, p. 45). This situation leads to an interesting question, if students are unable to finance their education, will that mean the end of the economic growth so vital to keep not only America strong, but the rest of the world as well? Part of the reason why America is so stable and the leading world superpower is due to the educated nature of its citizens. Without that educational background, American citizens will lose the advantage they have gained through being educated, and another great nation will bite the dust. That could be a worst-case scenario, though many would likely scoff at such a notion. One thing that sounds unlikely but is not being scoffed about is the pressure that some homeowners are under when faced with a foreclosure on their home. One nefarious method of extracting oneself from such a dilemma is to burn the house to the ground and let the insurance company worry about paying off the mortgage. Some insurers are worried that this scenario will take place "as anecdotal evidence begins to emerge that some might indeed be desperate enough to torch their houses to relieve their credit burden" (Hays, 2008, p. 12).

This scenario could lead to additional losses for insurance companies along with those they face contained in the lawsuits filed against them and their clients. According to Hays, there are reportedly more than two million homeowners at risk of foreclosure due to soaring interest rates, and things don't seem to be getting any better for those homeowners. "Things are accelerating downwards [and] in most cases the fall gets steeper and steeper every month," says David Blitzer, chairman of the index committee at Standard & Poor's" (Andriotis, 2008). Speculatively, if only a small percentage of those homeowners who are at risk decide to take a drastic action such as setting fire to their own homes, it could still lead to huge dollar losses for the insurance companies. Thankfully, there are other alternatives to committing arson, one of those alternatives is to work out a repayment plan between the borrower and the mortgage company or bank that holds the mortgage. Many borrowers are approaching non-profit credit counselors in search of help in regards to keeping their homes. According to Steve Daniels "These days, the small waiting room at the Spanish Coalition for Housing is often crowded with people hoping that Ofelia Navarro and her staff can help them hold onto their homes" (Daniels, 2008, p. 1). The Humboldt Park agency has five financial counselors who are all working 12-hour days attempting to negotiate with lenders to forestall foreclosure. "A year ago, the Spanish Coalition was averaging 30 foreclosure cases per month; now, its averaging 100" (Daniels, p. 8).

As more and more individuals are forced into foreclosure, the glut of homes on the market will become more pronounced, lowering prices and keeping investors and homeowners (or homebuyers) on the sidelines along with their cash that is so desperately needed to start the economic engine and keep it running. Additionally, the bankers will end up owning houses and real estate they would rather not own, especially community banks who historically have sold their holdings to larger and more established banks. One expert puts the situation in perspective when he states, "as foreclosures grow, both in the residential and residential construction sectors, more banks will likely find themselves holding other real estate owned" (Cocheo, 2008, p. 36). These holdings bring about a number of other problems including the fact that "unless the bank regularly does enough volume that it has arranged a master insurance policy, each property foreclosed on is going to require basic coverages, much as the homeowner would have had to maintain" (Cocheo, p. 36). According to Ronald Summerville, president, RCS Consulting Group, Chevy Chase, Md, "These (the insurance policies) would be to protect the lender/owner from loss from fire, broken and frozen pipes, and such" (Cocheo, p.38). Summerville says that the banks would also be liable for 'slip and fall' cases and vandalism for empty houses. The bank would have the opportunity to rent or lease the properties, but that is only if the bank ensures that the property is up to code.

If the property is rented and does not meet certain requirements, the bank is liable for any accidents or events affecting the party leasing or renting the property. Cocheo also writes that the D&O insurance carriers face risks they did not think they were assuming "and he fully expects them to fight before covering companies and executives and board members who have been sued, especially given the size of the claims" (Cocheo, p. 38). The carriers were buffaloed along with investors concerning structured investment vehicles (SIV's) into believing that they were much safer than what they really were. He says the subprime issue is already shaping up as a significant second-tier battleground, and insurance carriers are not going to be happy about having to pay damages for circumstances they were kept in the dark on. Another area that is being affected by the financial crisis are the retirement plans that have invested in the CMO's, CDO's, REMIC's and other SIV's. Especially hurt are the companies that have employees who purchased company stock in their respective retirement programs, and the company matched their investments with more company stock. Two of the big name companies that have encountered that problem are Citigroup and Countrywide Financial. One report showed that "employee groups are reacting to precipitous declines in 401(k) assets by filing or contemplating lawsuits against companies caught up in the sub-prime mortgage debacle" (Hawthorne, 2008, p. 85).

The report presented the problem with matching stock purchases with more company stocks because employees like to 'have pride in where they work'. The problem is that "it's very difficult to get participants to take action on anything...that includes voting to switch out if matching contributions are made in employee stock" (Hawthorne, p.85). There are some companies that are being sued by their employees and they are also being sued by cities with allegations that company officials have misled not only investors, but borrowers as well. "Baltimore, MD, is suing Wells Fargo Bank, alleging that the lender engaged in "irresponsible subprime lending practices" (Hoffman, 2008, p. 14). According to Hoffman, Cleveland has also filed lawsuits, suing 21 lenders under the state's public nuisance law. The city accuses the banks of violating the fair-housing laws. The City of Baltimore, according to Hoffman, agrees with Cleveland. The lawsuit filed by Baltimore alleges that "black neighborhoods in the city were disproportionately affected by the rise of subprime mortgages, leading to foreclosure rates nearly double the citywide average that cost Baltimore tens of millions of dollars" (Hoffman, p. 16). Another city that has been affected, but in a different manner, is New York City. One year ago, the city presented a report that put New York's position as the world's financial center in doubt. According to a recent Wall Street Report, the recommendations presented in the report were critical to reversing the city's slide. The report has subsequently been placed on the back burner while officials deal with the subprime crisis.

"Six of the recommendations were for changes to national policy" (Wall Street, p. 4) yet city and federal officials have not been able to implement any of the changes recommended by the report. New York has an additional problem as well. Wall Street bashing may be a politically correct move elsewhere across the United States, but New York politicians know that Wall Street accounts for "more than 5% of (the city's) jobs. 9% of its tax revenues, and 20% of the state's tax revenues" (Messina, 2008, p. 4). The policies the city is attempting to change in Washington can mean millions of dollars in losses or gains on Wall Street, according to Messina. Wall Street realizes the power those politicians hold as well and direct their political contributions towards those they believe will help them the most. "The industry has directed 61% of its support - more than $30 million - to Democrats this election cycle" (Messina, p. 5) evidently believing that the Democrats will take back the White House this year as well as gaining a substantial majority in Congress. Wall Street seems to have quickly learned its lesson. They are routing mortgages to life insurance companies and other traditional lenders. But borrowers who are developers are encountering difficulties in obtaining financing for large projects. One recent report showed that "a few CMBS issuers will still provide leverage for high-quality projects, but borrowers must first learn to navigate a dramatically different marketplace that shuns risk and demands a higher price for the privilege of borrowing" (Hudgins, 2008, p. 37). This is true for commercial real estate as well as homes and apartments.

Apartment builders may actually be the one shining light in the entire darkness of this crisis. One expert said "the slowing economy and more expensive financing are blessings in disguise" (Johnson, 2008, pp. 50 - 52). The reasoning behind such a report is that slowing the delivery of new (apartment) units will mean that already built apartments will rise in value, and new apartments delivered in 2009 and 2010 will be financed under much more conservative terms, which should lead to less defaults and troubles for the builders. Many of the developers who build office buildings and space are also cautiously optimistic. A recent report says "with many large tenants currently exploring the market, leasing activity and absorption are expected to be positive in '08" (Baeb, 2008, p. 14). Steve Levitas, a senior vice-president at CBK believes that there will be space coming on to the market after the fallout felt by banking and financial institutions. He said, "with the financial services tenants, particularly the banks impacted by the sub-prime meltdown, we would expect there'd be some space coming on the market as a result of layoffs" (Baeb, p. 14). One area of commercial real estate that has not been affected is the European market, which is welcome news to the EU bankers. The U.S. subprime crisis has had some affect on commercial real estate worldwide, but not as much in Europe as the press there would have everyone believe. One recent report touts the fact that the "European press often incorrectly lumps commercial and residential together by saying 'the real estate market in the U.S. is on the downslide" (Rosenthal, 2008, p. 24).

The U.S. residential market is being hit, but commercial loans are still being made, albeit a tightening of standards has taken place that makes it more difficult to obtain affordable financing. However, EU builders and developers do not necessarily have to go to EU banks or banks in America for financing, there are other avenues open to them now, that formerly did not exist in any substantial manner. Rosenthal states that Asia banks are saying "What credit crisis? If you want to borrow money in the AsiaPacific region, Japan is lending at very cheap rates" (p. 24) A positive note for one American financial firm may seem in order, especially since so many of the larger financial services firms find themselves mired in this debacle, many of them due to the greed with which they followed the dollars available through these investments. Astoria financial has been described as an "old-fashioned, plain vanilla" (Potkewitz, 2008, p. 4) type of financial firm and now "it's very conservatism is being cited as the thrift's greatest asset" (Potkewitz, p. 4). Because it was conservative in its approach to garnering profits it (for the most part) stayed away from the investment vehicles other firms jumped into with both feet. It's share prices have risen over 14% this year, "while those of larger, glitzier financial firms have crashed and burned" (Potkewitz, p. 4). There have been relatively few experts touting purchase of a financial services firm's shares, but the latest report on Astoria ends with the statement "Astoria is well positioned to gain market share in the coming months, which makes its shares worth owning" (Potkewitz, p. 4).

Astoria type companies are few and far between in this debacle, with most of the major firms having willingly participated in the generous profits generated by these new investment vehicles. The current mess is a perfect example of Krugman's economic theory regarding regulation and government intervention. Krugman espouses the belief that government can and should intervene in times of economy uncertainty in order to facilitate a smooth economy. In this case, Krugman may be correct, at least according to the actions of the Federal Reserve. All this bad news has a dampening effect on the economy not just in the U.S. but abroad as well, and has triggered some pretty interesting responses by governments, agencies, cities, and companies. One drastic move taken by the Federal Reserve was to lower interest rates by .75 percent and then to continue to lower them throughout the ensuing months. Another move by the Feds was to inject short-term liquidity into the market that banks use to lend to one another. One report characterized the December 2007 action taken by the Feds as a "dramatic attempt to contain the fallout from the subprime fiasco" (Buerkle, 2008, p. 7). The Fed's action did help to bring down short-term interest rates but "officials acknowledge that they will have to remain active for some time to shore up confidence and encourage banks to lend freely to one another again" (Buerkle, p. 8). That has proven true over the last several months as the Feds have lowered interest rates three additional times since then.

It is not only the Feds that have participated in such drastic actions but they are cooperating with other institutions as well. The December 07 injection of liquidity into the market was taken "in concert with the European Central Bank, the Bank of England, the Swiss National Bank and the Bank of Canada. One senior European central bank official said, "it's the first time five central banks have decided to do something together to address a global problem" (Buerkle, p. 8). Such action between five central banks is not unprecedented, but happens only in the direst of circumstances. The last time such an event took place was just after America was attacked on Sept 11, 2001. That such a confluence of power took place in December 2007 shows just how serious the problem was judged to be and the rate .75 percent interest rate cut that took place shotly thereafter also portrayed how serious the Feds were thinking this problem was going to be. One article touted the fact that "The Federal Reserve's startling, 75 basis point cut in interest rates on Jan. 22 -- the largest reduction in more than two decades -- quieted turbulent stock markets momentarily" (Kalette, 2008, p. 22). The article further stated that even though the markets, that had been quite jittery were now somewhat mollified, the Fed's action raised new questions along with not a few eyebrows. Some experts believe that these actions are meant well, but could backfire.

"While it's meant to stabilize things, that to me is going to make people more nervous," says Kim Diamond, managing director at Standard & Poor's, since it signals the Fed's deep concern over the economy. "A 75 basis point cut off-cycle is pretty extreme" (Kalette, p. 23). The fallout from these actions has still not fully asserted itself but will likely be felt for years to come. Some of the pain that this debacle will cause is just now being felt. One of the most direct and immediate responses has been the number of lawsuits that has been filed against investment companies, banks, the rating companies that rated the securities and the individuals involved with all of the above firms who had anything to do with the decision to market or sell these securities. Particularly concerned at this point in time are the underwriters of these securities. "As trouble in the subprime market begins boiling over into other areas, professional liability underwriters are bracing for claims and worrying that the worst could be yet to come" (Grenn, 2008, p. 77). The underwriters have assumed a huge risk that may come back to bite them in the arrears. "Professional liability writers wonder when the subprime mortgage crisis will crest -- and how high the waters will rise" (Grenn, p. 76). As of February 2008, over 200 lawsuits had already been filed seeking to hold someone, anyone, responsible for the losses being felt by individual investors and homeowners, and many more are sure to follow, and though most of the companies currently being sued are American, other global companies will also be affected.