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Why Some Firms Thrive While Others FailGovernance and Management Lessons from the Crisis$
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Thomas H. Stanton

Print publication date: 2012

Print ISBN-13: 9780199915996

Published to Oxford Scholarship Online: September 2012

DOI: 10.1093/acprof:oso/9780199915996.001.0001

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Dynamics of the Financial Crisis

Dynamics of the Financial Crisis

(p.17) 2 Dynamics of the Financial Crisis
Why Some Firms Thrive While Others Fail

Thomas H. Stanton

Oxford University Press

Chapter 2 provides background on the financial crisis and how it evolved. There was an inflow of funds into the United States that compressed returns on investments. This made more risky investments attractive, such as subprime mortgages, on which borrowers paid higher interest rates than prime borrowers. The chapter describes the financial crisis as a two-step process. When housing prices began to decline and losses appeared in securities labelled AAA, and in derivative securities based on them, this threatened major firms that had greatly increased their leverage over the period. Firms became uncertain about their solvency and also about the solvency of counterparties that held these securities. The result was panic and an unwillingness of financial firms to provide credit to one another. Only massive government intervention saved the economy from another Great Depression.

Keywords:   government intervention, risky investments, housing prices, subprime mortgages, mortgage securities, counterparties

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