The first-loss tranches change to AAA tranches was viewed by regulators as a risk minimization that saw compensation of higher leverage. The involved institutions reported more than $4.1 trillion in debt in 2007 fiscal year, which is approximately 30% of 2007 US nominal GDP. Lehman Brothers became bankrupt and liquidated, while Merrill Lynch and Bear Stearns were traded at fire-sale costs, and on the other hand, Morgan Stanley and Goldman Sachs became commercial banks, thus subjecting them to more strict regulations.
Apart from Lehman, other companies needed government support. Some behaviors nevertheless were viewed as optimal for individuals; for example, saving more in economic circumstances may be detrimental if a lot of people pursue similar behaviors as finally one individual’s consumption is the income of another. Also, many consumers trying to pay debts or save at the same time also referred as a “paradox of deleveraging”. It is said, financial institutions with a lot of leverage, that is debt associated with equity, cannot deleverage simultaneously without major declines in the value of their assets. And as that took place in US, many financial institutions were left in mode of panic in terms of the value of their assets.Visit official website : Click here.
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