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30 Day Success Club Review

by Jency William (2019-05-27)


For illustrative purposes let us simplify 30 Day Success Club the cause of the financial crisis somewhat and focus on two of the main reasons of the global credit crunch. The first cause is the immense increase in the availability and active trading of derivatives. These are financial instruments whose value is derived by the price of another asset, called the underlying. By themselves these instruments are very useful in the management of financial risk and, if applied correctly, are a very valuable tool in the arsenal available to money managers. However, over time the derivatives designed by the industry's rocket scientists became increasingly complex and opaque. In many cases the paper held was not only highly leveraged but also unlikely to be secured by physical assets directly but by more paper. As a result, banks increasingly held securities that were far removed from the banks' core activities, with a corresponding increase in risk. The second cause of the credit crunch is the lack of liquidity. Up until September 2008, banks were quite content to lend to each other in the global interbank market, ie banks with excess deposits would lend their spare cash to institutions that needed more deposits to support their balance sheet. In return the lending bank receives interest from the borrowing bank. Almost overnight the bankruptcy of the New York based bulge bracket investment bank Lehman Brothers, caused in no small measure by its overexposure to some of the complex derivative instruments mentioned above, put an end to this in the middle of September 2008. The resulting lack of liquidity in the interbank market, based on the extreme risk aversion of global banks that could no longer trust each other's balance sheets had the unwanted outcome of also stopping the global economy in its tracks.

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ISSN: 1946-1879