Subprime mortgages are mortgages targeted at borrowers with less-than-perfect credit and less-than-adequate savings. An increase in subprime borrowing began in 1999 as the Federal National Mortgage Association (widely referred to as Fannie Mae) began a concerted effort to make home loans more accessible to those with lower credit and savings than lenders typically required.
What is Subprime mortgages ??
A subprime mortgage is one that's normally issued to borrowers with low credit ratings
These mortgages were often issued with no down payment required, and proof of income was not necessary, either. A buyer might state that she earned $150,000 a year but did not have to provide documentation to substantiate her claim.
Fannie Mar and Freddie Mac,
Fannie Mae (officially the Federal National Mortgage Association, or FNMA) is a government-sponsored enterprise (GSE)—that is, a publicly-traded company that operates under Congressional charter—which serves to stimulate homeownership and expand the liquidity of mortgage money by creating a secondary market. Established in 1938 during the Great Depression as part of the New Deal, Fannie Mae channels its efforts into increasing the availability and affordability of homeownership for low-, moderate-, and middle-income Americans.
As a secondary mortgage market participant, Fannie Mae does not originate loans or provide mortgages to borrowers. Instead, it keeps funds flowing to mortgage lenders (e.g., credit unions, local and national banks, thrifts, and other financial institutions) through the purchase and guaranty of mortgages made by these firms. In fact, it's one of two of the largest purchasers of mortgages on the secondary market; the other is its sibling, the Federal Home Loan Mortgage Corporation, or Freddie Mac, which is also a government-sponsored enterprise created by Congress.
The idea was to help everyone attain the American dream of home ownership. Since these borrowers were considered high-risk, their mortgages had unconventional terms that reflected that risk, such as higher interest rates and variable payments.
How Subprime helps
Subprime is a classification of loans offered at rates greater than the prime rate to individuals who are unable qualify for prime rate loans.
This usually occurs when borrowers have poor credit and, as a result, the lender views them as higher risk.
Someone with a credit rating below 620 or with no assets will likely not qualify for a traditional mortgage and will need to resort to a subprime loan to gain the necessary financing.
Subprime loans are usually used to finance mortgages. They often include prepayment penalties that do not allow borrowers to pay off the loan early, making it difficult and expensive to refinance or retire the loan prior to the end of its term. Some of these loans also come with balloon maturities, which require a large final payment.
According to statistics released by the Federal Reserve Board in 2004, from 1994 to 2003, subprime lending increased at a rate of 25% per year, making it the fastest-growing segment of the U.S. mortgage industry. Furthermore, the Federal Reserve Board cites the growth as a "nearly ten-fold increase in just nine years."
While many saw great prosperity as the subprime market began to explode, others began to see red flags and potential danger for the economy. Bob Prechter, the founder of Elliott Wave International, consistently argued that the out-of-control mortgage market was a threat to the U.S. economy as the whole industry was dependent on ever-increasing property values.
As of 2002, government-sponsored mortgage lenders Fannie Mae and Freddie Mac had extended more than $3 trillion worth of mortgage credit.
Role of Fannie and Freddie
The role of Fannie and Freddie is to repurchase mortgages from the lenders who originated them,and make money when mortgage notes are paid.
Fannie Mae and Freddie Mac were given a government-sponsored monopoly in a large part of the U.S. secondary mortgage market.
Fannie Mae and Freddie Mac created a liquid secondary market for mortgages. This meant that financial institutions no longer had to hold onto the mortgages they originated. They could sell mortgages on the secondary market shortly after origination. Selling mortgages freed up funds for creating additional mortgages.
Fannie Mae and Freddie Mac had a positive influence on the mortgage market by increasing homeownership rates in the United States. However, allowing Fannie Mae and Freddie Mac to function as implied government-backed monopolies had unintended consequences.
Fannie Mae and Freddie Mac grew very large in terms of assets and mortgage-backed securities (MBS) issued. With their funding advantage, they purchased and invested in huge numbers of mortgages and mortgage-backed securities. They made these investments with lower capital requirements than other regulated financial institutions and banks.
Following the tech bubble and the economic trauma that followed the terrorist attacks in the U.S. on September 11, 2001, the Federal Reserve stimulated the struggling U.S. economy by cutting interest rates to historically low levels. As a result, economic growth in the U.S. began to rise. A booming economy led to increased demand for homes and subsequently, mortgages. However, the housing boom that ensued also led to record levels of homeownership in the U.S. As a result, banks and mortgage companies had difficulty finding new homebuyers.
Some lenders extended mortgages to those who couldn't otherwise qualify to capitalize on the home-buying frenzy.
At the same time, the U.S. Federal Reserve cut interest rates and held them down in order to combat the mild recession that followed the technology bust, as well as to assuage uncertainty following the World Trade Center attack of 9/11/2001.
This flood of money and credit met with various government policies designed to encourage homeownership and a host of financial market innovations that increased the liquidity of real estate-related assets. Home prices rose, and more and more people got into the business of buying and selling houses.
During the early-to-mid 2000s, the lending standards for some lenders became so relaxed; it sparked the creation of the NINJA loan: "no income, no job, no asset—no problem." Investment firms were eager to buy these loans and repackage them as mortgage-backed securities (MBSs) and other structured credit products. A mortgage-backed security (MBS) is an investment similar to a fund that contains a basket home loans that pays a periodic interest rate. These securities were bought from the banks that issued them and sold to investors in the U.S. and internationally.
To keep recession away, the Federal Reserve lowered the Federal funds rate 11 times - from 6.5% in May 2000 to 1.75% in December 2001 - creating a flood of liquidity in the economy.
The federal funds rate refers to the interest rate that banks charge other banks for lending to them excess cash from their reserve balances on an overnight basis.
In June 2003, the Fed lowered interest rates to 1%, the lowest rate in 45 years.
The whole financial market started resembling a candy shop where everything was selling at a huge discount and without any down payment. "Lick your candy now and pay for it later" - the entire subprime mortgage market seemed to encourage those with a sweet tooth for have-it-now investments. Unfortunately, no one was there to warn about the tummy aches that would follow.
But the bankers thought that it just wasn't enough to lend the candies lying on their shelves. They decided to repackage candy loans into collateralized debt obligations (CDOs) and pass on the debt to another candy shop. Hurrah! Soon a big secondary market for originating and distributing subprime loans developed.
To make things merrier, in October 2004, the Securities Exchange Commission (SEC) relaxed the net capital requirement for five investment banks - Goldman Sachs (NYSE:GS), Merrill Lynch (NYSE:MER), Lehman Brothers, Bear Stearns and Morgan Stanley (NYSE:MS) - which freed them to leverage up to 30-times or even 40-times their initial investment. Everybody was on a sugar high, feeling as if the cavities were never going to come.
But, every good item has a bad side and several of these factors started to emerge alongside one another.
The trouble started when the interest rates started rising, and home ownership reached a saturation point. From June 30, 2004, onward, the Fed started raising rates so much that by June 2006, the Federal funds rate had reached 5.25% (which remained unchanged until August 2007).
U.S. homeownership had peaked at 70%; no one was interested in buying or eating more candy. Then, during the last quarter of 2005, home prices started to fall, which led to a 40% decline in the U.S. Home Construction Index during 2006. Not only were new homes being affected, but many subprime borrowers now could not withstand the higher interest rates and they started defaulting on their loans.
Adjustable-rate mortgages began resetting at higher rates as signs that the economy was slowing emerged in 2007. With housing prices teetering at lofty levels, the risk premium was too high for investors, who then stopped buying houses. When it became evident to home buyers that home values could actually go down, housing prices began to plummet, triggering a massive sell-off in mortgage-backed securities. Housing prices would eventually decline more than 40 percent in some regions of the country, and mass mortgage defaults would lead to millions of foreclosures over the next few years.
Once the housing market started to crash, and borrowers were unable to pay their mortgages, banks were suddenly saddled with loan losses on their balance sheets. As unemployment soared across the nation, many borrowers defaulted or foreclosed on their mortgages.
In a foreclosure situation, banks repossess the home from the borrower. Unfortunately, because the economy was in a recession, banks were unable to resell the foreclosed properties for the same price that was initially loaned out to the borrowers. As a result, banks endured massive losses, which led to tighter lending, leading to less loan origination in the economy. Fewer loans led to lower economic growth since businesses and consumers didn't have access to credit.
The losses were so large for some banks that they went out of business or were purchased by other banks in an effort to save them. Several large institutions had to take out a bailout from the federal government in what was called the Troubled Asset Relief Program (TARP). However, the bailout was too late for Lehman Brothers–a Wall Street bond firm–which closed its doors after more than 150 years in business.
Once investors in the markets saw that Lehman Brothers was allowed to fail by the federal government, it led to massive repercussions and sell-offs across the markets. As more investors tried to pull money out of banks and investment firms, those institutions began to suffer as well. Although the subprime meltdown began with the housing market, the shockwaves led to the financial crisis, the Great Recession, and massive sell-offs in the markets.
This caused 2007 to start with bad news from multiple sources. Every month, one subprime lender or another was filing for bankruptcy. During February and March 2007, more than 25 subprime lenders filed for bankruptcy, which was enough to start the tide. In April, well-known New Century Financial also filed for bankruptcy.
Problems in the subprime market began hitting the news, raising more people's curiosity. Horror stories started to leak out.
According to 2007 news reports, financial firms and hedge funds owned more than $1 trillion in securities backed by these now-failing subprime mortgages - enough to start a global financial tsunami if more subprime borrowers started defaulting. By June, Bear Stearns stopped redemptions in two of its hedge funds and Merrill Lynch seized $800 million in assets from two Bear Stearns hedge funds. But even this large move was only a small affair in comparison to what was to happen in the months ahead.
The Fed started slashing the discount rate as well as the funds rate, but bad news continued to pour in from all sides. Lehman Brothers filed for bankruptcy, Indymac bank collapsed, Bear Stearns was acquired by JP Morgan Chase (NYSE: JPM), Merrill Lynch was sold to Bank of America and Fannie Mae and Freddie Mac were put under the control of the U.S. federal government.
By October 2008, the Federal funds rate and the discount rate were reduced to 1% and 1.75%, respectively. Central banks in England, China, Canada, Sweden, Switzerland and the European Central Bank (ECB) also resorted to rate cuts to aid the world economy. But rate cuts and liquidity support in itself were not enough to stop such a widespread financial meltdown.
The U.S. government then came out with National Economic Stabilization Act of 2008, which created a corpus of $700 billion to purchase distressed assets, especially mortgage-backed securities. Different governments came out with their versions of bailout packages, government guarantees and outright nationalization.
Dotcom
A dotcom, or dot-com, is a company that conducts business through its website. A dotcom company embraces the internet as the key component in its business.
The dotcoms or tech companies took the world by storm in the late 1990s, with valuations rising faster than for any industry in recent memory. Despite the fact that most internet companies had limited physical assets, many were given huge valuations on the stock market. Swayed by speculation regarding the dotcom sector, investors began directing a large amount of money to companies that lacked a proven track record of profitability.
The dotcom bubble burst in 2001 when many internet firms began to report a lack of profits. Some investors began to quickly move their funds to other investment vehicles, resulting in a sell-off and subsequent fall in stock prices. A significant amount of the funds invested were lost. As a result, a mild recession set in in the United States and other nations.
Examples of Companies From the Dotcom Crash
A site dedicated to selling pet products called Pets.com became a symbol of the dotcom crash. It was unable to grab enough market share to survive the bursting of the dotcom bubble, even after spending more than $2 million on a Super Bowl commercial in January 2000. Within the first nine months of 2000, the company reported losses of approximately $147 million. While the stock price peaked at $14 a share early in the year 2000, prices fell to below $1 after the losses were made public and, ultimately, the business never recovered.
Pseudo.com, a site without physical product offerings, focused on internet broadcasting services, including live-streaming services. Poor business practices ultimately resulted in the failure of the dotcom, as the site never become profitable.
Source : Investopedia
What is Subprime mortgages ??
A subprime mortgage is one that's normally issued to borrowers with low credit ratings
These mortgages were often issued with no down payment required, and proof of income was not necessary, either. A buyer might state that she earned $150,000 a year but did not have to provide documentation to substantiate her claim.
Fannie Mar and Freddie Mac,
Fannie Mae (officially the Federal National Mortgage Association, or FNMA) is a government-sponsored enterprise (GSE)—that is, a publicly-traded company that operates under Congressional charter—which serves to stimulate homeownership and expand the liquidity of mortgage money by creating a secondary market. Established in 1938 during the Great Depression as part of the New Deal, Fannie Mae channels its efforts into increasing the availability and affordability of homeownership for low-, moderate-, and middle-income Americans.
As a secondary mortgage market participant, Fannie Mae does not originate loans or provide mortgages to borrowers. Instead, it keeps funds flowing to mortgage lenders (e.g., credit unions, local and national banks, thrifts, and other financial institutions) through the purchase and guaranty of mortgages made by these firms. In fact, it's one of two of the largest purchasers of mortgages on the secondary market; the other is its sibling, the Federal Home Loan Mortgage Corporation, or Freddie Mac, which is also a government-sponsored enterprise created by Congress.
After purchasing mortgages on the secondary market, Fannie Mae pools them to form mortgage-backed securities (MBS). MBS are asset-backed securities that are secured by a mortgage or pool of mortgages. Fannie Mae’s mortgage-backed securities are then purchased by institutions, such as insurance companies, pension funds, and investment banks. It guarantees payments of principal and interest on its MBS.
Fannie Mae also has its own portfolio, commonly referred to as a retained portfolio, which invests in its own and other institutions' mortgage-backed securities. Fannie Mae issues debt, called agency debt, to fund its retained portfolio.
How Subprime helps
Subprime is a classification of loans offered at rates greater than the prime rate to individuals who are unable qualify for prime rate loans.
This usually occurs when borrowers have poor credit and, as a result, the lender views them as higher risk.
Someone with a credit rating below 620 or with no assets will likely not qualify for a traditional mortgage and will need to resort to a subprime loan to gain the necessary financing.
Subprime loans are usually used to finance mortgages. They often include prepayment penalties that do not allow borrowers to pay off the loan early, making it difficult and expensive to refinance or retire the loan prior to the end of its term. Some of these loans also come with balloon maturities, which require a large final payment.
According to statistics released by the Federal Reserve Board in 2004, from 1994 to 2003, subprime lending increased at a rate of 25% per year, making it the fastest-growing segment of the U.S. mortgage industry. Furthermore, the Federal Reserve Board cites the growth as a "nearly ten-fold increase in just nine years."
While many saw great prosperity as the subprime market began to explode, others began to see red flags and potential danger for the economy. Bob Prechter, the founder of Elliott Wave International, consistently argued that the out-of-control mortgage market was a threat to the U.S. economy as the whole industry was dependent on ever-increasing property values.
As of 2002, government-sponsored mortgage lenders Fannie Mae and Freddie Mac had extended more than $3 trillion worth of mortgage credit.
Role of Fannie and Freddie
The role of Fannie and Freddie is to repurchase mortgages from the lenders who originated them,and make money when mortgage notes are paid.
Fannie Mae and Freddie Mac were given a government-sponsored monopoly in a large part of the U.S. secondary mortgage market.
Fannie Mae and Freddie Mac created a liquid secondary market for mortgages. This meant that financial institutions no longer had to hold onto the mortgages they originated. They could sell mortgages on the secondary market shortly after origination. Selling mortgages freed up funds for creating additional mortgages.
Fannie Mae and Freddie Mac had a positive influence on the mortgage market by increasing homeownership rates in the United States. However, allowing Fannie Mae and Freddie Mac to function as implied government-backed monopolies had unintended consequences.
Fannie Mae and Freddie Mac grew very large in terms of assets and mortgage-backed securities (MBS) issued. With their funding advantage, they purchased and invested in huge numbers of mortgages and mortgage-backed securities. They made these investments with lower capital requirements than other regulated financial institutions and banks.
Wall Street Rivals Join the Party
It should come as no surprise that competitors on Wall Street wanted in on the profit bonanza. They wanted to securitize and invest in the parts of the mortgage market that the federal government reserved for Fannie and Freddie. They found a way to do this through financial innovation, which was spurred on by historically low short-term interest rates.
Wall Street began to make a liquid and expanding market in mortgage products tied to short-term interest rates, such as LIBOR, starting in about 2000. These adjustable-rate mortgages were sold to borrowers as loans that the borrower would refinance out of long before payments adjusted upward. They frequently had exotic characteristics, such as interest-only or even negative-amortization features. Home loans were often made with lax underwriting guidelines, leading to the growth of subprime mortgages.
Investors such as pension funds, foreign governments, hedge funds, and insurance companies readily purchased the sophisticated securities Wall Street created from home mortgages. Fannie Mae and Freddie Mac saw their market shares drop. They then began to purchase and guarantee an increasing number of loans and securities with low credit quality.
UpTrend in Home
In the up-trending market that existed from 1999 through 2005, these mortgages were virtually risk-free. A borrower, having positive equity despite the low mortgage payments since his home had increased in value since the purchase date, could just sell the home for a profit in the event he could not afford the future higher payments. However, many argued that these creative mortgages were a disaster waiting to happen in the event of a housing market downturn, which would put owners in a negative equity situation and make it impossible to sell.
To compound the potential mortgage risk, total consumer debt, in general, continued to grow at an astonishing rate and in 2004, it hit $2 trillion for the first time. Howard S. Dvorkin, president and founder of Consolidated Credit Counseling Services Inc., a nonprofit debt management organization, told the Washington Post at the time, "It's a huge problem. You cannot be the wealthiest country in the world and have all your countrymen be up to their neck in debt."
Rise of Creative Mortgage-Related Investment Products
During the run-up in housing prices, the mortgage-backed securities (MBS) market became popular with commercial investors. An MBS is a pool of mortgages grouped into a single security. Investors benefit from the premiums and interest payments on the individual mortgages it contains. This market is highly profitable as long as home prices continue to rise and homeowners continue to make their mortgage payments. The risks, however, became all too real as housing prices began to plummet and homeowners began to default on their mortgages in droves.
The Actual Story
During the dotcom bubble of the late 1990s, many new technology companies had their common stock bid up to extremely high prices in a relatively short period of time. Even companies that were little more than startups and had yet to produce actual earnings were bid up to large market capitalizations by speculators attempting to earn a quick profit. By 2000, the Nasdaq peaked, and as the technology bubble burst, many of these formerly high-flying stocks came crashing down to drastically lower price levels.
As investors abandoned the stock market in the wake of the dotcom bubble bursting and subsequent stock market crash, they moved their money into real estate.
As investors abandoned the stock market in the wake of the dotcom bubble bursting and subsequent stock market crash, they moved their money into real estate.
Following the tech bubble and the economic trauma that followed the terrorist attacks in the U.S. on September 11, 2001, the Federal Reserve stimulated the struggling U.S. economy by cutting interest rates to historically low levels. As a result, economic growth in the U.S. began to rise. A booming economy led to increased demand for homes and subsequently, mortgages. However, the housing boom that ensued also led to record levels of homeownership in the U.S. As a result, banks and mortgage companies had difficulty finding new homebuyers.
Some lenders extended mortgages to those who couldn't otherwise qualify to capitalize on the home-buying frenzy.
At the same time, the U.S. Federal Reserve cut interest rates and held them down in order to combat the mild recession that followed the technology bust, as well as to assuage uncertainty following the World Trade Center attack of 9/11/2001.
This flood of money and credit met with various government policies designed to encourage homeownership and a host of financial market innovations that increased the liquidity of real estate-related assets. Home prices rose, and more and more people got into the business of buying and selling houses.
During the early-to-mid 2000s, the lending standards for some lenders became so relaxed; it sparked the creation of the NINJA loan: "no income, no job, no asset—no problem." Investment firms were eager to buy these loans and repackage them as mortgage-backed securities (MBSs) and other structured credit products. A mortgage-backed security (MBS) is an investment similar to a fund that contains a basket home loans that pays a periodic interest rate. These securities were bought from the banks that issued them and sold to investors in the U.S. and internationally.
To keep recession away, the Federal Reserve lowered the Federal funds rate 11 times - from 6.5% in May 2000 to 1.75% in December 2001 - creating a flood of liquidity in the economy.
The federal funds rate refers to the interest rate that banks charge other banks for lending to them excess cash from their reserve balances on an overnight basis.
In June 2003, the Fed lowered interest rates to 1%, the lowest rate in 45 years.
The whole financial market started resembling a candy shop where everything was selling at a huge discount and without any down payment. "Lick your candy now and pay for it later" - the entire subprime mortgage market seemed to encourage those with a sweet tooth for have-it-now investments. Unfortunately, no one was there to warn about the tummy aches that would follow.
But the bankers thought that it just wasn't enough to lend the candies lying on their shelves. They decided to repackage candy loans into collateralized debt obligations (CDOs) and pass on the debt to another candy shop. Hurrah! Soon a big secondary market for originating and distributing subprime loans developed.
To make things merrier, in October 2004, the Securities Exchange Commission (SEC) relaxed the net capital requirement for five investment banks - Goldman Sachs (NYSE:GS), Merrill Lynch (NYSE:MER), Lehman Brothers, Bear Stearns and Morgan Stanley (NYSE:MS) - which freed them to leverage up to 30-times or even 40-times their initial investment. Everybody was on a sugar high, feeling as if the cavities were never going to come.
But, every good item has a bad side and several of these factors started to emerge alongside one another.
The trouble started when the interest rates started rising, and home ownership reached a saturation point. From June 30, 2004, onward, the Fed started raising rates so much that by June 2006, the Federal funds rate had reached 5.25% (which remained unchanged until August 2007).
U.S. homeownership had peaked at 70%; no one was interested in buying or eating more candy. Then, during the last quarter of 2005, home prices started to fall, which led to a 40% decline in the U.S. Home Construction Index during 2006. Not only were new homes being affected, but many subprime borrowers now could not withstand the higher interest rates and they started defaulting on their loans.
Adjustable-rate mortgages began resetting at higher rates as signs that the economy was slowing emerged in 2007. With housing prices teetering at lofty levels, the risk premium was too high for investors, who then stopped buying houses. When it became evident to home buyers that home values could actually go down, housing prices began to plummet, triggering a massive sell-off in mortgage-backed securities. Housing prices would eventually decline more than 40 percent in some regions of the country, and mass mortgage defaults would lead to millions of foreclosures over the next few years.
Once the housing market started to crash, and borrowers were unable to pay their mortgages, banks were suddenly saddled with loan losses on their balance sheets. As unemployment soared across the nation, many borrowers defaulted or foreclosed on their mortgages.
In a foreclosure situation, banks repossess the home from the borrower. Unfortunately, because the economy was in a recession, banks were unable to resell the foreclosed properties for the same price that was initially loaned out to the borrowers. As a result, banks endured massive losses, which led to tighter lending, leading to less loan origination in the economy. Fewer loans led to lower economic growth since businesses and consumers didn't have access to credit.
The losses were so large for some banks that they went out of business or were purchased by other banks in an effort to save them. Several large institutions had to take out a bailout from the federal government in what was called the Troubled Asset Relief Program (TARP). However, the bailout was too late for Lehman Brothers–a Wall Street bond firm–which closed its doors after more than 150 years in business.
Once investors in the markets saw that Lehman Brothers was allowed to fail by the federal government, it led to massive repercussions and sell-offs across the markets. As more investors tried to pull money out of banks and investment firms, those institutions began to suffer as well. Although the subprime meltdown began with the housing market, the shockwaves led to the financial crisis, the Great Recession, and massive sell-offs in the markets.
This caused 2007 to start with bad news from multiple sources. Every month, one subprime lender or another was filing for bankruptcy. During February and March 2007, more than 25 subprime lenders filed for bankruptcy, which was enough to start the tide. In April, well-known New Century Financial also filed for bankruptcy.
Problems in the subprime market began hitting the news, raising more people's curiosity. Horror stories started to leak out.
According to 2007 news reports, financial firms and hedge funds owned more than $1 trillion in securities backed by these now-failing subprime mortgages - enough to start a global financial tsunami if more subprime borrowers started defaulting. By June, Bear Stearns stopped redemptions in two of its hedge funds and Merrill Lynch seized $800 million in assets from two Bear Stearns hedge funds. But even this large move was only a small affair in comparison to what was to happen in the months ahead.
The Fed started slashing the discount rate as well as the funds rate, but bad news continued to pour in from all sides. Lehman Brothers filed for bankruptcy, Indymac bank collapsed, Bear Stearns was acquired by JP Morgan Chase (NYSE: JPM), Merrill Lynch was sold to Bank of America and Fannie Mae and Freddie Mac were put under the control of the U.S. federal government.
By October 2008, the Federal funds rate and the discount rate were reduced to 1% and 1.75%, respectively. Central banks in England, China, Canada, Sweden, Switzerland and the European Central Bank (ECB) also resorted to rate cuts to aid the world economy. But rate cuts and liquidity support in itself were not enough to stop such a widespread financial meltdown.
The U.S. government then came out with National Economic Stabilization Act of 2008, which created a corpus of $700 billion to purchase distressed assets, especially mortgage-backed securities. Different governments came out with their versions of bailout packages, government guarantees and outright nationalization.
Dotcom
A dotcom, or dot-com, is a company that conducts business through its website. A dotcom company embraces the internet as the key component in its business.
The dotcoms or tech companies took the world by storm in the late 1990s, with valuations rising faster than for any industry in recent memory. Despite the fact that most internet companies had limited physical assets, many were given huge valuations on the stock market. Swayed by speculation regarding the dotcom sector, investors began directing a large amount of money to companies that lacked a proven track record of profitability.
The dotcom bubble burst in 2001 when many internet firms began to report a lack of profits. Some investors began to quickly move their funds to other investment vehicles, resulting in a sell-off and subsequent fall in stock prices. A significant amount of the funds invested were lost. As a result, a mild recession set in in the United States and other nations.
Examples of Companies From the Dotcom Crash
A site dedicated to selling pet products called Pets.com became a symbol of the dotcom crash. It was unable to grab enough market share to survive the bursting of the dotcom bubble, even after spending more than $2 million on a Super Bowl commercial in January 2000. Within the first nine months of 2000, the company reported losses of approximately $147 million. While the stock price peaked at $14 a share early in the year 2000, prices fell to below $1 after the losses were made public and, ultimately, the business never recovered.
Pseudo.com, a site without physical product offerings, focused on internet broadcasting services, including live-streaming services. Poor business practices ultimately resulted in the failure of the dotcom, as the site never become profitable.
Source : Investopedia