Markets and Environments
The “American Dream” affects the German Market
By Roman Schilzow
“From Wall street to Main Street” is a German book by Michael Bloss,Dietmar Ernst, Joachim Häcker, and Nadine Eil. As well as the book, this research paper tries to explain how the Financial Crisis 2008, after significantly affecting the American market, could spill over its borders and affect economies all over the world, in particular the German economy. What started with the “American Dream” of affordable houses for everyone, led to one of the most significant financial crisis in history. But how did it affect other economies, especially the German market?
The following graph shall help to visual the relationship and connection between each participant in the securitization model.
Source: Thomas Schmitz-Lippert; Recht der Finanzaufsicht; Vorlesung 6, Finanzkrise II
At the very beginning of the system there are borrowers. This demand for money will be met by commercial banks or thrifts who act as originators of mortgages. To make sure that there is enough liquidity to meet the demand; mortgages are sold by the commercial banks on the secondary mortgage market, usually to big investment banks, such as Lehman Brothers, which need liquidity too. After bundling those ABSs and MBSs into different pools, and receiving a risk grade from rating agencies, those debt securities are being sold withthe help of so called Special Purpose Vehicles (SPVs). These SPVs usually represent a subsidiary of the selling Investment bank.SPVs are created so that investment banks can relieve their equity capital and adjust certain debt obligations by selling them to the SPV.The last step, but probably the most important point in answering the question how this system could affect other economies too, is the disposition of Asset Backed Commercial Papers (ABCP) to investors from all over the world. Such investors, for instance are insurance carriers, or other international investment banks, such as the German Hypo Real Estate.
Nevertheless, this model itself didn’t lead to the crisis, from which we haven’t fully recovered yet. Furthermore, this system was needed to generate liquidity efficiently, the most important driving forcefor every market. But how did it start?
To sum up, many incidents combined led to the fact that the financial crisis not only affected the US economy, but also economies all over the world. Probably the most significant aspect is represented by the securitization system itself. A system which connected participants so close together that only a slight malfunction led to the collapse of the whole. Participants who were only focused on their actions and who always wanted more, kept the risk beside and created a base for the failure of the system. The German Hypo Real Estate, as an example of how such a failure could look like, may raise another question: is it necessary, as John Maynard Keynes called for, to have more government regulations? Regulations which try to protect such systems to get out of hand one more time.
References: Thomas Schmitz-Lippert; Recht der Finanzaufsicht; Vorlesung 6, Finanzkrise II
 Börsen, Banken und Kapitalmärkte by Wolfgang Bessler, October 2006
 Deutschland gehört zu den größten Verlierer der Weltby Martin Greive, 06.09.2009
 Wirtschaftswachstum Deutschlands bei 3,6 Prozentby Focus Money,12.01.2011
 Estate Analysis: Environments and Activities by Julian Diaz III and J. Andrew Hansz, Kendall Hunt, 2010, p. 162