The "Subprime Mortgage Financial Crisis" - Part 1

I like economics. But I've never done well in this subject. Hell, I haven't done well in any subjects, anyway. Probably I don't put much faith in what I was taught. Well, these are all out of topics...

Many people have blamed that the recent market meltdown across the globe was caused by this evil little thing called "subprime mortgage financial crisis" in the America. As I am somehow illiterate in econs, I have decided to find out more on what the hell is this all about. So, keyed in the phrase in wikipedia and there were a few long articles of this. For the sake of my dear readers, I have somehow summarized it into the followings, as per my understandings (words of caution though: please bear in mind that I've nearly flunk my econ test. I swear I really did):

People borrow money to buy houses. These loan from banks are called mortgages. As the credit controls in the United States are very strict, many individuals that do not fulfill certain requirements will not have access to the mortgage facilities in primary mortgage market, usually from those big and reputable banks. So, one of the alternate routes for these individuals with bad credit history is to seek out the sub-prime mortgage. These usually come with higher interest rates because of the higher risks incurred. From 2001-2005, the housing market in the US was booming, and slowed down in 2005. Coupled with rising interest rates and falling house prices, the subprime market crashed. Many borrowers defaulted and the subprime lenders were suddenly faced with huge amounts of bad loans. And the chain effects quickly spread across the banking industries and had even spilled over to investment funds across the globe. The seriousness? Below is an extract from the Wikipedia that would somehow give you an idea:

"Wall Street Investment Banks and other financial institutions around the world have also been affected. On June 20, 2007, Merrill Lynch seized $800 million in assets from two Bear Stearns hedge funds that were involved in securities backed by subprime loans... on August 9, French bank BNP Paribas stopped valuing three of its funds and suspended all withdrawals by investors after United States subprime mortgage woes had caused "a complete evaporation of liquidity". Goldman Sachs' $8 billion Global Alpha hedge fund, its largest, reportedly lost 26% in 2007. Also, Citigroup has reported taking $700 million in losses in its credit business in July and August 2007... The European Central Bank (ECB) injected €61 billion, and the Federal Reserve injected $68 billion into their respective banking systems on Friday, August 10, 2007 in order to calm their markets, on top of the €95 billion the ECB had injected on Thursday, August 9, 2007. The following day, August 10th, saw widespread volatility resulting from fears about tightening credit conditions... While U.S. stock markets ended the day relatively unchanged after extreme volatility, other indexes fell. London's FTSE 100 index fell 3.7% in its worst day in four years, while Paris' CAC 40 index lost 3.1%, and Germany's DAX index fell 1.4%. The jitters followed in Asian markets: Tokyo's Nikkei share index fell 2.4%, while Hong Kong's Hang Seng Index fell 2.8%. The Federal Reserve further injected $24 billion into the US financial system that day."

Scary eh? It's like a replay of the Asian Financial Crisis all over again, but this time it was started from the West. So, shall we be concerned with this issue? will the regional markets in our part of the world be affected? Is this the beginning of a long bear run? we shall see..