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Things were going on perfectly fine till the time the houses which were bought on such loans were commanding loft valuations. Then by start of 2006, the housing market stagnated, i.e., the prices of houses remained the same and in some cases they infact fell.
Bankers stopped re-financing of loans and consequently many borrowers started defaulting. Asset-backed commercial paper, which accounted for half the market, tumbled $ 59.4 billion to $ 998 billion in the week ended October 5, 2007, the lowest since December 2006, according to the Federal Reserve.

Casualties

During this turn of events, there have been many high profile casualties. At the last count, close to 90 lenders in US had gone out of business. Many include high profile outfits run by many of big investment banks like Lehman's BNC Mortgage Unit, Capital One's Greenpoint Mortgage Company, two outfits run by Bear Stearns.

Implications

This has now made lenders more risk averse and made them wary of making further commitments to various deals, and primary casualties have been private equity firms which depend on banks to carry out their leveraged buyouts to an extent. Plus, the strain it has put on finances of so may banks, jobs and more prominently - SENTIMENTS! The financial world to an extent runs on sentiments as well.

Not Gloomy Everywhere

However, in some quarters the credit crunch is being seen with positive connotations. Its being said that it has put some breaks in irrational lending frenzy and will bring some sense to the market. Also, its felt that a slowdown in mergers & acquisitions will again create a space for venture funds to prosper. The great ideas might get backing to flourish again.

Keep watching this space!!!

Concluded.

* Contributed by: -
Vijay Singh Poonia,
PGDM 2007-09,
IIM Calcutta,
Has work experience of 3 years with Indian Oil Corp Ltd.