"Unlimited Personal Liability" and the current financial crisis

Résumé du document

The term "Unlimited Personal Liability" refers to a concept of law in the business world. It is related to the sole proprietorship business scheme: that is to say a form of business owned by one person. This concept holds a business owner personally responsible for all debts and financial failures of the business. In this scheme there is no intermediary between the owner and the company and they are legally considered one single person. It mostly refers to small size businesses.

Extraits

[...] It led to a complete freeze of the credit market and more generally to the paralysis of the whole financial system. We can indeed say that the new banking products: the derivatives are partly causes of the crisis especially a specific kind of derivative, the mortgage- pass-through security (mortgages were bundled into pools with tranches of risk), that triggered the economic crisis of 2008. It was exaggerated by the leverage tool. These products led to the spreading of the risk and to a dramatic lack of transparency you could no longer know which product was riskier than the others. [...]

[...] The term Unlimited Personal Liability refers to a concept of law in the business world. It concerns the sole proprietorship business scheme: that is to say a form of business owned by one sole person. This concept holds a business owner personally responsible for all debts and financial failures of the business. In this scheme there is no intermediary between the owner and the company: there are considered legally as one single person. It mostly concern small size businesses. The form of business ownership that can protect you against an “unlimited personal liability” is the corporation where the ownership and hence the responsibilities are shared among the different owners of the business. [...]

[...] As they were covered, the home owners could start adding risk to the mortgages: they give mortgages without any document. This is the principle of the sub-prime mortgages. However as it was highly risky, more and more home owners encountered default in the mortgage monthly payment. This means that more and more monthly payments turned into houses. The increase of supply in houses on the market led to the decrease of their prices, the lenders were no longer covered. Hence the CDOs turned to be so risky that no one wanted to buy it. [...]

[...] What were some of the key factors that contributed to the current financial crisis? First the origin of the current financial crisis is a housing bubble which started in 2000. This was mostly because real estate was part of the American dream, seen as a safe investment and hence encouraged by the government (mortgage-interest was tax-deductible). The rise of houses' price led to an aggressive speculation. At the same time, the Federal Reserve decided to lower the interest rate of the treasury bills to 1%. [...]