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What is subprime crisis? How it caused financial mayhem?

September 25, 2008

It all begins with an American wanting to live the famed American dream.

So he seeks a housing loan to give shape to his dream home. But there is a slight problem. He doesn't have good credit rating. This means that he is unable to clear all the stringent conditions that a bank imposes on an individual before it sanctions a loan.

Since his credit is not good enough, no bank will give him a home loan as there is a fear that the chances of a default by him are high. Banks don't like customers who default on their payments.

But lo!, before the American dream can fade away, there enters a second American -- usually a robust financial institution -- who has good credit rating and is willing to take on some amount of risk.

Image: A Wall Street sign near the New York Stock Exchange. | Photograph: Stan Honda/AFP/Getty Images

Also read: Google's amazing journey

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