Causes Of Subprime Crisis Analysis

Investment banks played a very important role in subprime mortgage crisis, which is inseparable from its restructuring from limited partnership to corporation.For a long time, in the United States majority of the independent investment bank take limited partnership as form of organization.As a limited partner investors bear most of the registered capital, but not directly involved in investment and decision-making, Managers, as general partner, use their funds as part of the registered capital, undertake unlimited liability for business losses. However, with the continuous development of financial products and capital market expansion, under double motivation of expansion and the release of unlimited liability, the independent investment banks began to restructuring from the limitied partnership to the corporation. Goldman Sachs’s public offering in 1999 marked the end of era of limited partnership investment bank. Due to the limited liability, the corporation investment bank’s managers tend to over-speculation, which is one of the triggers for subprime mortgage crisis.This paper first reviews investment bank in the sub-prime cirsis. Subsequently, the paper analyzes corporate governance of the U.S. investment banks. Then, the article compares the corporation system and the limited partnership’s incentives and constraints. Draw (1) limited partnership can maximize the credit rating of the investor (2) limited partnership can minimize the moral hazard (3) Limited Partnership’s reputation mechanism can effectively reduce the moral hazard.Finally, the paper made a summary that the limited partnership is more reasonable form for the investment bank which undertake high-risk business.