The invisible hand didn't cause the financial meltdown. The bogus belief, the bogus "complex" financial system, and the backing by credit rating agency, government, and AIG (and the like) caused the financial meltdown.

1. CDO/ CDS: Systems Based on False
Premises

2. Banks Improved Profits
with these 3 Ingredients

3. Belief Based on 3
Mythical Assumptions

4. Design Simple Systems
that Appear Complicated
Reality Assumed
We are all The invisible hand: Too
interconnected Complicated to Control

5. 3 Great Backers Convinced
Investors to Invest
AIG: Insured papers
CR: Rated favorably papers
Government: weakened rules and
regulations
New attractive product for
investors

6. Past: When Your Loss
Equaled Only One Loss

7. When Your Loss, Meant at
Most 2 losses
If you pay the house in full you get
your title
You Mortgage
Bank
If you cannot pay for it, Bank takes it,
and sell it.
Bank starts taking its profit (interest)
Live Title before the principle.
Bank can sell the title to Freddie Maximum number of possible losers in
Mac, Fannie Mae... case of default 2.
House
Assumption: fixed rate mortgage

8. When You Lose, there are
two losers
You Bank
Cannot change your
Rate goes up fixed rate/ fixed cost
contract
you may want to
Rate goes Down Less profit, if you refinance
refinance
If you fall behind you
May lose your home May be willing to negotiate
payment
predictable monthly
Advantage expense Easy to manage
Know your banker
Wait a long time to
20% downpayment
Disadvantage recuperate profit and
House/ Income <5
principle

9. Now: When Your loss
Equals The loss of
Many

10. How You are Reduce from a
Customer to a Thing
When you pay your mortgage your payment
is distributed to the holders of CDOs.
CDS CDS holders pay a bet to the bank that within
a time frame CDOs will not perform.
Speculator
s
Bank CDS Holders know who they are betting
against.
CDOs holders don’t know who is betting
Title
against them.
CDO
Wall
Investors If too many of us are unable to pay our
mortgages CDOs fail.
MI The insurance of CDOs is sold as CDS.
CDOs are rated by Credit Rating Agencies.
Title MI: Mortgage Initiator
CDO: Collateral Debt Obligation
CDS: Credit Default Swap
House

11. Appearance: In the Long
Run, you lose MI wins
You MI
You May not be able
Rate goes up More Money
to pay
Locked in, expensive Protected against
Rate goes Down
to change contract refinancing
If you fall behind you
May lose your home Not its problem
payment
Initially: Can afford
Sell title and recuperate
Advantage more with less
principle and some profit
income
Subsequent monthly
None: sold the title to
Disadvantage mortgage
someone else
unsustainable

12. What we Learned of our Belief
from the Financial Meltdown

13. The New Adjusted Belief
•Income matters when buying a house.
•Homeowners will not hold on a falling assets.
•Credit rating cannot be trusted.
•Houses, like any other assets, can and will fall.
•Every bubble bursts.
•Homeowners will not starve to pay for their
mortgages.

14. Presented by
Dalila Benachenhou
d_b@femvestor.com
Comments Welcomed