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The Credit Crisis Of 2008a

•
•
E
econman

Background of Credit Crisis

BusinessEconomy & Finance
1 of 26
What Happened?
NASDAQ People moved assets from stocks to Housing after the crash of 2000.
Case Schiller Housing Price Index 1890-2008 and prediction Based on past adjustments bottom by 2010 200___ 190___ 180___ 170___ 160___ 150___ 140___
 
Borrower Mortgage Broker Lender Loan $$$ Loans facilitated by Mortgage Brokers who had no continuing Interest Principal Agent Problem
Borrower Mortgage Broker Lender Issuer Investors Credit Rating Underwriter Loan $$$ $$$ Loan Monthly $ Security $$$ Monthly $ Lenders sell their loans to Others to recapitalize and continue Loaning. Issuers bundle loans into securities (Collateralized Debt Obligations) To resale to investors
Spreading the Risk
Some Common Companies Borrower Countrywide FNMA Bear Stearns Goldman Sachs Moody’s Loan $$$ $$$ Loan Monthly $ Security $$$ Monthly $
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Security Insurance Insurer Investor Default Protection Security Security Investor’s seek insurance to cover unexpected defaults on loans
Credit Default Swaps Goldman Sachs AIG
[object Object],[object Object],[object Object],AIG Hedge Fund Sovereign Wealth Fund
The Whole System Borrower Countrywide FNMA Goldman Sachs Loan $$$ $$$ Loan Monthly $ Security $$$ Monthly $ AIG Premium CDS Hedge Fund
What Went Wrong Borrower Countrywide FNMA Goldman Sachs Loan $$$ $$$ Loan Monthly $ Security $$$ Monthly $ Premium CDS Insurance Borrower AIG Hedge Fund Borrower defaults
Multiplied Losses Borrower Countrywide FNMA Goldman Sachs Loan $$$ $$$ Loan Monthly $ Security $$$ Monthly $ Premium CDS Insurance Borrower $1 $1 $1 $1 $1 AIG Hedge Fund
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],Balance Sheet as of 6/30/08 ,[object Object],[object Object],[object Object],Assets Current $110 b Long term: Investments $600 Other: $100 Total $810 Liabilities Short Term: $505 Long term: $230 Equity: $ 75 Total: $810
[object Object],[object Object],[object Object],Value of investments for illustration only, unknown value Assets Current $110 b Long term: Investments $500 Other: $100 Total $710 Liabilities Short Term: $505 Long term: $230 Equity: $ 0 Total: $735
[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object]
[object Object],[object Object]
 
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object]

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The Credit Crisis Of 2008a

  • 2. NASDAQ People moved assets from stocks to Housing after the crash of 2000.
  • 3. Case Schiller Housing Price Index 1890-2008 and prediction Based on past adjustments bottom by 2010 200___ 190___ 180___ 170___ 160___ 150___ 140___
  • 4.  
  • 5. Borrower Mortgage Broker Lender Loan $$$ Loans facilitated by Mortgage Brokers who had no continuing Interest Principal Agent Problem
  • 6. Borrower Mortgage Broker Lender Issuer Investors Credit Rating Underwriter Loan $$$ $$$ Loan Monthly $ Security $$$ Monthly $ Lenders sell their loans to Others to recapitalize and continue Loaning. Issuers bundle loans into securities (Collateralized Debt Obligations) To resale to investors
  • 8. Some Common Companies Borrower Countrywide FNMA Bear Stearns Goldman Sachs Moody’s Loan $$$ $$$ Loan Monthly $ Security $$$ Monthly $
  • 9.
  • 10. Security Insurance Insurer Investor Default Protection Security Security Investor’s seek insurance to cover unexpected defaults on loans
  • 11. Credit Default Swaps Goldman Sachs AIG
  • 12.
  • 13. The Whole System Borrower Countrywide FNMA Goldman Sachs Loan $$$ $$$ Loan Monthly $ Security $$$ Monthly $ AIG Premium CDS Hedge Fund
  • 14. What Went Wrong Borrower Countrywide FNMA Goldman Sachs Loan $$$ $$$ Loan Monthly $ Security $$$ Monthly $ Premium CDS Insurance Borrower AIG Hedge Fund Borrower defaults
  • 15. Multiplied Losses Borrower Countrywide FNMA Goldman Sachs Loan $$$ $$$ Loan Monthly $ Security $$$ Monthly $ Premium CDS Insurance Borrower $1 $1 $1 $1 $1 AIG Hedge Fund
  • 16.
  • 17.
  • 18.
  • 19.
  • 20.
  • 21.
  • 22.
  • 23.
  • 24.  
  • 25.
  • 26.