The Financial Crisis

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The Financial Crisis:

Y376 – Final Podcast Project The Financial Crisis

CDO:

CDO Security backed by home loans Packaged by banks and sold to investors Coupon payments are mortgage payments from homeowners Many cases backed by bad (subprime) loans to homeowners No good way to determine risk!

CDS:

CDS “Insurance” against CDO defaulting Not required to own CDO to buy CDS People realized housing problem and bought these like crazy No good way to value!

Housing Bubble:

Housing Bubble Home prices inflated People who can’t afford are buying Subprime loans “teaser rate” expiring Many defaults CDOs lose value, banks owe on CDSs

Early Signs Shake Market:

Early Signs Shake Market Stock prices fall as volatility in the housing and financial markets increase Banks are worried about failure Consumer confidence falls dramatically

Many Lose on Declining Market:

Many Lose on Declining Market The problem worsens as banks fail failure The stock market enters free fall Right: trader worried as prices drop heavily

Lehman Fails:

Lehman Fails The government allows Lehman Brothers to fail Thought that would be the end Throws the economy into a tail spin No confidence in financial companies

AIG Impending Doom:

AIG Impending Doom AIG was the largest underwriter of CDSs Owed billions in insurance payments Looked like it was about to fail Aid complications because it wasn’t based in the US

AIG Bailout:

AIG Bailout AIG was bailed out by US government Worries that if they failed so would the entire financial system Many blue collared citizens upset and thought they took too much risk and didn’t deserve a bailout Many did not realize the consequences if they were allowed to fail

Merrill Lynch:

Merrill Lynch Merrill Lynch was the next bank in trouble The government said they couldn’t bail out another bank after AIG Had to find a solution or they would start a snowball of failing US banks Purchased by Bank of America creating BAML

Hank Paulson:

Hank Paulson Treasury Secretary Had to sign off on the solutions Many people did not approve Conflict of interest as he was former CEO of Goldman Sachs, one of the worlds biggest banks

Solutions:

Solutions TARP Funds Quantitative Easing (1&2) The government had to spend a lot of money not only on bailouts but stimulus to get the economy out of recession and back on track

Thank You:

Thank You

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