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Old 10-11-2008, 06:58 PM   #1
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Default Sub Prime Crisis for Dummies

Sub Prime Crisis for Dummies

-Emerging economies dumping massive amounts of capital into the investment world. International pool of money doubles since 2000, from about 30 trillion dollars to around 70 trillion today.

-Greenspan lowers fed rates so low that the new emerging economies investors have to find somewhere else to invest other than federal bonds.

-They invest in Mortgage Backed Securities thinking that the housing price bubble wasn't a bubble. MBS are mortgages which are bundled together and sold together as a single investment package.

-They used incorrect data to assess the assests. Many "bad loans" were rated AAA(which is like a perfect credit rating in the bond rating world) because they used past loan information to assess the new loans. However there were so many changes to current loaning practices, that the "old data" was irrelevant.

-Collateralized debt obligations further pooling "bad rated" mortgages together to be invested so even really badly assessed loans were rated AAA. Investors buy up these pooled mortgages thinking they're "good as money".

- Because they thought that the housing bubble wasn't a bubble, investors put more and more stress on mortgage brokers and investment banks to continue lowering the standards of loaning practices.

They introduce the NINA (no income no assest) loans and many other insane loan types. The housing bubble collapses and we have trillions of dollars of assests which need to be revalued.

At this current point, many of those CDO's have 50% default rates. Some of these CDO's & MBS's which were/are owned by many huge investment banks are collapsing on a massive scale. And here we are today!

Now understand this is my understanding of the crisis. If anyone has any ideas or things to add about the information I've compiled, please do. This is purely my understanding of the situation based on reading the writings and sayings of "experts".
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