a simpler explanation of the global crisis of 2008.
One explanation for the international financial problem. What happened in U.S. banks?
Background
2005-2007 The Federal Reserve lowered borrowing costs from 6.5 percent to one percent.
With mortgage interest rates so low, off the "boom " property. In 10 years, the real price of housing is multiplied by two in the U.S..
problem begins
What for a small American investor is a blessing, that is able to buy a second or third home to a really low interest rate, for a banker becomes a dilemma of return, because although many place loans, their average income by charging interest is low.
Given this particular paradox, more than a banker in the United States came up with the following:
A. Give more risky loans (for those who charge more interest) and
B. Offset lower margins by increasing the number of operations (1000 x bit is only 100 x bit)
Regarding the former, that is, be more risky loans, they decided:
1. Offering mortgages to new types of customers called "ninja" (which in the American banking jargon means no income, no job, no assets). So people without steady income, without a job and without collateral.
2. Charge the "ninja" with interest, although obviously there would be more risk
3. Profiting from real estate boom.
4. Moreover, full of enthusiasm, decided to grant mortgage loans in excess the value of the house that he bought the "ninja." According to market trends, the house, in a few months, worth more than the amount given on loan. Moreover, as the U.S. economy was going well, now insolvent debtor could find work and pay the debt without problems.
5. This type of mortgage, they were called "subprime" Note: They are called "prime mortgages" which have little risk of default. They are called "subprime mortgages" which have a higher risk of default.
whole approach worked well for some years. Throughout this time, the "ninja" were paying for the time mortgage and also as they had been given more money than your new property value, had bought a new car, had done remodeling the house and had gone on vacation with the family. All this time and probably paying over the money they received from the bank.
Regarding the latter, ie, increase the number of operations:
As banks were suddenly giving many mortgage loans at a time, noted that they had money. The solution was easy: go to foreign banks to lend them money.
Thus, the money deposited in the morning now a simple english driver Savings Bank in London (let's call him Peter) may be the same evening in Illinois, because there's a bank to which the Savings Bank has lent money to lend it to a "ninja."
Of course, the "ninja" Illinois does not know that the money will come from London, let alone Peter knows that his money would be deposited in an institution such as the Savings Bank, began to be at some risk. Neither does the President of the Savings Bank where Peter lay their MONEY. Moreover, the president thinks that the "Bank of Illinois" is a serious institution with which you want to work. Probably does not know the branch manager of the Savings Cajade where Peter is a client. At best, you know that he represents the bank has invested some money of their depositors in a major U.S. bank.
First Comment
So far, everything is clear and it is clear that anyone with common sense, although not a financial expert, you may think that if something goes wrong The stroke may be important.
Second Review
Globalization has its advantages but also disadvantages and dangers. The people of the Savings Bank in London did not know you're taking a risk in the U.S. and when he begins to read that there are subprime mortgages, think: "How crazy do."
addition, it appears that there are "Basel Accords, which require banks worldwide that have a minimum capital in relation to their assets.
Basel Standards require that the capital of the Bank not less than a certain percentage of assets. Then, if the Bank is asking for money other banks and giving lots of credit, the percentage of Assets Capital Bank that low and does not comply with the Guidelines of Basel.
problem begins
Some clever recalled the benefits of securitization: the Bank of Illinois "packages" of mortgages-prime and subprime-in packages that are called MBS (Mortgage Backed Securities, or obligations secured by mortgages). Thus, where before I had a thousand mortgages "loose" in the account "Loans granted, now has 10 packs of 100 mortgages each, in which there is, as in the Vineyard the Lord, everything good (prime) and bad (subprime). The Bank of Illinois is seeking buyers for the 10 packages:
Where does the money you get for these packages? Asset
going to the account "Cash Money", increasing, decreasing by the same amount the account "loans", which the share Capital / Loans granted improvement and meets Bank Balance Basel Standards. So far so good.
Who buys these packages for the Bank of Illinois "improve" the balance immediately?
The Bank of Illinois creates subsidiaries, the "Conduits" are not companies, but Trusts or Funds, and therefore are not required to consolidate their balances with the Bank's matrix.
Third comment
If any person working in the Savings Bank in London, from the president of the branch manager of Peter, knew some of this, had been afflicted.
But as I knew, all speak with weekly and monthly meetings of its international investments, of which do not have the slightest idea. How
finance the Conduits? In other words, where do they get money to buy the Bank of Illinois mortgage packages?
response of several places:
1. Through loans from other banks.
2. Engaging the services of investment banks can sell the MBS to Investment Funds, Venture Capital, Insurance, Financial Holding companies of their family.
Fourth Review
The ball is getting bigger.
Fifth Review
Notice how the risk is getting closer to ordinary families, as well as Peter and encouraged by the commercial developers of the Savings Bank of London, anyone goes and gets his money in a American Investment Fund.
continue with the history
No one should doubt the honesty of bankers, professionals, scholars who know how to take care of our savings. Moreover, to be "financially correct" or MBS conduits had to be well qualified by the rating agencies.
These ratings are based on the solvency, liquidity. These ratings say, "this company in this state, this organization, you can lend money without risk," or simply "be careful with these others because you risk not being paid."
Note: This includes the meaning of the word "Rating": Credit rating of a company or institution, made by a specialized agency.
levels in general terms are: AAA (the highest), AA, A, BBB, BB, C and D (very bad).
Overall a big bank usually has a rating of AA, a medium-sized bank, a rating of A.
The rating agencies qualified to Conduits (Mutual Funds, Trust Funds, etc) and emissions of MBS (Mortgage Backed Securities) with these grades or giving them other names, more sophisticated and sexy, but in the end say the same. They were called:
investment grade MBS representing the prime mortgages, or those of least risk (be the AAA, AA and A).
Mezzanine, the middle (assuming that the BBB and maybe BB)
Equity at high risk of default, ie, poor, or the subprime, that in all this mess are the main protagonists.
and follows the story
Investment Banks placed easily the best MBS (investment grade) to conservative investors, low interest obviously.
other fund managers, venture capital companies, etc, preferred more aggressive at all costs, higher returns, ie, more risky. Among other reasons because the traders, managers and directors receive their annual bonuses based on the profitability.
MBS We are very bad. How to sell without being noticed as high risk who have in themselves?
Sixth Review
The plot thickens and, of course, the Savings Bank in London continue making statements happy and excited, talking about the smooth running of the economy and even the charities they do in the community.
We
Some investment banks were able to obtain from a re-rating agencies (a "re-rating", a word that does not exist but which will help us begin to understand Case)
The "re-rating" is an invention to raise the rating of the MBS bad, that is:
structure it in sections, which are called "Tranches" ordering, from highest to lowest, the probability of a default , and the commitment to prioritize the payment to the least bad.
words:
I buy a package of MBS, which tell me that the first three MBS are relatively good, the three seconds, very regular and the three others, frankly bad.
This means that I have structured the package of MBS into three "tranches": the relatively good, very consistent and very bad.
I agree that if not paid tranche one of the very bad (or as they say these gentlemen, if incurring the bad leg "default"), but collecting some of the very regular and quite tranche of relatively good, everything will go to pay mortgages tranche relatively good, with that automatically, this tranche will be rated AAA.
Seventh Review
Some experts are beginning to call these operations' financial wizardry. "
To finish matters worse for depositors as Peter, they sorted MBS tranches were renamed as CDO (Collateralized Debt obligations, collateralized debt obligations). Like they could have given any other name than exotic.
Not content with this, the financial wizards created another important product, the CDS (Credit Default Swaps) In this case, the purchaser, who bought the CDO, assuming a risk of default by the CDO would buy charging more interest . So, bought the CDO and said, "if it fails, I lose money. If no failure, plus interest payment. "
Following inventions, created another instrument, the Synthetic CDO, which many still will not crack, but surprisingly gave a higher yield.
Moreover, those who bought the Synthetic CDO could buy very cheap bank loans. The difference between these interests very cheap and high yields of Synthetic operation was extremely profitable.
I forgot, most of these investment instruments, such as risky but profitable at a time, were insured by companies of recognized standing and experience. This in order to "protect investors" Welcome to the AIG party. "
At this point it is worth remembering one thing we may have forgotten at this point: the fact that the complexity of the operations described are based on the "Ninjas" pay their mortgages and that the U.S. housing market continues to rise.
But
In early 2007, U.S. housing prices started to decline.
Many of the "ninjas" realized they were paying for their second or third home more of what is now worth and decided or could not keep paying their mortgages.
automatically, nobody wanted to buy MBS, CDOs, Synthetic CDOs and CDS or those who already had failed to sell.
entire assembly was sinking and one day the manager of the Savings Bank in London called Peter to tell him that good, that their money was gone, or at best, had lost 60 percent of its value.
Eighth comment
All try to explain to Peter what the "ninjas", about his money in the Bank of Illinois and the Chicago TrustCorporation, what the MBS CDO, CDS, and Synthetic CDOs.
Yet there is something that no one knows yet: Where is all this money?
There is a reason very important that this question has no answer: nobody knows where that money. And when I say nobody, nobody.
But things go further. Because no one knows the mess in financial instruments with banks (investment banks including) the packaging of mortgages they bought, and as anyone knows, the banks start to not trust each other.
As they do not trust, when they need money and go to the interbank market, where banks lend money to each other, or lend it or lend it expensive.
interest to lend money to banks in the interbank Euribor (Europe Interbank Offered Rate, or Interest Rate offered in the interbank market in Europe).
Therefore, many banks are nonperforming suddenly with liquidity problems. Consequences:
1.
noncredit 2. They do not give mortgages.
3. Many millions of investors who bought shares of these banks are starting to see how the value of its shares will plummet.
To further complicate all, the European Central Bank began to raise interest rates. The 12-month Euribor, which is the benchmark for mortgages, begins to rise.
As banks have no money:
1. Sell \u200b\u200btheir holdings in companies
2.
buildings sold 3. Campaigning for more investors like Peter invest more and better conditions. In Europe, banks are offering their customers deposits to 4.75 percent.
now is that families in Europe also begin to feel squeezed by the mortgage payment. The difference is that the mortgage is their only home. By raising the interest rate, the share rises. They have no choice but to tighten their belts and try to arrive safely to make ends meet. In Spain and many families suffer from this cause.
With the decline in consumption, traders buy less from manufacturers (say socks). The sock manufacturer notes that, as sold under socks, he begins to staffing and fire a few. And this is reflected in the unemployment rate, mainly in the city where the factory is located socks. In this place people start buying less in stores.
How long will this last?
is very difficult to answer, for several reasons:
1. Because it is still not know the extent of the problem: the figures vary from 500 thousand to a trillion dollars.
2. Because no one knows who is affected. It is not known if the hundreds of banks like Peter, banks of all life, serious and tradition, have a lot of crap on your asset.
The trouble is that these banks do not know.
The trouble is that these banks do not know.
3. When, in the U.S. mortgage defaults by the "ninjas" go running, or when the banks to sell foreclosed homes (at a price that is) it's time to know then how much worth MBS, CDO, CDS and to the Synthetic. Meanwhile, no one trusts anyone.
Ninth Comment
Someone has described this as "big scam." Others have said that the Crash of 29, compared to this, it is child's play.
Enough, perhaps too many traders have been enriched by the annual bonuses have been growing all these years.
financial authorities have a great responsibility for what happened. The Basel Accords, theoretically designed to control the system, have encouraged the abuse of financial instruments such as sound securitization of debt, to an extent able to obscure and complicate enormously the markets they are intended to protect.
investment banking in the United States is not under the control of the Federal Reserve.
The Boards of financial institutions involved in this great condition have a great responsibility, because they have realized the risk abysmal in which they moved.
These should include the manager and the president of the Savings Bank of London, an institution where Peter confided his modest savings driver. Some rating agencies have been incompetent or not independent from their clients, which is very serious.
End of story
Major central banks (European Central Bank, the U.S. Federal Reserve) have been injecting liquidity into money to traditional banks may have money.
The Federal Reserve and Treasury Department have asked the U.S. Congress for 700 billion dollars to buy mortgage securities and other instruments trash.
The idea is to clean the bad portfolio balance sheets of banks, mortgage and insurance nonperforming. What they have done is to nationalize the losses and privatize profits.
addition, although we have raised well, we must remember that for a few days AIG is the world's largest public insurer.
to be ending, a friend of mine asked: Where do they get the money the central banks?
order not to complicate the explanation of crisis, let's stay on the following: we are all paying for the recklessness and bad faith of many bankers, supervisors and all politicians who are unwilling or unable to put a stop to the greed of some.
Paradox: Henry "Hank" Paulson and Ben Bernanke asked Congress for additional powers to manage the crisis.
Finally, I repeat my question: Where's the Money Peter?
SOURCE: Garita COMMUNICAT
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