Crisis Credit Visualized Summary

The topic which I am choosing is about the Crisis Credit Visualized. The author tries to explain worldwide financial fiasco in visual form. In this video he covers sub-prime mortgages, collateralized debt obligation, frozen credit markets, and credit default swaps. He shows how mortgages and financial institutions, also known as Wall Street, are highly engaged in leverage. The crisis starts when the federal reserve lowers the interest rate to only 1%. Keeping the money in the savings account is no longer profitable to investors. For the banks, low interest rate charged by federal reserve from borrowed money creates large speculations. To maximize the profit, banks create leverages. For instance, if you borrowed $10,000 and you can leverage

They found the concept to connect home mortgages to the lending companies through brokerage firms. The home buyer arranges the home loan through the brokerage, which connects the loan to the lender. From there, the lender sells the loan to the banks. Investment banks package the loan in a Collateralized Debt Obligation account, collecting mortgage payments from homeowners monthly. To lower exposure, the investment banks created three categories of investment known as Safe which is rated as Triple A, Okay rated as Triple B, and the last one being Risky as Unrated. Banks heighten the appeal to investors by diversifying the interest rate among these accounts. The highest rated will earn the lowest and the riskiest earns the most. They created a default swap which means that every investment is covered by home as collateral. Most of the Triple A and Triple B were bought by investors and bankers who don’t want to take the risk. The Unrated was bought by the hedge funds. The investment banks generate huge profit and repay debt to central banks. The risk of the investments are carried by groups of investors who bought the Credit default swap. This is done on the basis that house value will always go up. The risky loans created lots of insolvent