The Creation of a Housing Bubble How Subprime Mortgages Became CDO’s

Subprime Mortgages Major Problem! Price Paid: $1,000,000 Down Payment: zero Interest rate adjustable initial rate is very low = 1.0% Major Problem! Initial Value of House $1,000,000 New Value: $800,000 Homeowner owes $1 million but the house is worth $800,000. Who owns the loan?

The creation of CDO’s Bank makes subprime loans Wall Street buys subprime loans Wall Street “pools” loans into a security Wall street creates a

The rise of CDO’s

Pools are divided into “tranches” with different risk Subprime

The “nuclear” tranche

CDO Prospectus Rating Agencies gave these securities “high ratings”

“shorting” the CDO Market……

1.0% Tech Bubble 5.25% 0.0% New Bubble?

Pools are divided into “tranches” with different risk Subprime

Start at 19.5 minutes… “shorting” the CDO Market……

Subprime Mortgage Recap: Banks made loans to consumers who were not qualified In the short run, this caused home prices to rise In the long run, this led to “inflated” home prices & people unable to pay their mortgage as interest rates rose Eventually the subprime mortgage/CDO market collapsed Banks were bailed out Foreclosures were common Homeownership fell 70% => 63%

700 Billion Dollar Bailout?

Government Takeover of Subprime Mortgages FNMA & FHLMC Government takeover Wall Street Firms Bankrupt or Bought Bear Stearns Merrill Lynch Lehman Brothers AIG Insurance Company Government Takeover Government Takeover of Subprime Mortgages