The Financial Crisis Marlene Kim Assoc. Prof. Department of Economics University of MA Boston 100 Morrissey Blvd. Boston, MA 02125 617/287-6954

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Presentation transcript:

The Financial Crisis Marlene Kim Assoc. Prof. Department of Economics University of MA Boston 100 Morrissey Blvd. Boston, MA /

Collateralized Debt Obligations (CDOs) Put different traunches of MBS together Add other “asset backed securities”—auto loans, credit card loans, student loans, commercial real estate Sell off the packages

AIG 9/08: AIG sold half a trillion CDS “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these [CDS] transactions” --AIG executive. August 2007

Moody’s profits Profits huge, larger than Microsoft, Exxon Can receive $200,000 in fees for evaluating MBSs Growth came from evaluating mortgage related securities Most of revenue from structured finance

Subprime: mortgages to borrowers with poor credit histories Alt-A: no documentation of income

How could they afford homes? Option ARM: low teaser rates that were re-set later. Interest only loans. No payment of principal Less than 20% down payment. Sometimes no down payment

What happened? Subprime mortgages defaulted. April 2007, housing prices fell nationally for first time People couldn’t re-sell their houses for a profit. Credit crunch

AIG September 2008 Biggest insurance company in the US $302 trillion in credit insurance out $183 billion