1. The Financial Crisis Act I: Mortgages

2. The Actors home buyers banks rating agencies investors construction industry Fannie Mae The government

3. It Can Only Go Up

4. Effects USA, population 300m $9.9T owed in mortgages ($33k/person)‏  (end of 2006) by households for homes for <= 4 families 6% of jobs in construction (2006)‏ Home equity loans ($750B=$2.5k/person in 2005)‏ Expansion of suburbs

5. On Wall St. Mortgage Originators (local banks etc.)‏ sell them to Fannie Mae, Freddie Mac, and big banks Mortgages bundled and sliced (~60%)‏ Rating agencies rate the best slices as AAA Sold to investors ~$24B in Wall St. bonuses (2006)‏

6. Why the crash?

7. Homeowners house prices expensive  $740k median home price in Santa Clara Co. (Dec 2007)‏ ARM, Option-ARM, teaser rates liar loans Leverage / Speculation (22% for investment purposes)‏

8. Ratings Agencies Only looked at historical data Ignored correlations / accuracy of info Paid by bank creating the mortgage pool  No payment if you don't like the rating Competition S&P email “Rating agencies continue to create and even bigger monster—the CDO market. Let's hope we are all wealthy and retired by the time this house of cards falters."

9. Banks Could create AAA bonds that paid more than regular AAA bonds Fees Kept a lot of it on their books (for capital requirements)‏ Mark to market

10. Investors These AAA bonds paid more than regular AAA bonds Restrictions on types of assets Need returns  Some pension funds were underfunded  Hedge funds need to justify fees Leverage

11. Effects

12. Foreclosures (9.2% delinquent or foreclosed, Aug 2008)‏ House values drop (27% from peak)‏ Hard to sell Real Estate and Construction jobs lost Property Tax (and income and sales tax) revenues go down

13. Effects on Wall St. Investors lose money  losses of entire crises >$10T Banks lose money ($435B in July, now $1T?)‏ Wall St. bonuses fell 37% to $18.4B