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

2. 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?

4. 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

5. The rise of CDO’s

6. Pools are divided
into “tranches” with
different risk
Subprime

7. The “nuclear” tranche

8. CDO Prospectus
Rating Agencies
gave these securities
“high ratings”

9. “shorting” the CDO
Market……

10. 1.0%
Tech
Bubble
5.25%
0.0%
New Bubble?

11. Pools are divided
into “tranches” with
different risk
Subprime

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

13. 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%

14. 700 Billion Dollar Bailout?

15. 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