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The Financial Crisis. Marlene Kim Assoc. Prof. Department of Economics University of MA Boston 100 Morrissey Blvd. Boston, MA 02125 617/287-6954 [email protected] Collateralized Debt Obligations (CDOs). Put different traunches of MBS together

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The financial crisis

The Financial Crisis

Marlene Kim

Assoc. Prof.

Department of Economics

University of MA Boston

100 Morrissey Blvd.

Boston, MA 02125

617/287-6954

[email protected]


Collateralized debt obligations cdos
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
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



How could they afford homes
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
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


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