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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 Marlene.Kim@umb.edu. Collateralized Debt Obligations (CDOs). Put different traunches of MBS together

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The Financial Crisis

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

  2. 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

  3. 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

  4. 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

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

  6. 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

  7. 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

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

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