For The Burly...
I bring you notes....
April 14, 2009
Global Financial Crisis: 2008-2009
Threat to financial stability of investment banks…Leahman Brothers
Insurance companies…AIG
American International Group
Mortgage bank…Fannie Mae and Freddie Mac
Fannie Mae-Federal National Mortgage Association
Freddie Mac-Federal National Mortgage Corporation
Consequences for homeowners, commodities producers, their employers and customers
The build-up for the housing bubble began in the Clinton administration, burst in 2006...a decade or a little more
Bubble=An increase in housing start-ups (housing good indicator, because it's a person's biggest investment), dramatic decline in retail values, the misapplication of risk controls (Sub prime mortgages, variable rate mortgages-paying no principal with anticipation of house's value increasing, leading to wheeling and dealing), collateralization of debt insurance (Spreading the risk)
Made to put Americans who couldn’t apply for a loan from a commercial bank in a position where they can buy a house (ignoring the risk of zero credit rating)
Sub prime=loans given at a rate lower than commercial banks are able to give to their "good customers"
Investment banks bundled these loans and traded them on the stock market
Called mortgage backed securities
This is spreading the risk
By 2008, 30% of all mortgages issued by Fanny Mae and Freddie Mac were to first time homebuyers who would not have qualified for a mortgage from a commercial bank
1994-2006 housing prices increased by 124%
Housing prices reached a level of 2.9-3.9 times the median household income by about 2000
By 2004 home prices to family income up to four times
On the eve of the bubble burst, home prices had reached 4.6
Value of the house compared to family income 2.9-3.2, then up to 4.0, then to 4.6
The value of residential real estate between 1994 and 2006 spiralling upward
"Leveraging"-borrow at a lower interest rate to pay off a higher interest rate
House hold debt in US in 2007 as % of annual income-130%
The average american owed more than he/she made in a year
In 2007, americans spent 800 billion more than they earned
US gov't owe 14 trillion dollars
In 1974-household debt stood at 640 billion
Last year-14 trillion
2006-for the first time in 12 years, housing starts to drop
Threshold of a looming catastrophe
1. Millions of americans whose credit rating would not have gotten them a mortgage get sub-prime rates
By 2007 9 million homeowners had no or negative equity on their property
By may 2008, housing prices fell by 20%
Millions of sub-prime mortgage home owners are homeless, number has jumped by 80%
1933 congress Glass Steagal act-separates mortgage banks from investment banks (conflict of interest)
1999-Glass Steagal act repealed
Allowed commercial banks to trade in mortgage backed securities, collaterized debt obligations, and structural investment vehicles
Conflict of interest between granting and investing of credit
April 14, 2009
Global Financial Crisis: 2008-2009
Threat to financial stability of investment banks…Leahman Brothers
Insurance companies…AIG
American International Group
Mortgage bank…Fannie Mae and Freddie Mac
Fannie Mae-Federal National Mortgage Association
Freddie Mac-Federal National Mortgage Corporation
Consequences for homeowners, commodities producers, their employers and customers
The build-up for the housing bubble began in the Clinton administration, burst in 2006...a decade or a little more
Bubble=An increase in housing start-ups (housing good indicator, because it's a person's biggest investment), dramatic decline in retail values, the misapplication of risk controls (Sub prime mortgages, variable rate mortgages-paying no principal with anticipation of house's value increasing, leading to wheeling and dealing), collateralization of debt insurance (Spreading the risk)
Made to put Americans who couldn’t apply for a loan from a commercial bank in a position where they can buy a house (ignoring the risk of zero credit rating)
Sub prime=loans given at a rate lower than commercial banks are able to give to their "good customers"
Investment banks bundled these loans and traded them on the stock market
Called mortgage backed securities
This is spreading the risk
By 2008, 30% of all mortgages issued by Fanny Mae and Freddie Mac were to first time homebuyers who would not have qualified for a mortgage from a commercial bank
1994-2006 housing prices increased by 124%
Housing prices reached a level of 2.9-3.9 times the median household income by about 2000
By 2004 home prices to family income up to four times
On the eve of the bubble burst, home prices had reached 4.6
Value of the house compared to family income 2.9-3.2, then up to 4.0, then to 4.6
The value of residential real estate between 1994 and 2006 spiralling upward
"Leveraging"-borrow at a lower interest rate to pay off a higher interest rate
House hold debt in US in 2007 as % of annual income-130%
The average american owed more than he/she made in a year
In 2007, americans spent 800 billion more than they earned
US gov't owe 14 trillion dollars
In 1974-household debt stood at 640 billion
Last year-14 trillion
2006-for the first time in 12 years, housing starts to drop
Threshold of a looming catastrophe
1. Millions of americans whose credit rating would not have gotten them a mortgage get sub-prime rates
By 2007 9 million homeowners had no or negative equity on their property
By may 2008, housing prices fell by 20%
Millions of sub-prime mortgage home owners are homeless, number has jumped by 80%
1933 congress Glass Steagal act-separates mortgage banks from investment banks (conflict of interest)
1999-Glass Steagal act repealed
Allowed commercial banks to trade in mortgage backed securities, collaterized debt obligations, and structural investment vehicles
Conflict of interest between granting and investing of credit