Financial Crisis in 10 min十分钟看懂次贷危机英文稿.docxVIP

The crisis of credit visualizedWhat is the credit crisisIts a worldwide financial FIASCO including terms you have probably heard like sub-prime mortgages , collateralized debt obligations, frozen credit markets and credit default swapswho is affected? everyone. how does it happen ?here is howthe crisis brings two groups of people together. Home owners and investorsHome owners represent their mortgages and investors represent their moneyThese mortgages represent houses and this money represents large institutions like pension funds, insurance companies, sovereign funds, mutual funds etc.These groups were brought together through the financial system, a bunch of banks ,brokers ,commonly known as ,wall street well it may not seem like it ,those banks in wall street are closely connected to these houses in main streetTo understand how, lets start from the beginning.Years ago, the investors are sitting on their pile of money, looking for an investment to turn into more moneyTraditionally they go to the us federal reserve or they buy the treasury bills believed to be the safest investmentbut, in the way of .com bust and 911, American federal reserve president Alan Greenspan艾伦格林斯潘（Alan Greenspan，1926年3月6日），美国犹太人，美国第十三任联邦储备委员会主席（1987-2006） lowered the interest rate to only1% to keep the economy strong.1% is a very low return on investment , so the investments say “no thanks”On the flip side, this means that banks on wall street can borrow from the federal for only 1%Add to that general surpluses from Japan , China and the middle east, and theres abundant cheap credit, this makes borrowing away money easy for banks and banks to go crazy with leverageLeverage is borrowing money to amplify the outcome of a dealHeres how it worksIn our normal deal, someone with 10000 buys a box for 10000, he then sells it to others for 11000for 1000, a very good dealBut with leverage ,someone with 10000 would go borrow 990000, giving him 1000000dollars in handThen he goes and buys 100 boxes with his 1000000 dollarsAnd sells them to someone else for 1100000.Then he pays back his 990000 plus 1000 interestsAnd extra his 10000, he is left with 90000 profitsVersus the other guys 1000, leverage turns good deals intake great dealsThis is the major way banks make their moneySo wall street take tons of credit, and take great deals and growths tremendously richAnd it pays it BackThe investors see this and walk up to seize this action and this gives the wall street an ideaThey keep connecting home investors and home owners through mortgagesHeres how It worksA family wants a house, so they save for a down paymentDown payment:头期付款 and contact the mortgage brokerThe broker connects the family to a lender who gives them mortgageThe broker makes a nice commissionThe family buys the house and becomes home ownersThis is great for them because housing price has been rising practically foreverEverything works out nicelyOne day the lender gets a call from an investment banker who wants to buy the mortgageThe lender sells it with a very nice feeThe investment banker then borrows millions of dollars and buys thousands more mortgages and puts it into a nice little boxThis means that every month he gets payment from the home owners of all the mortgages in the boxThen he cease his wizards on it and work their financial magic which is basically cut it into three slices : safe, okay and riskyThen pack these slices back into the box ,call it a collateralized debt obligation, or CDOA CDO works like three overlapping traysAs money comes in , the top trace sills first, then spills over into the middle and whatever is left into the bottomThe money comes from home owners paying their mortgagesIf some owners dont pay and default on their mortgagesLess money comes in and the bottom trace may not get filledThis makes the bottom tray riskier and the top tray saferTo compensate the risk , the bottom tray receives a higher rate of return while the top receives a lower but still nice returnTo make the top even safer, bank will ensure it with a small fee which is called a credit default swapCredit default swap信用违约交换Banks to all of these works so the credit assessing agencies will stamp the top slice as a safe triple A rating investment , the highest safest rating there isThe okay slide is triple B, still pretty goodAnd maid of the bottom receives the risky slideBecause of the triple A rating, the investment banker can sell the safe slide to investors who only want safe investmentsHe sells the okay slice to other bankersAnd the risky slice, the hedge fund and other risk takersInvestment bankers make millionsHe then repays his loansFinally the investors find a good investment for their money much better than the 1% treasury billsThey are so pleased they want more CDO slicesSo the investment banker calls the banker wanting more mortgagesThe lender calls the broker for more home ownersBut the broker cant find anyoneEveryone qualified for mortgage already has oneBut they have an ideaWhen home owners cant afford their mortgage, the lender gets the houseAnd house are always increasing their valueSince they are covered at the home owners defaultLenders can start adding risk to new mortgages, not requiring down payments, no proof of income, no documents at all!And that exactly what they didSo instead of lending to responsible home owners, called prime mortgagesThey start to get some, well , less responsibleThese are sub-prime mortgagesThis is the turning pointSo just like always , the mortgage broker connects the family with a lender and mortgage making his commissionThe family buys a big houseThe lender sells the mortgage to the investment bakerIt turns into a CDO, and sells slices to the investors and othersThis actually works out nicely for everyone and makes them all richNo one was worried because as soon as they sell their mortgages to the next guy, it was his problemIf the home owners couldnt afford , they didnt careThey were selling their risk to another guy and became millions!Like playing hot potatoes with timing bombNot surprisingly, the home owners default their mortgages which at this moment its on by the bankersThat means he for clothes and one of his monthly payments turns into a houseNo big deal, he puts it out for sellBut when more and more of his monthly payments turn into housesNow there are so many houses for sell on the market, creating more supply than there is demandAnd housing prices arent rising any moreIn fact they plumpedThis creates a interesting problem for home owners still paying their mortgagesAs all their neighbors houses go up for sell, the value of their house goes downAnd they start to wonder why they are paying back 300000 mortgage when their house is now worth only 90000 They decide that it doesnt make sense if they continue paying even they can afford to And they walk away from their houseThe fall rates sweep the country and prices plunge hardlyNow the investment banker is now basically holding a box full of worthless housesThey call up their buddy the investors to sell his CDO but the investor isnt stupid and says