Questions On Mortgage Backed Securities And Credit Default Swaps

The company’s finance department had the chance to reduce the company’s weight in mortgage-backed securities. However, it chooses not to. The company’s financial adviser did not evaluate any risk that would emerge in the economic sector of the U.S during that year. Furthermore, the company had an opportunity to identify the consequence that would result due to the falling mortgages; somewhat the company neglected this risk and increased in value of portfolio.

On October 3, 2008 President George W. Bush signed the Emergency Economic Stabilization Act of 2008, otherwise known as the “bailout.” The Purpose of this act was defined as to, “Provide authority for the Federal Government to purchase and insure certain types of trouble assets for the purpose of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, to amend the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes” (Emergency Economic Stabilization Act). In my paper I will explain and show the relationship between the Emergency Economic Stabilization Act of 2008 and subprime lending, the collapse of the housing market, bundled mortgage securities, liquidity, and the Government 's efforts to bailout the nation 's banks.

In 2008 the United States economy faced it most serious economic downturn since the great depression. This crisis began in 2006 when the subprime mortgage market showed an increase in mortgage defaults. This would lead to the decline of the U.S. housing market after a decade of high growth. The problems in the mortgage market where able to spread to other sectors of the economy especially in financial markets because of Collateralized Mortgage Obligations or CMOs. CMOs where mortgage backed securities that where given out by investment banks and where not regulated by the government. These securities fell as did mortgages due to increasing default rates. Because of CMOs companies bought Credit Default swaps or CDSs. These CDSs where nominally

Two of the most dramatic episodes in American economic history were the 1929 Great Depression and the 2008 Great Recession. While in each period the sources of economic excess differed, manufacturing in 1929 and housing in 2008, there are many similarities in their causes and effects. Initially there were also similarities in the way government and monetary authorities responded. However, it is the differences in response that are the most important and will have the greatest impact on the length, and depth of the two economic declines. Both crises began with poor quality lending by banks and unaffordable borrowing by consumers and industry. This led to overvalued prices for asset. While both crises were global, this paper will focus on national policy decisions and how they impacted U.S. outcomes.

Most Americans would associate the Great Recession with Lehman Brothers, Bear Stearns, and subprime mortgages. While all of these played a role in the Recession, they certainly weren’t the root causes of the crisis. While they certainly are major contributors, the main sources of the Recession was found elsewhere, in the form

In 2007, the bursting of the housing bubble of the U.S was at its peak. The bursting resulted in plummeting of security values tied to the U.S. real estate pricing. The complex interplay of policies that provided easier lending of loans, overpricing of sub-prime mortgages, on a theoretical basis that the prices would continue to increase, and inadequate capital holdings from insurance companies and banks to back their financial commitments contributed to the bursting of the bubble (Boatright, 2010). During 2008, securities suffered huge losses due to

What are your thoughts about unknowing investors purchasing “mortgage backed securities”? Do you consider that the risk of investing?

In 2008, the US experienced the traumatic chaos of a financial downturn, whose effects rippled throughout Europe and Asia. Many economists consider it the worst crisis since the Great Depression, and its alarming results are still seen today, a long six years later. Truly, the recession’s daunting size and formidable wake have left no one untouched and can only beg the question: could it have been prevented? The causes are manifold, but can be found substantially rooted in illogical investments and greedy schemes.

One of the first indications of the late 2000 financial crisis that led to downward spiral known as the “Recession” was the subprime mortgages; known as the “mortgage mess”. A few years earlier the substantial boom of the housing market led to the uprising of mortgage loans. Because interest rates were low, investors took advantage of the low rates to buy homes that they could in return ‘flip’ (reselling) and homeowners bought homes that they typically wouldn’t have been able to afford. High interest rates usually keep people from borrowing money because it limits the amount available to use for an investment. But the creation of the subprime mortgage

The onset of summer tends to bring a lull in excitement levels in financial markets. The media is consequently forced to exaggerate the importance of economic releases over this seemingly mundane period, and this year has proven to be no exception. The Financial Times recently reported that US consumer credit had surged by $18bn in the three months to June, thereby provoking fears that banks were being reckless and consumers were taking on too much debt in a slow economy. These fears constitute a major departure from the worries that prevailed during the financial crisis, when many commentators were forecasting years of household deleveraging. Balance sheet adjustment in the sector would,

Housing prices in the United States rose steadily after the World War II. Although some research indicated that the financial crisis started in the US housing market, the main cause of the financial crisis between 2007 and 2009 was actually the combination of housing bubble and credit boom. The banks created so much loan that pushed the housing price to the peak. As the bank lend out a huge amount of money, the level of individual debt also rose along with the housing price. Since the debt rose faster than people’s income, people were unable to repay their loan and bank found themselves were in danger. As this showed a signal for people, people withdrew money from the banks they considered as “safe” before, and increased the “haircuts” on repos and difficulties experienced by commercial paper issuers. This caused the short term funding market in the shadow banking system appeared a

Due to such events as the subprime mortgage crisis, the auto market and Wall Street’s failure, the United States suffered a severe economic blow. Looking at the situation from an economic view, supply is supposed to equal demand. Due to the mortgage crisis and the careless attempts of some to make money, there is a superfluous amount of empty homes throughout the United States. In the subprime mortgage crisis, the nature of the failure was the inability to account for money given to individuals, who lack the appropriate requirements. In order to obtain a loan, collateral is needed. References were not being checked and poor credit history went ignored. People were obtaining loans and not paying attention to the interests rates associated. “This time around, the slack standards allowed millions of high-risk borrowers to get easy home mortgages. When this so-called subprime market collapsed beginning about a year ago, ordinary working people bore the brunt” (Gallagher, 2008). Companies were so anxious to place people in homes, that it cost them billions of dollars and

In relation to the increase in house’s price, the rise of financial agreements such as mortgage-backed securities (MBS) and collateralized debt obligations (CDO) encouraged investors to invest in the U.S housing market (Krugman, 2009). When housing price declined in the U.S, many financial institutions that borrowed and invested in subprime mortgage reported losses. In addition, the fall of housing price resulted in default and foreclosure and that began to exhaust consumer’s wealth and

Another financial vehicle that could be problematic was CDS (credit default swap). CDS is a financial derivative works like insurance on securities. The underwriter is obligated to pay a pre-determined fee to counterparty if a certain security default. In return, underwriters charge a fee as compensation. CDS can be used to hedge against risks. However there are still some difference between a CDS and an insurance contract.

countries in addition to the United States. A global economic crisis ensues in which nonfinancial