Financial Crisis Understanding From the Ground Up (part 4)

crisis that understands from the ground up (Part 4) by George C (www.finance-database.com) the current financial crisis the public has a common understanding that the crisis of subprime mortgages has lead to a much more serious consequence, so-called? of? of the â? financial? of the crisis recently. To be exact, is going on for seven months. But how will that happen? That is the question. The crisis in the subprime load is relatively simple to understand. People bought if directs that? t of? the couldn allows and now they are falling behind on their mortgages. This has caused the loss of related financial institutions. However, the amount of loss is not the main cause of financial crisis. The U.S. government has already announced to take the direction of Fannie Mae and Freddie Mac and AIG and has injected capital in the market above that amount. Furthermore, most home owners still are doing just fine. The conventional mortgage market is still healthy. So, how is that a disorder focused in one part of the mortgage market of the subprime performance, it was frozen on the entire credit markets in the United States? As the crisis has caused such great effect to the stock market, causing the collapse of the stern of bears, Lehman Brothers, etc. and has left the economy on the edge of recession more defective in a generation and forced the Federal Reserve to take the more bold measures on the depression in 1923? To get a big picture of this event, I think this could be explained in this way. In the first place, behind the financial crisis of all, there are actually 3 major components: the subprime mortgage, power of leverage (or gearing system) and exchange of lack of accreditation (CDS). We have mentioned before about the subprime mortgage. So, what is the power of a lever? In finances, the power of leverage is a common sense used in this way to enlarge the result of investments. This can be done by the various financial instruments such as options, future margin or borrowed capital to increase the potential return of an investment. Currently, many banks use to Investimento the power of a lever to operate more then 20 times their capital. For example, if a bank has a good 5 billion, then 30 times the power of leverage means that cashing A can operate 150 billion money, where most are borrowed. Clearly, if there are 5% profit in investment, and then cashing in a profit of 7.5 billion. However, on the one hand, if there is loss of 5% in investment, and then recessed for the loss of All? s? ita of 5 billion of goods and the provider must still 2.5 billion. The third component is CDS. What is CDS? As explained above, the operating power of leverage is very risky. So some bankers think of a way to take insurance on these power leverage. This insurance is called CDS. It is a kind of specific agreement that allows the transfer of risk of accreditation from a third party in the other. A party in the exchange is a risk of fronts and accreditation of the provider by third parties and the exchange of lack of accreditation agrees to ensure that risk in exchange for regular periodic payments. For example, Peter borrows $ 100 from John. John wants to obtain insurance on that debt $ 100 if Peter has not been able to return the money. The John and Jane goes to Jane asked for assurance that debt. Jane agrees to do so if John is willing to pay an insurance fee of $ 5 a year. That's exactly the plan of action more simplified CDS.Now, apply one of the bank in the world. Remember the example of? of? aa Bank? of? â. Cash-A operates a power of a lever 30 times. To reduce the risk, go to cash the B and B prompted the bank to make insurance CDS. After analyzing the data market, the bank B knows that if the fracture of the contract is less than 1%. Consequently, the bank B is ready to take quell'assicurazione to earn the fee for insurance. However, this is not the end of history. Even if the bank agrees to accept B insurance, may not have the insurance fee immediately. At the same time, some other bank which the bank C, D bank, etc.. are interested in these CDS contracts. So the bank B is ready to sell them immediately to another bank to get cash. This is the plan of action. The CDS contracts that are selling and sell continuously between different financial sectors. Meanwhile, the market value of the CDS has reached 62 trillion. However, you can see that all the bank A, B, C, etc. are doing the money. So, where is the money come? The money comes from income generated through the sale of the subprime mortgage. So why the period of honey moon may continue in the previous few years? It is because the prices continu real estate Aare increase in the previous few years. At that time, home owners and business and resell it easy for real estate, which can earn good money at the same time. Gradica once the snowball or bubble. The market continu Aare sway until 2006. When the cuts came, the prices of property have fallen. The people who are lack of financial skills could not pay the high interests of those of subprime loans. In that case, the market for the subprime mortgage began to sink, which alternately affecting the market for CDS. Banks and financial institutions that are involved in these products is being inevitably moving. In fact, almost all of the I-bank and most commercial banks are involved in this storm, or more appropriate, the tsunami.

George C