Download Anatomy of a Financial Crisis: A Real Estate Bubble, Runaway by M. Jarsulic PDF

By M. Jarsulic

An indepth examine the origins and improvement of the present monetary trouble, from an economist and Washington insider. Jarsulic explains how a wide range of monetary associations, together with loan banks, advertisement banks, and funding banks created a credits bubble that supported nonprime personal loan lending and helped to inflate residence prices.

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Extra resources for Anatomy of a Financial Crisis: A Real Estate Bubble, Runaway Credit Markets, and Regulatory Failure

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7). The independent mortgage banks— New Century, Fremont, Ameriquest, Option One—are represented. But so are major banks and thrifts, including HSBC, Countrywide, Citigroup, and Wells Fargo. First Franklin was a subsidiary of Merrill Lynch, and WMC was a subsidiary of General Electric, so investment banks and industrial conglomerates were also part of the process. Data reprinted with permission. originating subprimes is also apparent from these data. The ten largest originators made more than 60 percent of the subprime loans in 2006.

The declines in prices reduce 34 Anatomy of a Financial Crisis borrower equity. This is an obvious disaster for nonprime borrowers who typically had little home equity when their loans were originated, and were likely to have few financial resources on which to fall back. But it also has affected prime borrowers, many of whom now have mortgage loans that exceed the market value of their houses. When these better-off households face economic reversals that make it impossible to support their mortgages, they are also forced to default.

The equity securities absorb the first losses on the collateral, and are paid the highest returns. Losses not covered by the equity tranche are absorbed by the debt holders. The lower-rated debt tranches absorb losses before the higher-rated, and contractual rates of return decline as ratings rise. The collateral pool is sometimes static, but often an asset manager has authority to reinvest proceeds and trade assets for some fixed period of time. The CDO structure will have asset quality and cash f low tests.

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