All the devils are here notes.docx - All the devils are...

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All the devils are here:Investment banks were buying mortgages from issuers and repackaging them and selling them off in tranches. Starting to get subprime mortgages. They default Fannie Mae and Freddie Mac: GSE’s largest companiesFannie and Freddie got into subprime lending and the government made required capital rules depending on riskiness of investment, GSE backed mortgages were the safest and only required to maintain 20% capital of the value of the security. Logical thing for banks to do was to fill portfolios with mortgage backed securities from Fannie and Freddie so they didn’t have to keep so much capital. Credit default swaps, reduced risks, they were insurance on defaults for investments. Banks bought themon risky investments, the seller would collect fees if the security didn’t default, but if it did then the seller would have to pay the loss to the bank. Hedging derivatives was interconnecting the entire financial system. AIG was a stable company, made a derivatives branch, because AIG was so stable and diversified in its assets it could take larger risks and could borrow at lower rates. They got rid of Sosin and let down their guard and underestimated the risk of credit default swaps. Subprime bubble ended, subprime auto lenders went belly up, then the world was shook, Asian financial crisis happens and everyone wants out of the subprime business as debts and bankruptcies shoot through the roof. Originally loans were harder to get because the lender was careful, if the borrower defaulted it was on the lenders book and they took the hit but now they give a loan, as soon as

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