Day+31-33+The+Credit+Crisis+8-12+Nov+2010

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Unformatted text preview: Click to edit Master subtitle style 2/4/11 The Credit Crisis 1. A sociological view of markets 2. The political-cultural construction of the housing market 2/4/11 How do markets work? Markets/Exchanges link buyers and sellers Product and price information help buyers make decisions 2/4/11 If your product is good, people will buy it, and youll do well If your product is bad, people wont buy it, and youll either go out of business or have to improve your product (competition & efficiency) 2/4/11 Assumptions There is perfect information Market actors act rationally 2/4/11 2/4/11 Enron, revisited Shares of Enron are bought and sold on a special type of market called a stock exchange Consumer information about the stock is: available accurate & reliable 2/4/11 Stock markets operate with bad information Enron misrepresented the companys finances to hide debt and operational risk A community of interests went along with this, through collusion or negligence 2/4/11 The Credit Crisis Two different markets: The housing market The market for securities based on home loans 2/4/11 Prospective homeowners go to local banks to get loans where, as part of the process, their credit is checked to assess their likely ability to repay the loan. 2/4/11 Local banks used to hold this loan on their balance sheets ... counting on the homeowner to pay back the loan over time (mortgage payments), with interest. 2/4/11 SECURI TI ZATI ON Not any more. Now the bank packages up loans into special pur pose vehicles (SPVs) and sells them to investment banks on Wall Street for immediate cash. 2/4/11 In turn, Wall Street created exotic financial products like CDOs to sell to the global giant pool of money. 2/4/11 Transformation of Housing Market Home loans used to be mostly locally held By the end of the housing boom, loans were increasingly concentrated in the hands of very large financial firms (this means that lenders were flipping loans off to Wall Street instead of Click to edit Master subtitle style 2/4/11 So, all well and good Where do the problems begin to come in? 2/4/11...
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This note was uploaded on 02/04/2011 for the course SOC 110 taught by Professor Powers during the Fall '07 term at University of California, Berkeley.

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Day+31-33+The+Credit+Crisis+8-12+Nov+2010 - Click to edit...

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