UGBA M3L2 - UGBA M3L2 Bond promise to repay Sub-Prime Loan...

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UGBA M3L2 Bond- promise to repay Sub-Prime Loan Problem 70 percent of all mortages ? Public “guarantee” But! Private $alaries Lots of commissions to Wall Street Banks- package and sell Huge lobbying expenditures to congress Off national account, but they were safe because set up by government Relaxing the criteria for a loan 1. Social pressures to promote homeownership by people with less than perfect credit- expand loans by clinton 2. Fannie and Freddie were lobbying to grow their business (more bonuses!) 3. Interest rates were very low—everyone was looking for a “good return”—why not mortgages? Rules for conforming loans weakened. No one worried about salary. Originator- outright fraud- why? All kinds of loans where no ss or numbers not adding up Fannie and Freddie- bigger means more bonuses. Investment banks- more business = more commissions Ratings agencies offered false reassurance Bond holders desperate for “a return” Interest rates were too low I was wrong- around y2k- grind to hault because of computers, then dot.com meltdown, avoided a recession Short term interest so banks could borrow from central bank- flooded market with money Consequence ir were low up prices of houses- house up in bubble Alan Greenspan- no way bankers would operate in way to collapse system- banker sign off on loans without ss- he assembled bankers would not do something stupid that would bring down the banks- did not think about those making $40 million Result of too-low interest rates 1. Asset bubble—rise in house prices much faster than the general rate of inflation- vast over building 2. Vast overbuilding of housing stock Result of loan standards that were too lax: Everyone could buy
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This note was uploaded on 10/03/2011 for the course UGBA 10 taught by Professor Xuanmingsu during the Fall '08 term at Berkeley.

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UGBA M3L2 - UGBA M3L2 Bond promise to repay Sub-Prime Loan...

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