ECON 319 Lecture Notes - Lecture 6: Credit Default Swap, Subprime Lending, Special Purpose Entity
9 Feb 2017
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Document Summary
Banks engineered a regulatory climate that allowed- product innovation and (cid:494)crony capitalism(cid:495) Banks found another way to tap into people(cid:495)s money: taxpayer-funded risk-taking, creating largest bubble in modern economic history bailout. Golden goose: financial innovations: structured finance, credit default swaps, and subprime lending investors invested in financial assets that had some direct tie to the real economy eg. stocks, corporate or government bonds, currencies, gold. Structured finance: created new assets, made it easier for businesses to raise money. Spv- special purpose vehicle: a company that only exists on paper. Senior tranches- least risk ( credit agencies rating aaa) Cdo is similar but build out of mortgage backed securities. In the 1990s, wall street became addicted to mortgage-backed securities and. As housing prices took off, it was easy to build models howing mbs and cdos virtually had no risk: because borrowers could always refinance their mortgages as long as prices were rising.
