SMG SM 131 Lecture Notes - Lecture 5: Troubled Asset Relief Program, Credit Default Swap, Collateralized Debt Obligation
Document Summary
Crisis of credit: leverage- borrowing money to amplify outcome of a deal, collateralized debt obligation- selling of mortgages on secondary market, sorted into 3 trays - safe, okay, and risky. More returns on risky investments: credit default swap- ensures safety of safe tray, insurance on toxic assets to investors. If these investments fail, company will repay you: ran out of good candidates for loans, started lending to sub prime mortgages, ppl defaulted on payments, houses started foreclosing. Deals made on assumptions that housing prices would never decrease. Lehman brothers- investment bank: paulson refused to bail out, told them to find buyer, couldn"t, failed, moral hazard > systemic risk, result: markets crashed, banks stopped lending, financial system stopped. Aig- largest insurance company: invested billions in risky investments, had to pay millions to ppl who they had guaranteed lehman would never fail, gov"t nationalized- if they had failed, would have ruined economy.