FIN 260 Lecture Notes - Lecture 67: Accounting Scandals, United States Treasury Security
• The Financial Crisis:
➢ The Real Start (1990s):
o Congress in 1990s (both Democrats and Republicans) wants to make it
easier for people to buy a house.
o They push gov’t agencies to give more loans to people who may not be
able to afford it.
o Owning a house becomes an American right.
➢ Sequence of Events:
1. On September 11, 2001, the Fed lowered interest rates & fueled a big
housing boom.
2. Before 2001, most banks required strict requirements from borrowers in
terms of buying a house:
o 20% down
o Good credit
▪ The reason for this is that most banks would sell their mortgages
to Fannie Mae & Freddie Mac.
▪ They required all borrowers to have these types of credentials.
3. Accounting scandals like Enron occurred at Fannie Mae & Freddie Mac in
2002.
o These caused other institutions like Wall Street to get involved in the
mortgage business.
o Wall Street started competing w/ Fannie & Freddie.
o However, they did not require as many requirements from lenders.
4. Around this same time, Wall Street starts creating Collateralized Debt
Obligations (CDOs).
o These are bonds that are backed up by home mortgages that are sold
to investors.
o Many were AAA-rated by Moody’s & S&Ps (highest rating-very safe).
find more resources at oneclass.com
find more resources at oneclass.com
