Tuesday, September 30, 2008

How did we come to this Financial Crisis?

If you have been following the news, you know there is a pending Financial Crisis. While you might not be feeling a crisis personally, there is a crisis in the financial industry. Below is a link to a really good article that describes how we got here. The reasons are fairly technical, but the author does a good job in writing it in simple terms to understand.

If you still don't get it, then give me a call and I will explain..

In simples terms here are the reasons for this crisis:
  1. Government creation of GSE, Fannie Mae and Freddie Mac to buy Mortgage Loans
  2. Desire to increase home ownership: Bush pushed GSEs and Fed to lower rates and lending standards to allow more people the ability to own homes
  3. Sarbanes Oxley Act comes along after Enron scandal, requiring Mark to Market accounting for all public companies, including banks
  4. Interest rates start to increase and people with ARM start foreclosing
  5. Wall Street stops buying Mortgage Back Securities
  6. Banks requiring to "mark to market" there unrealized loan losses do so, causing rating agencies to downgrade there credit
  7. Banks sell and buy Credit Default Swaps to protect against loan losses
  8. Investment Bankers that sell CDS, go out of business when they are required to pay out and cant.
  9. Banks go into bankruptcy after there capital requirements are not meet and the CDS protection they purchase goes into default.

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