Subprime Mortgage Crisis.

My understanding on this matter has increased somewhat marginally. Here is my take so far.

There are 6 major titles that you have to keep in mind.
1) Borrowers              [B]
2) Lenders                  [L]
3) Investment Banks[IB]
4) Investors               [I]
5) CDO (collateralized debt obligations)
6) CDS (credit default swaps)

So the borrowers which are in this case potential HOME buyers will take loans from these lenders, whilst the lenders sell these mortgage loans to investment banks [Hence the investment banks are in charge of the loans]. You must comprehend that subprime lending [refer to title] means loaning money to the various groups of the society, all of which most probably would have trouble with the repayment of the loans.

Now these investment banks (GS, ML, LB etc) would agglomerate these loans along with a horde of other subprime loans [ eg. car loans, credit debt]  into what we would come to know as CDOs, which are convulated derivatives. Following this, the investment banks would pay rating agencies namely Moody's, Fitch and S&P to assess the CDO and these agencies are paid and paid well. Therefore, the CDOs are given AAA ratings. Take note, these institutions merely offered their opinions on the matter and hold no responsibilities whatsoever.

What happens next is that these CDOs would be sold to investors who based their decision mostly on these ratings albeit the fact that they should first understand what they were buying exactly. Let me elucidate the P.O.V. of these investors.

They see CDOs as high return investment, higher than any other types of investment. For example if the Borrowers took a loan of 100,000 Dollars and there are 100 Investors, each would have invested 1000 Dollars; And due to the high interest rates, these Investors would get back say 1250 Dollars by the end of the bond repayment. I mean famous rating agencies declared that these investments were AAA! And they had such high return rates! Why not invest?

But what did investment banks get from these sales, i mean the risk is ostentatiously high but you see they are not the ones shouldering it, the investors are the unfortunate ones. Thus, when the investment banks sell these derivatives to the investors they charge say a 'small' fee for it. So continuing with the example, each investor would earn 250 Dollars, now, say the investment banks charge a fee of 50 Dollars that wouldn't be too much, right? Yes. That's what the investors thought as well. So therefore, short term performance is being focused on, whereby the more CDO they sell, the more they profited from it. This leads to predatory lending, where no one cares how unsuitable the loans were for the borrowers and who they lend the money to; as long as they rake in mortgage loans to be sold. Except the investors of course but this fact was obfuscated to them wasn't it?

Now, of course another reason as to why these borrowers were further mired into their intractable quandaries was because of the steep fall in house prices. Yes it was high and yes it was rising but when it suddenly fell, the eddy effect of the sudden decrease knocked borrowers down. I am still reading on this.

next is :

Why AIG Nearly Fell.

ps. i know i know i should be covering on more recent news like the ludicrous anti-blasphemy laws in Pakistan which led to several deaths or the vital ramifications after Hosni Mubarak's downfall, or the blatant refusal of Laurent Gbagbo to acknowledge the fact that Alassane Ouattara has already won the elections held in november or whether Gaddafi is going to go down but yeahh this held my attention suddenly. like a dormant seed of interest that sprouted shoots and leaves of curiosity :D