Where did All the Money Go?

WHERE MONEY LENDE 2004 MORTOADE BACKED SECURITY A security composed of thousands of mortgages. MORTGAGES PRIME- Meets all the PRE reguirements credit scere above 0. 20% down payment steady income COLLATERALIZED DEBT OBLIGATION ICOOI NOS MONE, OPproved DOWNZ SUBPRIME Dees DID ALL THE MONEY GO? Thousands of different securities bundled together to into one huge container. meet ene or mere of the requirements - mere risky WHY IS THIS sO GREAT? Securitization of Debt Easy Credit As long as the house prices don't tall, there is really no way to loose money If the people Thousands of debts, such as mortgages, credit card debts or college loans, get packaged into a convenient No cash? No problem! As the global economy grew, the amount of money available for investment grew exponentially Since a loan is a high yielding investment, there was a huge incentive to give out as a society dependent on credit. Companies and individuals alke rely on credit to purchase even their most basic needs. Currently,. US household debt adds up to a 100% of our GDP, That means that private Americans alone hold stop paving and default on their mortgage, you get their house which if the house prices storage unit called a security. Untike individual loans, these securities can be sold and traded on the stock market. They eliminate the hassle of managing loans while still giving high profit returns. keep going up, is probably worth more then the mortgage itself. And because the CDOS are so diversified and so large, the risk is spread out. as possiote, generating AAA RATING ate ahe US as much debt as the entire country produces in a year. This has happened only once belore - in 1929. Debt Turns Toxic Stock When you take most basic tools of finance - leverage. You are taking on debt to supplement your savings lyour equityl in order to buy an asset - the house. The higher the leverage llower down paymentl, the riskier the investment. Watch what happens when the house prices fall. out a loan on a house, you are employing one of the FINANCIAL FIRM 20% DOWN (5:1 R DRO ASSETS 1 RATIOI ma-uity Easy Credit Global Economic Downturn LIABILITIES MONTHLY RETURN - 2004 As the debtors paid their monthly payments, the loan securities generated a return, Since there is always a small % of people who won't make their payments, the security is divided into different levels of risk. The safest investors get paid first and the riskiest last. In return, the riskiest investments get a bigger share of housing market was booming, everyone got paid. As the house prices started talling, however, the securities stopped giving returns. They became toxic. DEBT - S0.000 sibs.opo $15,000 EOUITY- se SI1.000 sibo,op0 $15,000 k. SAFE 3% return 3% return rendin don Housing Boom 5% DOWN (20:1 RATIO) the profit. When the LIABILITIES NO EQUITY DRO ASSETS DEOT- S.00 RISKY Credit Crisis Teaic ansets, compans and panic virtually sedlendng SiDn.opo $15,000 sibo.000 $95,000 Mortgage Securitization that they wid eer get their my back white thers l Investors Demand Lowers Standards 5% DOWN (20:1 RATIOJ et altur lend. They had let ech aptal that they had LIABILITIES NO EQUITY TOICI The global economy has been growing fast. It has been As the demand for Mortgage Securities grew, the supply dryed up. Everyone who qualified for a loan and wanted one, already had one In order to generate more loans to satisty the growing demand for securities, the standards for getting a loan were lowered. Not only did this create toic also triggered the bur butble. As the house prices peaked, the average income stayed flat. People couldn't afford to buy INVA acquiring enormous amounts of capital, This money had to be invested somewhere, The CDOs were particularly appealing because they were perceived as safe and they yielded a high interest rate at a time when the U.S. Bonds DEBT- S.0e mtgges aresecuoed and The is debt larger than Ihe alve of the assets If yeu sell the hese. yeu Sibb.opo $80,000 sidD.000 $15,000 ing maney on the feesl you transfer th losses Subprime Crisis ic" loans le d into loxic securitiesl, but it onta the investor were at a record low. Througheut e hoing boom the hanlarkelhas Market Saturation the overpriced houses. The housing market stopped, the prices tell & ere theghtbesate were nly sale becaune tlay were backe y everyone found themselves owing a lot more then they owned. the ered allewed everyne temwan terned en s head crap House Prices Fall LOANS! Crisis Spreads Lowered Loan Standards prices start aingdtally The short term lending that most companies rely on fo day to day business practically stopped. This had enormous Credit Crisis e thed me stayed implications to the economy. It meant that most businesses were short on cash, The capital they usually borrow to pay for daily operations and payroll was simply not there. They had no choice but to cut costs. Jobs were cut, projects cancelled and company spending frozen. The lack of credit also uncovered deep financial problems that companies and individuals were able to hide by taking more money in order to make their mortgage payments, The toxic assets made their way through the financial system quickly. After several investment firms "broke the buck - loosing the investors meney, and several major companies nearly collapsed, full blown panic set in. No one knew who was going to go under next. Because the as re h ng FINANC assets they were holding were so complex, unregulated, and interconnected no one even knew to ahat ertent on more debt. Just like people borrowed companies borrowed to cover their losses. their own assets were exposed. Lending stopped. What is money? Money Supply Savings- $1 Debt - $1 Spending - $3 Total Economie Value (from the original dollarl $5 Money can be anything. Rare & valuable resources have been used historically because they are easy to control, but anything that people collectively agree on can be used as money. There are four general functions money fulfills: medium of exchange, unit of account, store of value & standard of deferred payment. Money needs to have a perceived value. This is an overview of the different forms of money and where their value comes from. The Money Supply is the armount of available money in the economy. It fluctuates with the market, In times of economic growth, the money supply is high, In a recession, the money supply is v. Lending and spending are two major factors that influence the money supply. BANK -> Barter Commodity Money Credit Money Fiat Money 1 Tou deposit $1inoo your Representative Money bank. It gets added to ytalante 2. The bank lends your dolar to Tim 1. Tmbuna pekof gu tromaecal pas t 1thenewspaper bey by atteryscke takes the dollar and In a barter, ne meney is uaed amae goods or services The valse con Tken money hat ndsin government law decianna it t belegal ender lcurrencythat must be acpetedas peyment way home words a S1 cain made ou at ilver would have $s worth of your account Ths mone not drecty backed by a commedity Velocity of Money whenetiteltmate ofit leg earty paper money which onginated as recept for gold As a$ l orcuanes throughout the dayit multiples s valuenthe economy Every me tchanges hands, it creates another $1 ineconomic actiity. In a recession, when Jenging spengingis lower, there is actuay less moneyinthe ecenomy Whijene cash disappears, the velocity of the dollar goes down it ally pnied ty he acked by your y haional bank la money - paper given value by law no money monev commadity meney - premise terepay money = tokens backed by a commadity ↑