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1-12D Big short 2015 - 2008 Financial CrisisOnline version
GE.6.3 Demonstrate how banks create money through the principle of fractional reserve banking.
GE.6.4 Describe the structure and functions of the Federal Reserve System. (E)
GE.7.1 Define and explain fiscal policy and its tools. (E)
GE.7.2 Define and explain monetary policy and its tools. (E)
GE.7.3 Analyze how the government uses fiscal policy to promote price stability, full employment,
and economic growth.
GE.7.4 Explain how the use of fiscal policy affects budget deficits or surpluses and the national
debt.
GE.7.5 Analyze how the Federal Reserve uses monetary policy to promote price stability, full
employment, and economic growth. (E)
1
Mark Baum bought credit default swaps against the mortgage backed securities, because he found that rating agencies were giving all mortgages the AAA _____ that the banks needed, even subprime mortgages. Banks needed AAA, so investors would buy them
2
Loan officers could approve fixed rate mortgages to poor borrowers, but they did not make as much commission. They had an incentive to approve ____ ____ rates to poor borrowers, because their commission was 5 times larger.
3
Michael Burry read the loan data & found that mortgage backed securities, or bonds, were full of risky subprime adjustable rate loans. Adjustable rates started in 2007 & borrowers were too poor to pay. So he ____ the ____ , or bet against them.
4
Jared Vennett sees Michael Burry shorting housing bonds & starts selling credit default swaps to investors, so they can bet against them too. Jared explains that old ____ ____ were made up of thousands of AAA mortgages, but the new ones are risky
5
Michael Burry read the loan data & found that ____ ____ ____ were full of risky subprime adjustable rate loans. He saw that adjustable rates started in 2007 & that borrowers were too poor to make that payment. He shorted the housing market.
6
Michael Burry sees a bubble in the housing market, people buying homes irrationally to get rich. Which is why a realtor sold the same house 3 times in 5 years. And why the current owners are motivated to sell, since neither is ____
7
S & P and Moodys are ____ ____ & their job is to rate investment securities (bonds) for banks. Since investors will not buy securities (bonds) that are risky, banks want a AAA rating on all securities (bonds), even if the bonds are subprime.
8
Jared Vennett explains that when risky bonds do not sell, they are repackaged with other risky bonds in a ____ ____ ____ until it is diversified, or the risk is spread across different investments, so a drop in one does not ruin you.
9
Jared Vennett sees Michael Burry shorting housing bonds & sells credit default swaps to investors. Jared explains that new mortgage bonds are full of risky trash loans & when ____ ____ reach 8%, the bond fails & you collect the insurance money.
10
Michael Burry read the loan data in the mortgage backed securities, or bonds, & finds a ____ in the housing market, meaning people are acting irrationally & emotionally as they buy homes. Thus, he wants to short the housing market, or bet against it
11
Jared Vennett explains that when risky bonds do not sell, they are repackaged with other risky bonds in a CDO, until it is ____ , or the risk is spread across different investments (stocks, bonds, cash) so a drop in one does not ruin you.
12
2000s, banking industry made millions selling mortgage bond to investors. But they ran out of rich borrowers & stared giving mortgages to poor borrowers. Loan officers were approving 10 ____ a month & now approved 60 ____ a month.
13
Standard & Poor is a rating agency that gave subprime loans a AAA-rating, so banks would pay for their services. They did this because, if they gave the loans a lower rating, banks would go to their ____ , Moodys Investment Services.
14
Jared Vennett sees Michael Burry shorting housing bonds & sells ____ ____ ____ to investors. Jared explains that [same] are insurance on the bond & when default rates reach 8%, the bond fails & [same] pay twenty to one return.
15
Rating agencies had an ____ to rate subprime loans as AAA, so banks would pay them, Mark Baum had an ____ to buy credit default swaps, which are insurance policies for loans that are not repaid; mortgage backed securities were full of subprime loans
16
2000s, banking industry made millions selling mortgage bonds to investors. They ran out of rich borrowers & started giving mortgages to poor buyers. They did this with ____ ____ , for borrowers with no income, job, or assets.
17
Loan officers could approve fixed rate mortgages to poor borrowers, but they did not make as much commission. Almost all mortgages were ____ ____ , because the commission bonus for those loans skyrocketed; Banks needed more mortgages to sell.
18
Michael Burry found that mortgage backed securities (bonds) were full of subprime loans. He wanted to short the bonds with credit default swaps, but the housing market did not use them. Thus, banks created an ____ ____ that allowed him to do that.
19
Jared Vennett sees Michael Burry shorting housing bonds & starts selling credit default swaps to investors, so they can bet against them. Jared explains that new mortgage bonds are full of BBB loans, which are a ____ ____ , but also trash loans.
20
2000s, banking industry made millions selling mortgages to investors. But they ran out of home-buyers with high paying jobs, so they started giving mortgages to any buyer. These risky loans were _____ , but they were rated AAA by rating agencies.
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