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I was surfing the web and came across an excellent illustration of how the subprime mortgage crisis came to be. Again, it is simply too good to keep it to myself. Click on the link at the bottom of this post to go to the Google Doc where the document is housed, but first here is a summary:

  • Eager to make a buck while cashing in on the generous money liquidity policy and (artificial) rising housing value, mortgage brokers and banks began to qualify anybody for housing loans.
  • In order to minimize their own liability with these subprime loans, they created CDOs, disguised them as highly rated bonds and sold them to unsuspecting investors.
  • The problem was exacerbated by the lack of transparency among these financial transactions.
  • When the rates of these subprime mortgages began to reset, mortgage holders began to default. Problems with non-payment eventually trickled down to the CDOs holders, i.e. the institution investors, who have to sell other profitable investments to cover their losses and hence the market downturn.

If, after you’ve gone through the illustration, you still want more information, I highly recommend the classic Liar’s Poker by Michael Lewis. The book is highly entertaining and contains detailed description of the birth of our current mortgage crisis.

Click to go to The Subprime Mortgage Crisis illustration

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March 2008