1. The Financial Crisis Marlene Kim Assoc. Prof. Department of Economics University of MA Boston 100 Morrissey Blvd. Boston, MA 02125 617/287-6954 Marlene.Kim@umb.edu

2. Collateralized Debt Obligations (CDOs) Put different traunches of MBS together Add other “asset backed securities”—auto loans, credit card loans, student loans, commercial real estate Sell off the packages

3. AIG 9/08: AIG sold half a trillion CDS “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these [CDS] transactions” --AIG executive. August 2007

4. Moody’s profits Profits huge, larger than Microsoft, Exxon Can receive $200,000 in fees for evaluating MBSs Growth came from evaluating mortgage related securities Most of revenue from structured finance

6. Subprime: mortgages to borrowers with poor credit histories Alt-A: no documentation of income

7. How could they afford homes? Option ARM: low teaser rates that were re-set later. Interest only loans. No payment of principal Less than 20% down payment. Sometimes no down payment

8. What happened? Subprime mortgages defaulted. April 2007, housing prices fell nationally for first time People couldn’t re-sell their houses for a profit. Credit crunch

10. AIG September 2008 Biggest insurance company in the US $302 trillion in credit insurance out $183 billion