sector increased rapidly As prices rose and speculation continued, a growing number of the borrowers were of lower and lower credit quality These borrowers, and their associated mortgage agreements (sub-prime debt), now carried higher debt service obligations with lower and lower income and cash flow capabilities New market openness and competitiveness allowed many borrowers to qualify for mortgages that they would not have qualified for previously Structurally, some mortgages re-set a high interest
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Future of Finance Finance is the study of how investors allocate their assets over time under conditions of certainty and uncertainty. The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th 20th and early 21st centuries, many financial crises were associated with banking fears, and many recessions coincided with these fears. Other circumstances that are often called financial crises
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The Credit Crunch of 2007: What Went Wrong? Why? What Lessons Can Be Learned? First draft: September 2008 This draft: May 2009 John C. Hull* Joseph L. Rotman School of Management University of Toronto Abstract This paper explains the events leading to the credit crisis that began in 2007 and the products that were created from residential mortgages. It explains the multiple levels of securitization that were involved. It argues that the inappropriate incentives led to a short‐term focus in the decision making of traders and
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Investment Capital (ROIC) Citigroup as well as others in the banking industry have been hounded by legal fees and proceedings, and that does not seem like it is going to let up. In January Citi was sued for 1 Billion dollars due to collateralized debt obligations. In December of 2011 they were also sued by HTC, as
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L CHAPTER 8: Share and share alike - derivative inequity This chapter is about what probably is the most traded instrument: equities. According to the author, Equity derivatives were the hottest financial instrument in the 90’s. Author quotes the situation as, “I came from a bond background where you put up your money, you know what interest you get, and at the end, you get your money back. With shares, the only similarity to this is that you put up the money. You have no guarantee that the
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investor, thereby increases the volatility of the banks. ✓ Another lesson is that credit rating agencies need to refine their models for evaluating esoteric credit risks in securities such as Mortgage-Backed Securities and Collateralized Debt Obligations. This
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various illiquid assets. Securitisation is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or collateralized mortgage obligation (CMOs), to various investors. The principal and interest on the debt, underlying the security, is paid back to the various investors regularly. Securities backed by mortgage receivables are called
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[pic] Many fleet cars were bought with an option to sell them back to the manufacturer. Such vehicles were called “program cars”, as distinct from “risky cars” which were not covered by a put option. Roughly 85 % of Hertz’ domestic fleet and 74 % of its international fleet were program cars. Program cars will become more expensive in the future due to the fact that Ford and GM adopted new market strategies that deemphasized lower-margin sales of program cars Risk cars exposed the company to residual
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The Great Depression The Great Depression was the first bubble that Goldman Sachs made explode and got away with next to no penalty. They were just beginning as an immigrant owned business with the idea to gain money by loaning it out to people at interest. They blew up around the depression for their practice in “investment trust”. They offered stock and made the average guys feel like they were investing a lot but they knew little of the process. Once they invested, the company bought their
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the highest possible gain. The most well-known derivatives that occurred late 2000s financial disaster are known as securitized financial products, such as mortgage-backed securities (MBS), Credit default swap (CDS), and collateralized debt obligations
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