Absolutely brilliant 10 minutes for you a comprehensive understanding of the current world financial crisis to financial crisis
The official explanation is the most common subprime mortgage problems, but hundreds of billions of subprime lending in total, however, the U.S. government bailout fund to the trillion or more long, and why Crisis or not see the head? There is an article pointed out that the root of the crisis of financial institutions a sub-prime mortgage, leveraged, and what is the relationship between CDS? between them by what kind of interaction of today's financial crisis? analysis of the financial crisis in many articles in these issues has not seen a simple straightforward explanation . This paper attempts to understand their own to provide an answer to these questions, for understandable reasons, we use several hypothetical examples. are not appropriate to discuss the Department welcomes criticism.
one. Lever. Currently, many investment banks In order to earn huge profits by 20-30 times leverage, suppose a bank's own assets of 3.0 billion A, 30 times the leverage is 900 billion. In other words, the bank A 30 billion of assets as collateral to borrow funds with 90 billion on investment, if the investment earnings of 5%, then A to get 4.5 billion profit, compared to A's own assets, which is 150% of the profits. Conversely, if the investment losses of 5%, the banks would lose it to their A All assets of 1.5 billion owed.
II. CDS contract. As leverage high-risk, in accordance with the normal, the Bank does not run for such a risky operation. So someone came up with a way to get the leverage to do my loan default insurance how to do, I pay you the premium 5 million per year for 10 years, a total of 500 million, if my investment does not default, then this insurance you took white, if the breach of contract, you want to I compensation. A thought, if you do not default, I can make 4.5 billion, which takes out 500 million used for insurance, I could net 40 billion. If there is breach of contract, to pay the insurance anyway. So in terms of A This is an earn, instead of losing business. B is a smart man, did not immediately agreed to the invitation of A, but go back and do a statistical analysis of the situation of non-compliance of less than 1%. If you do one hundred business a total of 50 billion can get the insurance money, if one of breach of contract,UGG shoes, compensation up to but 50 million, even though the two breach of contract, they can earn 40 billion. A, B both sides believe that this sale to their advantage, so immediately closed transaction, the satisfaction of all.
three. CDS market. B do this after the insurance business, C in the next jealous. C B to go over there said that these 100 CDS you sold to me how, each give you 200 million contract, a total of 200 billion. B think my 40 billion to 10 years to get, there is now a 200 billion changed hands, and there is no risk, why not, so B and C immediately a deal . As a result, CDS flow as the financial markets like stocks above can be traded and trading. In fact, after C got these CDS, does not want to wait another 10 years to receive 200 billion, but put it up for sale, price of 22 billion; D to see this product, forget about the 40 billion minus 22 billion, and earn 18 billion, which is earned 20 billion. Since then, the CDS in the market repeatedly copied, and now the market value of CDS have been copying the $ 62,000,000,000,000.
IV. the sub-prime. above the A, B, C, D, E , F. ... are making huge profits, then in the end from where the money came out of it? Basically, the money is similar to A from A, and investors with the profits. and most of their profits from the United States sub-prime loans. People say that the subprime crisis is due to lend money to the poor. I disagree on this statement. I think that the sub-prime mainly to the average American real estate investors. These people had enough to buy the economic strength own an apartment, but saw rapid increases in house prices, moving from the idea of real estate speculation. They mortgaged their houses, loans to buy investment house. Such interest on loans to more than 8% -9%, by virtue of their difficult to deal with their own income, but they can continue to mortgage the house to the bank, borrow money to pay interest, sleight of hand tricks. A very happy at this time, his investment for his money; B is also very pleased that the market default rate is low, the insurance business can continue to do so; behind the C, D, E, F, etc., along with money.
five. the sub-prime crisis. prices rose to a certain extent on the rise not up, nobody answered the back plate. At this time, like real estate speculators were anxious cat on hot bricks. sell the house, to keep paying high interest rates, and finally to the blind alley of the day, the house training and preparation of the bank. breach took place at this time . At this point A was a trace of regret, big profits are vain, but there are no losses, there are B for insurance anyway. B do not worry about, anyway, the insurance has been sold to C. So now the CDS Insurance in there, in the G hands. G F just spent 300 billion to buy the hands of 100 CDS, have not had time to change hands, suddenly received the news, these CDS were downgraded, including 20 default, greatly exceeding the original estimate of 1% The default rate to 2%. Every breach of contract to pay 50 billion of insurance money, a total expenditure of 1,000 billion. plus acquisition costs 300 billion CDS, G's loss totaled 1,300 billion. Although G is the nation's top 10 big names institutions, can not withstand such a huge loss. So G verge of collapse.
VI. the financial crisis. If the closure of G, then A cost of 500 million U.S. dollars to buy insurance on the bubble of the soup, even worse, due to adopt A the leverage investment, according to the preceding analysis, A lose it all of the assets is not enough debt. So A immediately faced bankruptcy. In addition to A, there is A2, A3 ,..., A20, all should be prepared to close down. So G, A, A2 ,..., A20 came together in front of the United States Treasury Secretary, a nose a tear to lobbying, G must not fail, it is a failure all over. Minister of Finance, a soft heart, put the G to nationalized, then A ,..., A20 of the insurance money totaling 100 billion U.S. dollars all paid by U.S. taxpayers.
VII. dollar crisis. 100 CDS mentioned above the market price is 300 million. The CDS GDP is 62 trillion market, assuming that 10% of the breach of contract, breach of contract then there is 6 trillion CDS. This figure is 300 million 200 times. If the U.S. government 300 billion of acquisition value after the sum of the 1000 CDS billion. then for the rest of those who default CDS, the U.S. government to bear the consequences of a 20 trillion. If you do not pay, we must look at A20, A21, A22, and so one after another collapse. No matter what measures the U.S. dollar devaluation has been inevitable.
the assumptions used in the calculation above and the number of discrepancies with the actual situation, but the U.S. can not underestimate the seriousness of the financial crisis.
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