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Summary of Financial Crisis

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Around the 1980’s, the financial system, commonly known as Wall Street, began to shift. Investors wanted to find a new, diverse way to make money and in doing this, the mortgage bond was created. In the past, when a person needed to buy a home, they would take out a mortgage through the bank after the bank had safely assessed the their state of income, credit history, and ability to pay off the loan with interest. In recent years however, this process changed. Instead of holding the loans they had previously made to homeowners and other borrowers, the banks began to sell these mortgage bonds off to large investment banks like Goldman Sachs and Lehman Brothers. A mortgage bond consisted of hundreds of mortgages offered to Americans. In order to more easily sell the bonds to investors, they were divided into three different tranches, each offering different interest levels. Since mortgages are paid off at different times, the lowest level was paid of first with the highest interest rate and the highest tranches would take the longest to mature with the lowest interest. After receiving these mortgage bonds, the investment banks would bundle them up into securities known as Collateralized Debt Obligations, or CDO’s. These CDO’s consisted of hundreds of mortgage bonds which held thousands of other loans from all over the country and sold to investors around the world. Although, before the CDO’s were sold, rating agencies like Moody’s and Standard & Poor’s would rate how safe the investments were. The CDO’s would often receive a Triple-A rating suggesting there was little risk in the investment rather than a deserved Triple-B rating that lower, riskier tranches of the bonds would usually receive. It became evident that many banks and managers did not understand the underlying truth of the bad mortgages with high, undeserved ratings and these people were the ones in the business to sell these CDO’s to the wealthiest investors.

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Summary of Financial Crisis. Anti Essays. Retrieved December 14, 2018, from the World Wide Web: http://parimatch-stavka7.com/free-essays/Summary-Of-Financial-Crisis-347960.html


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