Sunday, February 22, 2009

Nice Video on Credit Crisis

This is a nice work by Jonathan Jarvis who provides a simple and logical explanation of the current Credit Crisis.

Key points the video focuses on are:
  • Terms involved in credit crisis: Sub-prime Mortgages, Collatarized Debt Obligation, Credit Default Swaps and Frozen Credit Market.
  • How Home Owners (Main Street) and Investors (Wall Street) were connected through the Investment Banks.
  • How credit and leverage normally works and how Investment Banks abused it.
  • The entities involved in Housing market: Home Owners, Broker, Lender, Investment Banks, Investors.
  • What is Collaterized Debt Obligation (a bunch of Safe, OK and Risky mortgages).
  • How Investment Banks sold the so-called safe investments (mortgages with AAA ratings provided by Rating Agencies) to the Investors interested only in safe investments. 
  • How the Lenders sold the defaulted Prime Mortgages to "less responsible" Home Owners (the turning point) as Sub-prime Mortgages which were later bought by Investment Banks. (The "less responsible" Home Owners eventually defaulted too leading to the vicious cycle.)
  • Why the Housing prices went down (due to more supply of houses in the market than demand) and how it led to the crash of the Housing Market (either Home Owners defaulted or forsake the depreciating asset).
  • How Investment Banks (and even Investors) are left with such currently risky Housing assets that no one else (Investors, others Banks, etc.) wants to buy. This led to the Frozen Credit Market

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