Posts Tagged ‘securitized loan’
Welcome back Franco fan! Please share your thoughts and leave some comments!
The final episode of this series opens in summer of 2006 at the peak of the US housing markets. Consumers have been leaning on their home equity to finance their spending and drive economic growth. In addition, the advent of the credit default swaps have made risk a transferable and tradeable product. The perception that risk can be stripped out of an investment vehicle and transferred to another counter party has driven credit spreads (the difference between the cost of risky, corporate debt and the risk free US government debt) to historically low levels. Tight credit spreads have made it very cheap to borrow money and create leverage to amplify returns. But all that is about to change as the era of easy money and excessive leverage comes to a screeching halt.
In the first two parts of this series, we covered the rise of securitized loans and birth of credit default swaps. We left off in the throngs of a raging bull market being driven by a new era of technology companies. With the exception of a few hiccups, Wall Street has perpetuated almost 20 years of wealth creating, bull market returns on the backs of financial leverage, innovation, and good ol’ fashion greed.
Falling home values, growing unemployment, plunging stock prices; how did we get into this mess? Well, in order to fully understand our current economic funk, we need to go back and examine the roots of what has now been coined the credit crisis. So take a walk with me down memory lane while we explore the origins of securitized loans and unregulated swap contracts in a fascinating tail of innovation, riches, stupidity, and good ol’ fashion greed.
