Thecrisisofcreditvisualized.PDFVIP

The crisis of credit visualized What is the credit crisis? It is a worldwide financial fiasco, involving terms you probably heard like, Sub-prime mortgages, collateralized debt obligations, frozen credit markets and credit default swaps. Who is affected? EVERYONE. How did it happen? Heres how. The crisis if credit brings two groups of people together, home owners and investors. Home owners represent their mortgages and investors represent their money. These mortgages represent houses, and these money represent large institutions, like pension funds, insurance companies, sovereign funds, mutual funds etc. These groups are brought together though the financial system, a bunch of banks and brokers commonly known as Wall Street. Although it might not seem like it, these banks on Wall Street are closely connected to these houses on Main Street. To understand how lets start at the beginning. Years ago the investors were sitting on their pile of money, looking for a good investment to turn into more money. Traditionally they go to the US Federal Reserve, where they buy treasury bills believe to be the safest investment. But in the wake of the bust and September 11th, Federal Reserve chairman Alan Greenspan lowers interests rates to only 1% to keep the economy strong. One percent is a very low return on investment, so the investors say no thanks. On the flip side, this means banks on Wall Street can borrow from the Fed for only 1%, add to those general surpluses from Japan, China and Middle East, and there is an abundance of cheap credit. This makes borrowing money easy for banks and causes them to go crazy with LEVERAGE. LEVERAGE is borrowing money to amplify the outcome of a deal. Here is how it works: in a normal deal, someone with 10 thousand dollars buys a box for 10,000 dollars, he then sells it to someone else for 11,000 dollars, for a 1000 dollars profit, a good deal. But using leverage, someone with 10,000 dollar would go borrow 990,000 more dollars, giving him on