2008-10-01 15:02:43 considered a serious look at how the U.S. financial crisis
endangering the financial crisis, the official explanation is the most common sub-prime problem, but the sub-prime However, total hundreds of billions, the U.S. government bailout fund to the trillion or more long, why the crisis is still no end in sight? There is an article pointed out that the root of the crisis in the financial institution a "leveraged" transactions; Other experts pointed out that the financial crisis is behind 62 trillion of credit default swaps (Credit Default Swap, CDS). Then, the sub-prime, 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, has not seen these questions simple explanation. This article attempts to understand their own to provide an answer to these questions, for the sake of easy to understand, we use several hypothetical examples. And improper criticism of the discussion are welcomed.
1. Lever. At present, many investment banks to earn huge profits, with 20-30 times leverage, assume that A's own assets, a bank of 30 million, 30 times leverage is 90 billion. In other words, the bank A 30 billion in assets as collateral to borrow 90 billion of funds for investment, if investment earnings 5%, then A would be 4.5 billion profit, compared to A's own assets, which is 150% of the profits. Conversely, if the investment losses of 5%, then the Bank lost A light all the assets of their 1.5 billion owed.
2. CDS contracts. As the leverage of high-risk, in accordance with the provisions of this adventure does not allow banks to operate. So someone came up with a way to leverage investment to take to do "insurance." This type of insurance called CDS. For example, Bank A lever in order to avoid the risk of finding a body B. Body B may be another bank, it could be insurance companies, and so on. A pair of B said that you do to help my credit default insurance, how, I pay your premium each year 5 million, for 10 years, a total of 500 million, if my investment does not default, then this insurance you took on the white If breach of contract, you have to compensate for me. A thought, if you do not default, I can make 4.5 billion, there is come up with 500 million used for insurance, I could net 4.0 billion. If there is breach of contract, there is insurance to pay anyway. Therefore, it is a case of the A earn not lose business. B is a smart man, did not immediately accepted the invitation of A, but go back and do a statistical analysis showed that less than 1% of non-compliance situation. If you do 100 business, you can get 50 billion total insurance premium, if one of breach of contract, compensation up to but 50 million, even though the two breach of contract, they can earn 40 billion. A, B both believe that this sale to their advantage, it immediately closed the transaction, satisfaction of all.
3. CDS market. B, after doing this the insurance business, C in the next jealous of. C went to B over there that these 100 CDS you sold to me how, give you 200 million for each contract, a total of 20 billion. B would like, my 40 billion to 10 years to get, there is now a 20 billion changing hands, and there is no risk, why not, so B and C immediately on a deal. Thus, CDS is like the stock flow to the financial markets as above can be traded and trading. Group C received after the fact, CDS, does not want to wait 10 years to charge 20 billion, but put it up for sale, price 22 billion; D see the product, forget about, 40 billion minus 22 billion, also earn a 18 billion, which is "IPO\A resale, C earned 2 billion. Since then, the CDS in the market repeatedly copied, and now CDS market has been copying the value of 62 trillion dollars.
4. Sub-prime. Above A, B, C, D, E, F. ... are making big money, then from somewhere in the end the money come from? Basically, the money from A and A similar investors with the profits. Most of their profits from the U.S. sub-prime loans. People say that the subprime crisis is due to lend money to the poor. I not agree to this argument. In my view, the sub-prime mainly to the average American real estate investors. Economic strength of these people had enough to buy their own apartment, but saw rapid increases in house prices, moving from the idea of the real estate speculation. They mortgaged their house, borrowed money to purchase investment housing. Interest on these loans to 8% -9%, and with their own income is difficult to deal with, 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 is very low default rates, the insurance business can continue to do so; behind the C, D, E, F, etc. are followed to make money.
5. Subprime mortgage crisis. Prices rose to a certain extent on the rise not up, and later no answer set. Real estate speculation at this time were anxious like ants on a hot pan. Not sell the house, high interest rates to keep the pay, and finally to the end that day, the house training and preparation of the bank. At this time of default to occur. A point was a trace of regret, big profits are a vain, but also loss not there, anyway, there are B for insurance. B do not worry about Anyway, the insurance has been sold to C. So now the CDS insurance, where it, in the G hand. The hands of just F G spent 30 billion to buy the 100 CDS, not enough time to change hands, suddenly received the message, these CDS were downgraded, including 20 default, far beyond the original estimate of 1% to 2% default rates. Every breach of contract to pay 5 billion of insurance money, total expenditures amounted to 100 billion. CDS add 30 billion acquisition fee, G losses totaling 130 billion. Although G is the U.S. ranked the top 10 large institutions, can not withstand such a huge loss. Therefore G insolvent.
6. Financial crisis. If the closure of G, then A cost 500 million U.S. dollars to buy insurance on the bubble of soup, even worse, because A uses leverage investment, according to previous analysis, A lost all of the assets is not enough light debt. Therefore, the risk of A bankruptcy immediately. In addition to A, there is A2, A3 ,..., A20, all should be prepared for closure. Therefore, G, A, A2 ,..., A20 came together in front of the United States Treasury Secretary, a nose a tear to lobbying, G must not close down, we all finished it a failure. Minister of Finance, a soft heart, put G to nationalize, and then A ,..., A20 of insurance totaled 100 billion U.S. dollars all paid by U.S. taxpayers.
7. U.S. dollar crisis. CDS 100 mentioned above the market price is 30 billion. The CDS market is worth 62 trillion, assuming that 10% of them default, then there is 6 trillion of default CDS. This figure is 300 million 200 times. If the U.S. government worth 30 billion acquisition of CDS after the sum of the 100 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 was inevitable.
the assumptions used in the calculation above and the figures will differ with the actual situation, the U.S. can not underestimate the seriousness of the financial crisis.
References
[1] The Real Reason for the Global Financial Crisis ... the Story No One's Talking About
http://www.moneymorning.com/2008/09/18 / credit-default-swaps /
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