Hello Michael,

Glad to hear from you.

In short these two agencies were responsible for much of the expansion in lending into the subprime sector which is at the heart of the problem here. There is a good in detail explanation by wikipedia at the link below:

Subprime mortgage crisis - Wikipedia, the free encyclopedia

Have a read through the government policy section of that page and then let me know if there are any other questions.

Best Regards,
Dave

__________________
Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

thanks, I now understand it as well.

folks, it is not just 'subrime' crisis just now, is it?

the crisis has arrived in non-financial economy as well ;o(((. in germany plan many carmakers to stop their production for some short(?) time (maybe about 2 weeks, starting soon) ....

the most shocking issue from the weekend news for me is the possibility to CLOSE the european stock-exchanges on monday (or longer) if the politicians will not find a 'solution' till sunday evening ;o((

are there also some good news? yes, some investors like warren buffett or jim rogers start to BUY assets in their preffered areas ....

bye,
j.

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http://jarogruber.blogspot.com/ (my trading)
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Thanks for doing a great job explaining the subprime crisis to a person that had no information and understanding before. Hope to see more updated videos

my pleasure thank you for watching I am glad you enjoyed it.

Best Regards,
Dave

__________________
Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Hello David,

If only you had been my finance teacher. :-) I struggled through my Capital-Markets course because most of it just went over my head. I read some of the wikipedia article before I read your explanation, and I was stumped a few times as to what was being said there. I must say that you do a helluva job explaining it in layman's terms. Reading your explanation made me a better informed person - and to my amazement, got me more interested in financial markets than I've even been before. I had always seen it as boring, but I was transfixed by your clear explanation. I am now mentally jotting down a summary so that I can explain this matter to my friends and family.

Thanks for investing so much time and effort into patiently explaining the details of this crisis to us. I will raise a toast to you next time I have a pint with my friends. :-)

Once again, thank you for your generosity. And keep up the good work.

Regards,
Nathan

Hi Nathan,

Glad to hear from you and thank you for the kind words I am glad you like the video. Yes finance is actually pretty fascinating and I think the mainstream press does a pretty bad job of explaining things in a way that shows that.

Hope to see you around the site if there are any questions that I can help with in your quest for more finance knowledge let me know.

Best Regards,
Dave

__________________
Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Thanks so much for your videos and background. Just had a few inquires about this whole sub-prime discussion:

I was hoping you could clarify a bit more about the role of the investment banks in this process, because it seems a bit circuitous. From my understanding, it seems like not only we're banks involved in the securitisation part of this process (i.e. they structured the deals), but they were also the investors in the assets themselves….so not only did banks sell off these assets to other investors (like pension funds, insurers, etc.) they also kept some of the "assets." Is this a correct understanding? Also, how does this whole 'write down' business link-in with this? Are the insurers, pension funds writing down these assets as well? Or only the investment banks? And what does a write down actually mean?

Also, at the first stage of this process, who did these investment banks "buy" these mortgages from? Was it like regional commercial banks?

As mentioned on your video, investors set up SIVs in order to keep these sub-prime investments off their balance sheet. They funded the acquisition of these assets through issuing short term debt? Who were the lenders of this ST debt to these investors? Did this ST debt funding dry up as investors got anxious? And what is the link with this and credit spreads?

Thanks so much for your help and cheers.

Daniel (South Africa)

Hi Daniel,

Glad to hear from you. I have done my best to answer your questions below in the order received.

Yes this is a correct understanding. Some of the investment banks would either quire these pools of mortgages as investors or keep some of the pools that they securitized as investors themselves which is why so many of them are having troubles now.

Accounting rules require that investment assets be carried on the books of companies at market value. So if for instance one of these banks or another investor paid $100 Million for a pool of these mortgages, but because of everything that is happening they could only get $50 Million for that same pool now, then they are required to carry that asset on their books at a value of $50 Million going forward instead of $100 Million. This is true even though they are not selling the asset, and why it is called a writedown, because they are writing the value of the asset to down to market value even though they have not yet realized that loss. This is called Mark to Market Accounting and I have a video on the affect of this which you can find below:

Subprime Crisis Free Video Course: Is Mark to Market Accounting Making Things Worse?

Yes they bought them from banks and other institutions that were involved in the business of mortgage origination.

The lenders of the short term debt where other banks, and participants in the commercial paper market which is the market that companies with high credit ratings use to finance short term obligations. Yes, this funding did dry up as investors got anxious, which put the institutions who were using this debt to finance their investments in a precarious position, because they could no longer get the funding they need to do so. How investors getting anxious is represented in the debt markets, is by the interest rates that are being charged to borrowers going up. This is what the widening of credit spreads basically means, in other words the interest rate difference being charged on something like a treasury bill which is considered safe, and something like short term debt issued by one of these banks widens out with the interest rate on the government debt staying low and the interest rate on the short term company debt going significantly higher.

Hope that makes sense. If there are any other questions or comments on this one please feel free to post.

Best Regards,
Dave

__________________
Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Thanks so much for your obligations. If you wouldn't mind I'd just like to dig a bit more into the detail of my last point, because I am still getting lost in the party relationships….


My understanding was that investors (pension funds, insurers, etc.) wanted to receive a nice return so they bought these sub-prime CDOs from investment banks. Now how did these investors finance this acquisition? And what is the link between this financing and not having access to ST debt? I don’t see why not having access to ST debt is such a big deal…is not having access to ST debt something that affected only the investors or also the investment banks?

Also how did the investment banks fund the acquisition of these Cods in the first place? Did Citigroup individually buy up mortgages form regional banks, or did they just bundle the mortgages from their commercial bank? Or maybe a combination?

And lastly, can you tell me a bit about how these interest rates banks charge each other are derived? Does it differ bank by bank (so will Citigroup charge Morgan Stanley something different then they might charge Goldman Sachs)? And who determines this rate? And how do you find out what it is? Like I see everyone say "Credit spreads are rising" but what does that actually mean? Which credit spreads?

Thank you so much, again, David!

Daniel