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    Week 5-3

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    Shaima Al Sanad
    The document discusses the Dot-Com crash of 2000 and the 2007 financial crisis. It provides background on how the Federal Reserve lowered interest rates after the Dot-Com crash to stimulate the economy. This led to rising credit card and mortgage borrowing. It then discusses the 2007 financial crisis and asks who was at fault. Various financial crisis terminology is defined, including mortgage-backed securities, collateralized debt obligations, and credit default swaps. Groups are asked to explain these terms.

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    Week 5-3

    Uploaded by

    Shaima Al Sanad
    8 views16 pages
    The document discusses the Dot-Com crash of 2000 and the 2007 financial crisis. It provides background on how the Federal Reserve lowered interest rates after the Dot-Com crash to stimulate the economy. This led to rising credit card and mortgage borrowing. It then discusses the 2007 financial crisis and asks who was at fault. Various financial crisis terminology is defined, including mortgage-backed securities, collateralized debt obligations, and credit default swaps. Groups are asked to explain these terms.

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    The document discusses the Dot-Com crash of 2000 and the 2007 financial crisis. It provides background on how the Federal Reserve lowered interest rates after the Dot-Com crash to stimulate the economy. This led to rising credit card and mortgage borrowing. It then discusses the 2007 financial crisis and asks who was at fault. Various financial crisis terminology is defined, including mortgage-backed securities, collateralized debt obligations, and credit default swaps. Groups are asked to explain these terms.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    8 views16 pages

    Week 5-3

    Uploaded by

    Shaima Al Sanad
    The document discusses the Dot-Com crash of 2000 and the 2007 financial crisis. It provides background on how the Federal Reserve lowered interest rates after the Dot-Com crash to stimulate the economy. This led to rising credit card and mortgage borrowing. It then discusses the 2007 financial crisis and asks who was at fault. Various financial crisis terminology is defined, including mortgage-backed securities, collateralized debt obligations, and credit default swaps. Groups are asked to explain these terms.

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    © All Rights Reserved
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    Money & Banking

    Week 5- day 2
    Dot.Com Crash
    • The internet gave rise to IT companies causing a
    technology bubble and heavy investment in .com
    companies
    • They were overvalued and finally the bubble
    burst in 2000
    • As a respond to the recession the Fed lowered
    rates from 6.5% to 1% to help the economy
    • This made borrowing CHEAP …..
    • There was a rise in credit card and mortgage
    borrowing
    Financial Crisis 2007
    • Video on Moodle Part 2 of the credit crisis

    • Think about who was at fault who was to


    blame for the crisis?
    Did everyone lose during the
    financial crisis???
    Who is this?
    Financial Crisis Terminology

    Match words with their


    definitions (Group
    Exercise)
    Who’s fault was it?
    • The Fed for making keeping rates low?
    • The government policy promising a house for
    all?
    • The brokers lending to sub-prime borrowers?
    • The sub-prime borrowers knowing they can’t
    afford to pay the loan payments?
    • The bankers for creating exotic derivative
    models?
    In groups explain the below terms:
    • Mortgage Backed Securities
    • Collateralized Debt Obligation
    • Credit Default Swap
    • Margin Buying
    • Fannie Mae
    • Freddie Mac
    • Securities and Exchange Commission
    • Too-big-to-fail
    • FDIC
    • Laissez- faire
    • Moral Hazard
    MBS
    • Mortgage-backed securities (MBS) are debt obligations that represent claims
    to the cash flows from pools of mortgage loans, most commonly on
    residential property. Mortgage loans are purchased from banks, mortgage
    companies, and other originators and then assembled into pools by a
    governmental, quasi-governmental, or private entity. The entity then issues
    securities that represent claims on the principal and interest payments made
    by borrowers on the loans in the pool, a process known as securitization.

    • Most MBSs are issued by the Government National Mortgage Association


    (Ginnie Mae), a U.S. government agency, or the Federal National Mortgage
    Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
    (Freddie Mac), U.S. government-sponsored enterprises. Ginnie Mae, backed
    by the full faith and credit of the U.S. government, guarantees that investors
    receive timely payments. Fannie Mae and Freddie Mac also provide certain
    guarantees and, while not backed by the full faith and credit of the U.S.
    government, have special authority to borrow from the U.S. Treasury. Some
    private institutions, such as brokerage firms, banks, and homebuilders, also
    securitize mortgages, known as "private-label" mortgage securities.
    Credit Default Swap as Insurance
    • A credit default swap is, in effect, insurance against non-payment.
    Through a CDS, the buyer can mitigate the risk of their investment
    by shifting all or a portion of that risk onto an insurance company
    or other CDS seller in exchange for a periodic fee. In this way, the
    buyer of a credit default swap receives credit protection, whereas
    the seller of the swap guarantees the credit worthiness of the
    debt security. For example, the buyer of a credit default swap will
    be entitled to the par value of the contract by the seller of the
    swap, should the issuer default on payments.
    • If the debt issuer does not default and if all goes well the CDS
    buyer will end up losing some money, but the buyer stands to lose
    a much greater proportion of their investment if the issuer
    defaults and if they have not bought a CDS. As such, the more the
    holder of a security thinks its issuer is likely to default, the more
    desirable a CDS is and the more the premium is worth it.

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