[This is part to of my explanation of the current financial crisis and reasoning behind who I believe the real culprits are for our current financial situation. Enjoy and feel free to comment.]
Big Bank would then be the Secondary market. While Big Bank certainly can sit back and collect the payments on this loan, they have other motivations and decide to package this loan up with a group of other mortgages, and sell it. This product it called a Mortgage Backed Security. In this case, they sell the entire MBS to Bigger Bank. This then becomes the Tertiary Lender. Bigger Bank has some really sharp people on it's team, and they therefore have a more diversified portfolio of securities to offer their customers including something called a Real-estate Mortgage Backed Collateralized Debt Obligation (RMBCDO or just CDO for short).
Big Bank's team takes a number of MBS and bundles them together, and sells them to a paper company specifically created for this purpose (a Special Investment Vehicle or SIV). This SIV will then issue a Bond just like any other company. This bond is given a qualitative rating by one of three major ratings companies, Standard & Poors, Fitch's or Moody's. Other people and companies can then purchase this bond and expect a certain fixed rate of return for their money over a specific period of time with a known risk level (the reason for the rating).
Several types or organizations would buy these CDOs, particularly those with a AAA rating. Banks, hedge funds, investment houses, and even mutual funds would buy these. This was a secure investment, with a fixed rate of return that nicely matched certain types of investment strategies. The real estate market had been booming for years, and there was no reason to assume that anything would change any time soon.
It is through this process that money from private investors eventually made its way back down to the individual to fuel the housing boom and price bubbble. There was only one thing that this model did not account for.Technorati Tags: economics, banking, real estate, CDO, crisis,
Big Bank would then be the Secondary market. While Big Bank certainly can sit back and collect the payments on this loan, they have other motivations and decide to package this loan up with a group of other mortgages, and sell it. This product it called a Mortgage Backed Security. In this case, they sell the entire MBS to Bigger Bank. This then becomes the Tertiary Lender. Bigger Bank has some really sharp people on it's team, and they therefore have a more diversified portfolio of securities to offer their customers including something called a Real-estate Mortgage Backed Collateralized Debt Obligation (RMBCDO or just CDO for short).
Big Bank's team takes a number of MBS and bundles them together, and sells them to a paper company specifically created for this purpose (a Special Investment Vehicle or SIV). This SIV will then issue a Bond just like any other company. This bond is given a qualitative rating by one of three major ratings companies, Standard & Poors, Fitch's or Moody's. Other people and companies can then purchase this bond and expect a certain fixed rate of return for their money over a specific period of time with a known risk level (the reason for the rating).
Several types or organizations would buy these CDOs, particularly those with a AAA rating. Banks, hedge funds, investment houses, and even mutual funds would buy these. This was a secure investment, with a fixed rate of return that nicely matched certain types of investment strategies. The real estate market had been booming for years, and there was no reason to assume that anything would change any time soon.
It is through this process that money from private investors eventually made its way back down to the individual to fuel the housing boom and price bubbble. There was only one thing that this model did not account for.Technorati Tags: economics, banking, real estate, CDO, crisis,
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