September 24, 2008

Here is an other explanation of what the heck just happened:

Here is an other explanation of what the heck just happened:

The Big Picture has a lot of good knowledge on the way things work in the markets.

“The authors note the “domino-like” character to the financial crisis:

  1. The bubble in home prices, fueled by the ready availability of credit, resulted in an underestimate of the risks of residential real estate;

  2. The peaking of residential home prices in 2006, combined with lax lending standards were followed by a very high rate of delinquencies on subprime mortgages in 2007 and a rising rate of delinquencies on prime mortgages;

  3. Losses thereafter on the complex “Collateralized Debt Obligations” (CDOs) that were backed by these mortgages;

  4. Increased liabilities by the many financial institutions (banks, investment banks, insurance companies, and hedge funds) that issued “credit default swaps” contracts (CDS) that insured the CDOs;

  5. Losses suffered by financial institutions that held CDOs and/or that issued CDS’s;

  6. Cutbacks in credit extended by highly leveraged lenders that suffered these losses.

Sure, that’s an oversimplification. But it is a good place for the layperson to begin trying to comprehend what exactly went wrong here . . .”