banker. Then‚ the banker borrows millions of dollars and buys thousands more mortgages. This means‚ every month he gets payments from all the home owners concerned. After that‚ he collects the mortgages in a so-called “CDO”‚ a collateralized debt obligation. This CDO is split into three different risk classes‚ from safe to mediocre to risky. Additionally‚ he insures the safest part for a fee‚ called “credit default swap”. In so doing‚ credit rating agencies give the investment a “AAA” rating. What
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to house buyers they will be expecting them to pay back the mortgages and consequently they would be careful to give out loans. Financial engineers then came up with the idea of putting together complex derivatives - called collateralized debt obligations (CDO)‚ partially based on mortgages‚ but also other various loans - this logic drastically changed. In this new system‚ lenders sold their mortgages to investments banks and did not care to whom they gave the loan‚ because they sold them immediately
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Originator (Bank/FI) Loan Cash Liquidity Support Cash SPV Sell Receivables Credit Enhancement Securities Investors Types of securitization Residential mortgage backed securities (MBS) Asset backed securities (ABS) Collateralized debt obligations (CDO) Commercial mortgage backed securities (CMBS) Future flow securitization Requirements for securitization Legal environment Accounting environment Regulatory environment Tax environment Back office systems/Information System Strong investor
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growth. Many Americans watched as their primary source of wealth become increasingly devalued. By late 2007‚ the prime mortgage markets were showing higher than normal default rates as well. Collateralized Mortgage Obligations (CMOs)‚ a type of collateralized debt obligations (CDOs)‚ allowed these problems to spread from the mortgage market to other sectors of the economy‚ having especially widespread effects on financial markets as a whole. CMOs were mortgage-backed securities issued by investment
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the new securitization chain‚ lenders of loans to home owners could sell the mortgages to investment banks. The investment banks‚ in turn‚ combined several such mortgages and other loans to create complex derivatives called Collateralized Debt Obligations (CDOs) which can be sold to investors worldwide. Hence‚ essentially‚ the loan payments of home owners went to investors worldwide. It is crucial to note that investment banks paid rating agencies to rate these CDOs very highly hence creating an
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Ethical Leadership Name Kaplan University SUBJECT SUBJECT CODE PROFESSOR Date Introduction The topic Ethical Leadership is more complex than meets the eye. It means leadership that knows what is right and acting based on those guidelines. The question that should be asked then is “what is right?” Once the ethical course of action is determined the leader must then have the integrity and fortitude to proceed with that course of action. In addition to decision making ethical leadership
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Accounting’s Role in the Financial Crisis Introduction The accounting profession is responsible for delivering the information necessary to make correct decisions. To promote the dissemination of high quality information‚ accounting standard setters constantly struggle to keep standards up to date with the ever evolving markets. In light of the recent financial crisis‚ fair value accounting has come under scrutiny. Some critics go as far as to blame the whole crisis on fair value accounting
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Social proof and the confirmation trap were evident in the actions of many or all of the various players involved in the subprime mortgage crises (or credit crises) of 2008. From the NPR News radio program “The Giant Pool of Money‚” the characters on the different rungs of the subprime mortgage value chain explain their actions‚ showing these two characteristics. Social proof is a behavior by which we determine correctness of opinions‚ beliefs‚ or actions by comparing them to others’ opinions‚ beliefs
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Taylor Lewis Accounting 03/10/2013 Inside Job The movie “Inside Job” was a very controversial movie. It talked about the financial crisis and how it affected everyone. Personally‚ it made me angry. All of the big companies such as Goldman Sachs‚ Citi Bank‚ Meryl Lynch‚ and many more‚ performed unethical activities. They went behind their customers back to bet against them just to make more money‚ and the statistics don’t lie. From 1978 to 2008 a banker’s regular salary went from $47‚000 a year
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An Exploratory Report on Shadow Banking Neal Edmonson University of the District of Columbia Money and Banking Professor Muhammad Samhan March 4‚ 2013 Table of Contents Executive Summary 3 Findings 4 Risk 10 Regulation 11 Conclusion 12 Bibliography 13 Executive Summary This paper documents the institutional features of shadow banks‚ discusses their economic roles‚ and analyzes their relationship to the traditional banking system. It utilizes the print and web resources
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