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Annotated captions of The Crisis of Credit Visualized in Turkish

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the crisis of credit visualized

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what is the credit crisis?

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It is a worldwide financial fiasco

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involvig terms you probably heard like

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Sub-prime mortgages

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collateralized debt obligations

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frozen credit markets

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and credit default swaps

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Who is affected?

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Everyone.

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How did it happen.

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Here's How.

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The crisis of credit brings two groups of people together

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Home owners and investors

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Home owners represent their mortages

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and investors represent their money

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These mortages represent houses

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and these money represent large institutions

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like pension funds, insurance companies

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sovereign funds, mutual funds etc.

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These groups are braught together through the financial system

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a bunch of banks and brokers commonly known as

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wall street

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Although it might not seem like it

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these banks on wall street are closely connected to these

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houses on main street.

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To understand how le't's start at the beginning

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Years ago the inverstors were sitting on their pile of money

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looking for a good investment to turn into

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more money

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Traditionally they go to the US Federal Reserve

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where they buy treasury bills

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believed to be the safest investment

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but

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In the wake of the dot.com bust and september 11th

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Federal reserve chairman Alan Greenspan

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lowers interests rates to only 1% to keep the economy strong

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One percent is a very low return on investment, so the investors say

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no thanks

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On the flip side this means banks on wall street can borrow

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from the Fed for only 1%

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add to that general surpluses from

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Japan, China and Middle East

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and there is an abundance of cheap credit

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This makes borrowing money easy for banks

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and causes them to go crazy with

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LEVERAGE

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LEVERAGE is borrowing money to amplify the outcome of a deal

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Here is how it works:

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In a normal deal someone with 10 thousand dollars

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buys a box for 10 000 dollars

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he then sells it to someone else for 11 000 dollars

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for a 1 000 dollars profit, a good deal

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but using leverage, someone with 10 000 dollars

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would go borrow 990 000 more dollars

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giving him one million dollars in hand

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then he goes and buys 100 boxes

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with his one million dollars

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and sells them to someone else for 1 100 000 dollars

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then he pays back his 990 000 plus 10 000 in interest

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and after his initial 10 000, he is left with 90 000 dollar profit

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versus the other guys 1 000

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leverage turns good deals into great deals

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this is a major way banks make their money

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so Wall st. takes out a ton of credit

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makes grate deals and grows tremendously rich

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and then pays it back

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the investors see this and want a piece of the action

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and this gives Wall st. an idea

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they can connect the investors to the home owners

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through mortgages

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here is how it works

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a family wants a house

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so they save for a down payment

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and contact a mortgage broker

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mortgage broker connects the family to a lender

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who gives them a mortgage

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the broker makes a nice comission

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the family buys a house and becomes home owners

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this is great for them because housing prices

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have been rising practicaly forever

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everything works out nicely

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one day, the lender gets a call from an investment banker

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who wants to buy the mortgage

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the lender sells it to him for a very nice fee

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the investment banker then borrows millions of dollars

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and buys thousands more mortgages

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and puts them into a nice little box

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this means that every month

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he gets the payments from the home owners of all the mortgages in the box

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then he sets his banker wizzards on it

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to work their financial magic

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which is basically cutting it into three slices

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safe, okay and risky

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they pack the slices back up in the box

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and call it a Collateralized Debt Obligation

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or, CDO

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a CDO works laike three cascading trays

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as money comes in, the top tray fills first

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then spils over into the middle

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and whatever is left into the bottom

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the money comes from home owners paying off their mortgages

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if some owners don't pay and default on their mortgage

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less money comes in and the bottom tray may not get filled

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this makes the bottom tray riskier

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and the top tray safer

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to compensate for the higher risk

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the bottom tray recives a higher rate of return

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while the top recives a lower but stil nice return

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to make the top even safer the banks will ensure it

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for a small fee called a Credit Default Swap

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the banks do all of this work so that credit rating agencies

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will stamp the top slice as a safe, triple A rated investment

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the highest safest rating there is

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the okay slice is triple B - still pretty good

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and they don't bother to rate the risky slice

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because of the triple A rating

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the investment banker can sell the safe slice

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to the investors who only want safe investments

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he sells the okay slice to other bankers

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and the risky slices to hedge funds and other risk takers

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the investment banker makes millions

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he then repays his loans

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finaly, the investors have found a good investment for their money

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much better than the 1% tresaury bills

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they are so pleased, they want more CDO slices

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so the investment banker calls up the lender

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wanting more mortgages

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the lender calls up the broker for more home owners

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but the broker can't find anyone

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everyone that qualifies for a mortgage already has one

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but they have an idea

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when home owners default on their mortgage

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the lender gets the house

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and houses are allways increasing in value

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since they're covered if the home owners default

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lenders can start adding risk to new mortgages

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not requiring down payments

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no proof of income

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no documents at all

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and that's exactly what they did

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so, instead of lending to responsible home owners

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called Prime Mortgages

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they started to get some that were... well, less responsible

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these are Sub-Prime Mortgages

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this is the turning point

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so, just like allways the mortgage broker

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connects the family with a lender and a mortgage

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making his commision

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the family buys a big house

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the lender sells the mortgage to the investment banker

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who turns it into a CDO

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and sells slices to the investors and others

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this actually works out nicely for everyone and makes them all rich!

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no one was woried because as soon they sold the mortgage to the next guy

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it was his problem

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if the home owners were to default

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they didn't care

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they were selling out their risk to the next guy making millions

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like playing hot-potato with a time bomb

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not surprisingly the home owners default on their mortgage

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which at this moment is owned by the banker

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this means

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he forecloses, and one of his monthly payments turns into a house

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no big deal

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he puts it up for sell

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but more and more of his monthly payments

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turn into houses

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now there are so many houses for sell on the market

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creating more supply the there is demand

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and housing prices are not rising any more

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in fact they plummet

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this creates an interesting problem for the home owners still paying their mortgages

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as all the houses in their neighbourhood

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go up for sale

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the value of their house goes down

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and they start to why they are paying back their 300 000 dollars mortgage

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when the house is now worth only 90 000 dollars

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they decide that it does not make sense to continue paying

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even though they can afford to

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and they walk away from their house

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default rates sweep the country and prices plummet

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now the investment banker is basically holding

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a box full of worthless houses

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he calls up his buddy the investor to sell his CDO

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but the investor isn't stupid and says 'no thanks'

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he knows that the stream of money isn't even a dribble any more

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the banker tries to sell to everyone

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but nobody wants to buy his bomb

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he is freaking out because he borrowed millions,

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sometimes billions of dollars to buy this bomb and he cant pay it back

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whatever he tries, he cant get rid of it

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but he is not the only one

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the investors have already bought thousands of these bombs

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the lender calls up to try and sell his mortgage

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but the banker won't buy it

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and the broker is out of work

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the whole financial system is frozen

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and things get dark

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everybody starts going bankrupt

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but that is not all

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the investor calls up the home owner

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and tells him that his investments are worthless

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and you can begin to see how the crisis flows in a cycle

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welcome, to the crisis of credit.