Watch videos with subtitles in your language, upload your videos, create your own subtitles! Click here to learn more on "how to Dotsub"

Annotated captions of The Crisis of Credit Visualized in English

Last Modified By Time Content
mirone 00:02
00:07

the crisis of credit visualized

mirone 00:09
00:11

what is the credit crisis?

mirone 00:11
00:13

It is a worldwide financial fiasco

mirone 00:13
00:16

involvig terms you probably heard like

mirone 00:16
00:17

Sub-prime mortgages

mirone 00:17
00:19

collateralized debt obligations

mirone 00:19
00:21

frozen credit markets

mirone 00:21
00:23

and credit default swaps

mirone 00:23
00:25

Who is affected?

mirone 00:25
00:26

Everyone.

mirone 00:26
00:28

How did it happen.

mirone 00:28
00:29

Here's How.

mirone 00:29
00:32

The crisis of credit brings two groups of people together

mirone 00:32
00:34

Home owners and investors

mirone 00:34
00:37

Home owners represent their mortages

mirone 00:37
00:40

and investors represent their money

mirone 00:40
00:42

These mortages represent houses

mirone 00:42
00:45

and these money represent large institutions

mirone 00:45
00:47

like pension funds, insurance companies

mirone 00:47
00:50

sovereign funds, mutual funds etc.

mirone 00:50
00:53

These groups are braught together through the financial system

mirone 00:53
00:56

a bunch of banks and brokers commonly known as

mirone 00:56
00:58

wall street

mirone 00:58
00:59

Although it might not seem like it

mirone 00:59
01:02

these banks on wall street are closely connected to these

mirone 01:02
01:04

houses on main street.

mirone 01:04
01:07

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

mirone 01:07
01:12

Years ago the inverstors were sitting on their pile of money

mirone 01:12
01:14

looking for a good investment to turn into

mirone 01:14
01:16

more money

mirone 01:16
01:18

Traditionally they go to the US Federal Reserve

mirone 01:18
01:20

where they buy treasury bills

mirone 01:20
01:22

believed to be the safest investment

mirone 01:22
01:23

but

mirone 01:23
01:26

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

mirone 01:26
01:29

Federal reserve chairman Alan Greenspan

mirone 01:29
01:34

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

mirone 01:34
01:38

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

mirone 01:38
01:40

no thanks

mirone 01:40
01:44

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

mirone 01:44
01:46

from the Fed for only 1%

mirone 01:46
01:49

add to that general surpluses from

mirone 01:49
01:51

Japan, China and Middle East

mirone 01:51
01:54

and there is an abundance of cheap credit

mirone 01:54
01:57

This makes borrowing money easy for banks

mirone 01:57
02:00

and causes them to go crazy with

mirone 02:00
02:03

LEVERAGE

mirone 02:03
02:06

LEVERAGE is borrowing money to amplify the outcome of a deal

mirone 02:06
02:09

Here is how it works:

mirone 02:09
02:12

In a normal deal someone with 10 thousand dollars

mirone 02:12
02:15

buys a box for 10 000 dollars

mirone 02:16
02:21

he then sells it to someone else for 11 000 dollars

mirone 02:22
02:25

for a 1 000 dollars profit, a good deal

mirone 02:26
02:29

but using leverage, someone with 10 000 dollars

mirone 02:30
02:34

would go borrow 990 000 more dollars

mirone 02:38
02:41

giving him one million dollars in hand

mirone 02:41
02:44

then he goes and buys 100 boxes

mirone 02:44
02:47

with his one million dollars

mirone 02:48
02:53

and sells them to someone else for 1 100 000 dollars

mirone 02:56
03:02

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

mirone 03:02
03:07

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

mirone 03:07
03:10

versus the other guys 1 000

mirone 03:10
03:13

leverage turns good deals into great deals

mirone 03:13
03:16

this is a major way banks make their money

mirone 03:17
03:19

so Wall st. takes out a ton of credit

mirone 03:20
03:25

makes grate deals and grows tremendously rich

mirone 03:26
03:27

and then pays it back

mirone 03:29
03:32

the investors see this and want a piece of the action

mirone 03:32
03:34

and this gives Wall st. an idea

mirone 03:34
03:37

they can connect the investors to the home owners

mirone 03:39
03:41

through mortgages

mirone 03:44
03:46

here is how it works

mirone 03:46
03:48

a family wants a house

mirone 03:48
03:50

so they save for a down payment

mirone 03:50
03:52

and contact a mortgage broker

mirone 03:52
03:56

mortgage broker connects the family to a lender

mirone 03:56
03:58

who gives them a mortgage

mirone 03:58
04:01

the broker makes a nice comission

mirone 04:01
04:04

the family buys a house and becomes home owners

mirone 04:04
04:07

this is great for them because housing prices

mirone 04:07
04:09

have been rising practicaly forever

mirone 04:09
04:11

everything works out nicely

mirone 04:12
04:15

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

mirone 04:15
04:16

who wants to buy the mortgage

mirone 04:17
04:20

the lender sells it to him for a very nice fee

mirone 04:21
04:24

the investment banker then borrows millions of dollars

mirone 04:24
04:27

and buys thousands more mortgages

mirone 04:27
04:30

and puts them into a nice little box

mirone 04:30
04:32

this means that every month

mirone 04:32
04:37

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

mirone 04:37
04:40

then he sets his banker wizzards on it

mirone 04:40
04:43

to work their financial magic

mirone 04:43
04:46

which is basically cutting it into three slices

mirone 04:46
04:49

safe, okay and risky

mirone 04:49
04:52

they pack the slices back up in the box

mirone 04:52
04:55

and call it a Collateralized Debt Obligation

mirone 04:55
04:57

or, CDO

mirone 04:57
05:00

a CDO works laike three cascading trays

mirone 05:01
05:04

as money comes in, the top tray fills first

mirone 05:04
05:07

then spils over into the middle

mirone 05:07
05:09

and whatever is left into the bottom

mirone 05:09
05:13

the money comes from home owners paying off their mortgages

mirone 05:13
05:16

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

mirone 05:16
05:19

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

mirone 05:19
05:22

this makes the bottom tray riskier

mirone 05:22
05:24

and the top tray safer

mirone 05:24
05:27

to compensate for the higher risk

mirone 05:27
05:30

the bottom tray recives a higher rate of return

mirone 05:30
05:33

while the top recives a lower but stil nice return

mirone 05:33
05:37

to make the top even safer the banks will ensure it

mirone 05:37
05:41

for a small fee called a Credit Default Swap

mirone 05:41
05:45

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

mirone 05:45
05:49

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

mirone 05:49
05:52

the highest safest rating there is

mirone 05:52
05:55

the okay slice is triple B - still pretty good

mirone 05:55
05:58

and they don't bother to rate the risky slice

mirone 05:58
06:01

because of the triple A rating

mirone 06:01
06:04

the investment banker can sell the safe slice

mirone 06:04
06:07

to the investors who only want safe investments

mirone 06:07
06:10

he sells the okay slice to other bankers

mirone 06:10
06:14

and the risky slices to hedge funds and other risk takers

mirone 06:14
06:17

the investment banker makes millions

mirone 06:17
06:21

he then repays his loans

mirone 06:22
06:25

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

mirone 06:25
06:28

much better than the 1% tresaury bills

mirone 06:28
06:31

they are so pleased, they want more CDO slices

mirone 06:31
06:34

so the investment banker calls up the lender

mirone 06:34
06:37

wanting more mortgages

mirone 06:37
06:40

the lender calls up the broker for more home owners

mirone 06:40
06:42

but the broker can't find anyone

mirone 06:42
06:46

everyone that qualifies for a mortgage already has one

mirone 06:46
06:50

but they have an idea

mirone 06:52
06:54

when home owners default on their mortgage

mirone 06:54
06:56

the lender gets the house

mirone 06:56
06:59

and houses are allways increasing in value

mirone 06:59
07:02

since they're covered if the home owners default

mirone 07:02
07:05

lenders can start adding risk to new mortgages

mirone 07:05
07:07

not requiring down payments

mirone 07:07
07:09

no proof of income

mirone 07:09
07:11

no documents at all

mirone 07:11
07:14

and that's exactly what they did

mirone 07:14
07:17

so, instead of lending to responsible home owners

mirone 07:17
07:19

called Prime Mortgages

mirone 07:19
07:24

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

mirone 07:24
07:27

these are Sub-Prime Mortgages

mirone 07:27
07:30

this is the turning point

mirone 07:32
07:35

so, just like allways the mortgage broker

mirone 07:35
07:38

connects the family with a lender and a mortgage

mirone 07:38
07:40

making his commision

mirone 07:40
07:43

the family buys a big house

mirone 07:43
07:46

the lender sells the mortgage to the investment banker

mirone 07:47
07:50

who turns it into a CDO

mirone 07:51
07:54

and sells slices to the investors and others

mirone 07:54
08:00

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

mirone 08:00
08:04

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

mirone 08:04
08:05

it was his problem

mirone 08:05
08:08

if the home owners were to default

mirone 08:08
08:09

they didn't care

mirone 08:09
08:12

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

mirone 08:12
08:16

like playing hot-potato with a time bomb

mirone 08:17
08:20

not surprisingly the home owners default on their mortgage

mirone 08:20
08:23

which at this moment is owned by the banker

mirone 08:23
08:24

this means

mirone 08:24
08:28

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

mirone 08:28
08:30

no big deal

mirone 08:30
08:32

he puts it up for sell

mirone 08:33
08:36

but more and more of his monthly payments

mirone 08:36
08:38

turn into houses

mirone 08:40
08:44

now there are so many houses for sell on the market

mirone 08:44
08:47

creating more supply the there is demand

mirone 08:47
08:49

and housing prices are not rising any more

mirone 08:49
08:52

in fact they plummet

mirone 08:53
08:57

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

mirone 08:58
09:00

as all the houses in their neighbourhood

mirone 09:00
09:01

go up for sale

mirone 09:01
09:04

the value of their house goes down

mirone 09:04
09:07

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

mirone 09:07
09:13

when the house is now worth only 90 000 dollars

mirone 09:13
09:16

they decide that it does not make sense to continue paying

mirone 09:16
09:18

even though they can afford to

mirone 09:18
09:20

and they walk away from their house

mirone 09:20
09:23

default rates sweep the country and prices plummet

mirone 09:23
09:26

now the investment banker is basically holding

mirone 09:26
09:29

a box full of worthless houses

mirone 09:29
09:31

he calls up his buddy the investor to sell his CDO

mirone 09:31
09:36

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

mirone 09:36
09:40

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

mirone 09:40
09:42

the banker tries to sell to everyone

mirone 09:42
09:45

but nobody wants to buy his bomb

mirone 09:45
09:47

he is freaking out because he borrowed millions,

mirone 09:47
09:52

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

mirone 09:52
09:55

whatever he tries, he cant get rid of it

mirone 09:58
10:00

but he is not the only one

mirone 10:00
10:05

the investors have already bought thousands of these bombs

mirone 10:05
10:07

the lender calls up to try and sell his mortgage

mirone 10:07
10:10

but the banker won't buy it

mirone 10:10
10:12

and the broker is out of work

mirone 10:12
10:15

the whole financial system is frozen

mirone 10:15
10:18

and things get dark

mirone 10:23
10:27

everybody starts going bankrupt

mirone 10:27
10:29

but that is not all

mirone 10:29
10:32

the investor calls up the home owner

mirone 10:32
10:35

and tells him that his investments are worthless

mirone 10:35
10:40

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

mirone 10:41
10:45

welcome, to the crisis of credit.