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The Crisis of Credit

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the crisis of credit visualized what is the credit crisis? It is a worldwide financial fiasco involvig terms you probably heard like Sub-prime mortgages collateralized debt obligations frozen credit markets and credit default swaps Who is affected? Everyone. How then happen. Here's How. The crisis of credit brings two groups of people together Home owners and investors Home owners represent their mortages and investors represent their money These mortages represent houses and these money represent large institutions like pension funds, insurance companies sovereign funds, mutual funds etc. These groups are braught together to the financial system a bunch of banks and brokers commonly known as wall street Although it might not seem like it these banks at wall street are closely connected to these houses at main street. To understand how le't's start from the beginning Years ago the inverstors were sitting on their pile of money looking for a good investment to turn it into more money Traditionally they go to the US Federal Reserve where they buy treasury bills believed to be the safest investment but In the wake of the dot com bust and 11 september Federal reserve chairman Alan Greenspan lowers interests rates to 1% to keep the economy strong One percent is a very low return on investment, so the investors said no thanks On the flip side this means banks on wall street can borrow from the Fed for only 1% add to that general surpluses from Japan, China and Middle East and there is an abundance of cheap credit This makes borrowing money easy for banks and causes them to go crazy with LEVERAGE LEVERAGE is borrowing money to amplify the outcome of a deal Here is how it works: Ina normal deal someone with 10 thousand dollars buys a box for 10 000 dollars he then sells it to someone else for 11 000 dollars for a 1 000 dollars profit, a good deal but using leverage, someone with 10 000 dollars would go borrow 990 000 more dollars getting him one million dollars in hand then he goes and buys 100 boxes with his one million dollars and sells them to someone else for 1 100 000 dollars then he pays back his 990 000 plus 10 000 in interest and after his initial 10 000, he is left with 90 000 dollar profit versus the other guys 1 000 levrage turns good deals into great deals this is a major way banks make their money so Wall st. takes out a ton of credit makes grate deals and grows tremendously rich and then pays it back the investors see this and want a piece of the action and this gives Wall st. an idea they can connect the investors to the home owners through morgages here is how it works a family wants a house so they save for a down payment and contact a morgage broker morgage broker connects the family to a lender who gives them a morgage the broker makes a nice comission the family buys a house and becomes home owners this is great for them because housing prices have been rising practicaly forever everything works out nicely one day, the lender gets a call from an investment banker who wants to buy the morgage the lender sells it to him for a very nice fee the investment banker then borrows millions of dollars and buys thousands more morgages and puts them into a nice little box this means that every month he gets the payments from the home owners of all the morgages in the box then he (seeks?) his banker wizzards on it to work their financial magic which is basically cutting it into three slices safe, okay and risky they pack the slices back up in the box and call it a Collateralized Debt Obligation or, CDO a CDO works laike three cascading trays as money comes in, the top tray fills first then spils over into the middle and whatever is left into the bottom the money comes from home owners paying off their morgages if some owners don't pay and default on their morgage less money comes in and the bottom tray may not get filled this makes the bottom tray riskier and the top tray safer to compensate for the higher risk the bottom tray recives a higher rate of return while the top recives a lower but stil nice return to make the top even safer the banks will ensure it for a small fee called a Credit Default Swap the banks do all of this work so the credit rating agencies will stamp the top slice as a safe, triple A rated investment the highest safest rating there is the okay slice is triple B - still pretty good and they don't bother to rate the risky slice because of the triple A rating the investment banker can sell the safe slice to the investors who only want safe investments he sells the okay slice to other bankers and the risky slices to hedge funds and other risk takers the investment banker makes millions he then repays his loans finaly, the investors have found a good investment for their money much better than the 1% tresaury bills they are so pleased, they want more CDO slices so the investment banker calls up the lender wanting more morgages the lender calls up the broker for more home owners but the broker can't find anyone everyone that qualifies for a morgage already has one but they have an idea when home owners default on their morgage the lender gets the house and houses are allways increasing in value since they're covered if the home owners default lenders can start adding risk to new morgages not requiring down payments no proof of income no documents at all and that's exactly what they did so, instead of lending to responsible home owners called Prime Morgages they started to get some that were... well, less responsible these are Sub-Prime Morgages this is the turning point

Video Details

Duration: 7 minutes and 32 seconds
Country: United States
Language: English
Genre: Animated
Producer: Jonathan Jarvis
Director: Jonathan Jarvis
Views: 631
Posted by: arturogoga on Feb 24, 2009

The Short and Simple Story of the Credit Crisis.

By Jonathan Jarvis.

The goal of giving form to a complex situation like the credit crisis is to quickly supply the essence of the situation to those unfamiliar and uninitiated. This project was completed as part of my thesis work in the Media Design Program, a graduate studio at the Art Center College of Design in Pasadena, California.

For more on my broader thesis work exploring the use of new media to make sense of a increasingly complex world, visit

Or email me at [email protected]

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