6.3. CMO and the crisis (1) – the market, mortgage brokers, and substandard mortgages

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来自 Moscow Institute of Physics and Technology 的课程

Capital Markets and Financial Institutions – How to Survive Them

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Moscow Institute of Physics and Technology

Capital Markets and Financial Institutions – How to Survive Them

9 个评分

课程 1（共 5 门，Specialization Understanding Modern Finance）

Capital markets and financial institutions are all around us. This is an enormous industry in which powerful players oftentimes challenge investors and the public at large and expose them to significant risks. This Course provides for the deep understanding of the core ideas, concepts, and mechanisms of the modern capital market in a learner-friendly way. We will analyze the market’s most fundamental problems, realize the intrinsic interests of the market participants, reveal the true meaning of certain financial terms, and uncover credible signals of the likely behavior of economic agents – all that with little math and a lot of fun. The learners will be much better positioned with respect to the financial environment. They will see through the financial news, reveal the risks of the financiers’ wishful thinking promises, and protect themselves against dangerous adventures. The learners will get the opportunity to use the obtained knowledge, skills, and understanding for the successful professional career in the financial and other business areas, as well as in their day-to-day life.

从本节课中

СМО and the 2008 World Financial Crisis. The Ascent of Moral Hazard. Globalization. Wrap-Up. Some Positive Messages

Week 6, the final week of the Course covers securitization and CMO’s. We will reveal the role of the CMO market in the development of the world financial meltdown that peaked in 2008 and, as many believe, is not yet over. We will study the details of the role of CMO’s in the development of the crisis. We will consider the measures taken by the regulators, the “too big to fail” phenomenon, and will understand why the governments so actively helped the biggest international investment banks found to have been on the verge of bankruptcy. We will also talk about the globalization of capital markets and the first signals of a counter-trend – de-globalization. We will clearly see how modern geopolitical and technological trends contribute to the ascent of moral hazard that is now a global problem. Finally, some clear and useful recommendations are provided. As a result, you will be able to successfully apply the obtained knowledge and skills not only in finance but also in your career and life in general.

6.1. CMO – the idea14:51

6.2. CMO – the mechanism, cash flows, and risk12:11

6.3. CMO and the crisis (1) – the market, mortgage brokers, and substandard mortgages5:14

6.4. CMO and the crisis (2) – securitization, CMO tranches, credit rating and insurance, SPV. Toxic assets6:32

6.5. “Too Big to Fail”8:06

6.6. Globalization in capital markets and its challenges7:46

6.7. What has been done to fight the crisis? New regulation, QE, negative interest rates18:46

6.8. The first signs of “de-globalization”. Brexit. Problems and challenges7:58

6.9. Wrap-up and conclusions. Positive messages and practical advice10:34

与讲师见面

Konstantin Kontor
Director and Professor of Finance and Strategy
American Institute of Business and Economics (AIBEc)

Now, let's take a look at the CMO process.

Now, we have the following players.

We have the borrower, then,

we have the mortgage broker,

and clearly, we have the bank.

Then we have the investment bank.

And then we have CMO buyers,

for simplicity like this.

So in this episode we will discuss the first part.

So, in this drama,

there is act one, looks like this.

So this is a house.

This is a window.

This is a cat sitting in.

So, you would like to get the mortgage for this house.

So you go to a broker and the broker asks you few questions,

because it's as well sometimes in the subprime cases as well.

Are you employed? You say well, you know, no.

Do you have enough income?

Well, not now, but maybe.

They say, no problem. We'll give you a loan.

We've no down payment.

We have no interest.

We've even postponed payments. Why is that so?

Because the broker gets commission if he sells this mortgage.

But here, you can see that there is a bank.

The bank has nothing to seem for right now,

but the contract is between the bank and the borrower.

And the broker here sells it,

and the broker gets commission from the bank.

Now, when the broker sold the mortgage and collected the commission,

he doesn't care anymore.

Now, see what happens now with the bank.

The bank should care about what the broker does.

But, does the bank do it in reality?

Let's see what's the behavior of the bank.

The bank says, well,

we have relaxed requirements.

And that's too bad because clearly,

there is high risk because of that.

So, I as a bank should care.

But then the bank thinks,

if the price of the house goes up,

then this risk is alleviated.

Why?

Like I said before,

well, if the price goes up of them,

these people who took these mortgages with no income, no nothing,

they maybe will be able to make some of these payments to refinance so, basically.

And after all, even if they default,

I foreclose on this house.

But now, it's price is higher.

So, even after I pay some commission to the home seller,

I still will make up for my potential loss.

So, I as a bank,

start to behave more negligently.

I stopped caring much.

Now, at the same time what happens is that here,

I as a bank, think that I can resell that to the IB.

Well, that in this case,

if I have this option,

then I care even less.

Because if I resold the well,

the question is the price.

But if I still resold them,

I can resell good mortgages at a nice price,

and then the poor performing mortgages may be at a discount.

But I still do not take that much risk.

And even if some of the poor,

but the home prices go up,

then it's not such a bad thing.

So basically, this whole setup results in the fact that

banks start to

behave imprudently.

So, we are back to the classic case of

adverse incentives that always are accompany such developments.

Now, from here, we have to move ahead.

And in the next episode,

we will see other players.

Namely, the bank, the investment bank,

and the final clients.

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