Bad Banks
The bank will do this to your property if you do not keep up your mortgage payments.
What is foreclose of your property? The bank will then be in possession of your property. Meaning that the bank loses money if the house is not worth a lot, and the person lost money and does not get to own their house.
This helps investors determine whether or not they are making a safe investment
What are credit ratings?
This was the chair of the Fed at the time of the financial crisis.
Who is Alan Greenspan?
Bundles of mortgages created by banks, where the safest rated mortgages are on top, covering the presence of riskier mortgages lower in the bundle.
What are Mortgage Backed Securities? Banks tricked people into buying bundle mortgages that were not actually as safe as they seemed.
What should credit agencies have given people who are more likely to default on their mortgages?
What is a low credit score? (Anything below A is considered risky)
This was the main goal of the Fed at the time (not inflation).
What is full employment?
Very risky loans, mostly rated B-BBB, that are pooled together by the bank and are considered “diversified”. Which allows the credit agencies to give them a AAA rating.
What are Collateralized Debt Obligations? Banks would frequently bundle these risky mortgages and sell them knowing that if they failed it would not affect them.
The credit agencies gave CDOs which consisted of these types of mortgages which had very high chances of defaulting.
What are subprime mortgages?
People blame the Fed for not adjusting this policy, but it would only have had a limited effect on the crisis anyway.
What is Interest Rate Policy?
After being urged by leaders in the investment community, the SEC increased this ratio from 3 to 1 for businesses, to 40 to 1 for banks.
What is the leverage ratio? Banks could have 40 times more debt than they had equity capital. This shortage of money is what lead to the collapse of many banks such as Lehman brothers.
The credit agencies gave these ratings to give the impression that an investment was less risky.
What is a AAA rating? AAA rating is the highest rating a loan can get from a credit agency. These were frequently bought first by investors due to the high likelihood that they would not default.
This would have been the result if the Fed had driven up interest rates prior to the crisis.
What is unacceptable levels of UNEMPLOYMENT
This Act increased the volume of loans (from Fannie Mae, Freddie Mac, and banks) to borrowers who did not meet the conventional criteria.
What is the Community Reinvestment Act? Congress passed this Act in 1977 with the primary purpose of lowering the amount of discriminatory credit practices against low income neighborhoods.
Standard & Poor's, Moody's Investors Service and Fitch Ratings are these.
What are the big three credit agencies.
The program in which Fed tried to trigger economic growth by buying bonds from banks in the financial markets with the expectation that the banks would lend this money to their clients.
What is quantitative ease?