Monday, September 29, 2008

The Wall Street Bailout For Dummies

How did we get to the point where Washington is about to shovel $700 billion of our money into the coffers of Wall Street giants?

Barry Rithholtz at The Big Picture translates and summarizes a wonkish Brookings Institution analysis:
(1.) The bubble in home prices, fueled by the ready availability of credit, resulted in an underestimate of the risks of residential real estate.

(2.) The peaking of residential home prices in 2006, combined with lax lending standards were followed by a very high rate of delinquencies on subprime mortgages in 2007 and a rising rate of delinquencies on prime mortgages.

(3.) Losses thereafter on the complex "Collateralized Debt Obligations" (CDOs) that were backed by these mortgages.

(4.) Increased liabilities by the many financial institutions (banks, investment banks, insurance companies, and hedge funds) that issued "credit default swaps" contracts (CDS) that insured the CDOs.

(5.) Losses suffered by financial institutions that held CDOs and/or that issued CDSs.

(6.) Cutbacks in credit extended by highly leveraged lenders that suffered these losses.
Thanks, Barry.

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