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Glass-Steagall Act of 1933
eliminated the last barriers between commercial and investment banks, allowiing commercial banks to enter areas of more risk
Community Reinvestment Act by Congress
banks forced to make loans in bad neighborhoods
guidelines rewrote prudent lending rules
-lack of credit history is not a disqualification
-welfare payments accepted as source of income
-temporary unemployment benefits accepted as income
-instructed to be flexible on employment criteria
Mortgage loans in US categoriezed
prime (A-Paper)
Alt-A (alternative paper)
Sub prime
sub prime
reflects borrowers who do not meet underwriting criteria and have a higher perceived risk of default normally as a result of credit history
typrically pay 2% premium over prime - subprime differential
securitization
the process of turning an illiquid asset into a liquid saleable asset
liquid asset
one that can be exchanged for cash instantly at fair market value
securitization (2)
bypasses the traditional financial intermediaries to go direct to investors in the marketplace to raise funds
two forms
: mortage-backed securities (MBSs) and asset-backed securities (ABSs)
ABSs
include second mortgages and home-equity loans based on mortgages, credit card receivables, auto loans
Collateralized debt obligation (CDO)
sold to market in categories representing the credit quality of the borrowers in the mortgages
sophisticated risk management models
scenario analysis
stress testing of portfolios
'what it' analysis
Credit default swap (CDS)
a contract, a derivative, which derived its value from the credit quality and performance of any specified asset
in short
: bet whether a specific mortgage or security would fail to pay on time or at all
designed to shift the risk of default to a third-party
provide insurnace against the possibility of borrower not paying
credit enhancement
the method of making ivnestment more attractive to prospective buyers by reducing their perceived risk
Author
whylime
ID
83814
Card Set
FI351_CC
Description
Credit Crisis
Updated
5/4/2011, 11:18:28 PM
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