as we known,financial crisis have breaken out all of the word,and the subprime mortgage crisis is the most importance reason.how the subprime mortgage crisis arose the financial crisis ?this report will give an answer in some simple example.
frist.leverage, for example,a investment bank A ,assets of 3 billion,use the bank as a martgage to borrow 100 billion for investment.this is 30 times leverage. if the investment loss of 5%, the bank A would pay all of its assets still owe 2 billion.
second.CSD(credit default swaps) contract,leverage is high-risk, so A talk a insurance on the investment of leverage in a insurace called B.A pay B 50 miliion per year, for 10 years, a total of 500 million. B do a analysis and found that the breach of contract case less than 2%. he do 100 business,a total of 50 billion get from the insurance, can earn 40 billion at lest. after B do this business, C was jealous, C spent 20 billion buy the 100 CDS from B,then sold to D at price of 22 billion on the CDS market.
third.subprime martgage loan.so where the 40 billion come from?from A,and the similar investor's profits .And most of their profits from the sub-prime mortgage loan. In the past years,the price of house rise up quickly.some people,which only have the money to buy a house of their own,mortgage their houses out,borrow money from bank A,buy another house for investment.their income also can’t pay the interest of 9%,and they mortgage the other house out,borrow money to pay the high interest.but,one day,the house price come down all of a sudden,nobody buy their houses,finally,they pledge the houses to A..At this point,the breach of contract occurred.but where is the CDS now ? assumption in hands of G,G spent 30 billion bought the 100 CDS, have not had time to change hands, he found that there are 20 violations,ever more. Each breach of contract have to pay 5 billion, a total of 100 billion.Add the cost of CSD,30 billion, G lost a total of 130 billion.G was broken.
forth, the financial crisis. G was closed, then the insurance of A is abated, so A was broken too,and the bank who lend the 100 billion to A,will be broken. the market price of the 100 CDS is 30 billion,it bring these companys broken down.now The CDS market is worth 62 trillion,how many company will close,and this is the financial crisis.