Corporate & Securities Law

Subprime Summary, Twitter Style

By Brett D. Sherman

Subprime Crisis Cheat Sheet (A stream of consciousness recital of issues that caused the subprime crisis)

By Brett Sherman; The Sherman Law Firm

Housing market hot since late 1990s; Tech-Wreck; September 11; Federal Reserve Board cuts fed funds rate aggressively, all the way down to 1% in June 2003; In low rate environment, institutional investors hunt for yield; Wall Street sees opportunity; cheap money = easy credit; Bear Stearns, Lehman Brothers, Merrill Lynch and others fuel expansion of loans to low credit borrowers by funding subprime lenders; Bear, Lehman, et. al buy huge inventories of subprime mortgages; Wall Street's "securitization machine" bundles pools of subprime mortgages together to form subprime mortgage-backed securities (MBS) and repackages pools of MBS into collateralized debt obligations (CDOs); Subprime filled MBS and CDOs get all-important AAA ratings; MBS/CDOs marketed as low risk / high yield; Institutions buy MBS/CDOs; Wall Street "drinks the cool-aide," retaining and or buying large portfolios of MBS/CDOs for their own accounts; Big Wall Street investment banks take on tremendous leverage (loans to finance investing) and rely on billions in short-term credit to fund daily operations; Fed starts cycle of interest rate hikes in summer of 2004; Lending standards erode as lenders are under intense pressure from Wall Street to keep supply of subprime mortgages flowing; Lots of bad loans - especially late 2005 and 2006; Default and foreclosure rates skyrocket; By February 2007, major subprime lenders are going bankrupt; Bear Stearns subprime hedge fund scandal in summer 2007 last nail in coffin for ailing market for subprime MBS; before long all mortgage-related securities are illiquid (there are no willing buyers); subprime crisis turns into credit crisis and, eventually, global financial crisis...

Full post as published by Wall Street Law Blog on June 01, 2009 (boomark / email).