Cause of Subprime Mortgage

11/5/18

Tien
GOAL: Today I plan to find the summary of the Subprime Mortgage Crisis.

WHAT I LEARN: Subprime Mortgage Crisis is one of the biggest crisis in the world. It was the

cause of the recession around the world in 2008. It started in 2000. Cause of this crisis has a lot of

factor such as the high demand of house, the low interest rate, the bank policy, CDS and especially the

CDO which the main factor of this crisis. This crisis is about the bubble in the housing market and the

default of the CDO. This Crisis known as the biggest recession in the world.

NEW QUESTION: Find a reason why subprime mortgages affect a house buyer and seller?

REFLECTION: Today, I have been introduced to the Subprime Mortgages Crisis which is the

biggest economic crisis in the world. I’m very excited about the information and this topic sound very

interesting.

REFERENCE: https://www.investopedia.com/ask/answers/07/subprime-mortgage.asp
Kartoon

GOAL: My goal to day is to find the economic in USA before the Subprime Mortgages.

WHAT I LEARNED: After the Dotcom bubble the Federal Reserve start to low the interest rate

for the growing of the economy. When the interest rate is low bank start to stop buying bond from

FED, on the other hand, the bank start to borrow the money from the bank, and then it creates the

leverage which the process that bank use the debt for investing. At that time banks have a lot of cash,

so they don’t know what to invest; therefore, they started to invest in the mortgages.

NEW QUESTION: why subprime mortgages affect a house buyer and seller?

REFLECTION: In my opinion, one of the factor that cause the subprime mortgage is the economy

before the subprime mortgage because after the dotcom boom the US economy started to get in to the

new phrase, the recover phrase and after it recover, it will go to the acceleration phrase, and in the

acceleration phrase, it starts to grow fast. If it grows to fast, the bubble will occur.

REFERENCE: The Crisis of Credit Visualized - HD - YouTube

15/05/18

Tien

GOAL: Today I plan to find a reason why subprime mortgages affect a house buyer and seller.

WHAT I LEARNED

The American dream is that a lot of American people want to buy and have a house. At 2000 the

interest rate is very low, so that the American dream almost come true. The price of house rose a lot,

more people that have money want to buy a house.

When the subprime mortgage open to the market, people can a big money easier. In that

period the people’s trends were that who has a house will seem stable. Then people borrow money

from subprime mortgage for buying a house and they did not have money enough to pay back. It

became a bad dept. At that time a house price was rise up and up.

Beyond it should be but people still buy it. When it stops rising because people think that it too

expensive. House Seller decrease a house price in the same time that people have to pay a money back

to bank. House price decrease down and stop at the point it should be.

As this graph showing, the house prices have risen very fast since 2000. In 2007, The price of house

rose almost 80 percent since 2000.

NEW QUESTION: Why interest rate was low.

REFLECTION:

From my own opinion I think that this problem starts from human greed. Bank want a money

and use consumer greed to make their money. In the end it become a big well-known crisis.

Reference:http://www.homebuyinginstitute.com/mortgage/how-does-the-secondary-mortgage-

market-work/

Kartoon

GOAL: Today I will answer the question what is CDO.

WHAT I LEARNED: collateralized debt obligation(CDO) is a selling a debt to the investor. the

investor believe that they will get a big profit from debt that act like a loan.

The bank saw that the demand for the house was very high so that the made the product called

CDO. CDO was the loan that bank gave it to the bad credit people that want money, and sell the CDO

to the investor. This CDO consist of a lot of risk such as the risk of the borrower because they got the

bad credit, Risk in product because the CDO is the mix of the bad loan. Fraud is that the mortgages

broker add some fuel or inaccurate information to the investor about the CDO. CDO also got AAA+

rate from Moody.

Moody is the one of the main character in the crisis because moody gave the CDO the AAA+ rate.

The reason why moody gave the AAA+ to CDO is that the CDO have a lot of loan mix inside it and

they said that when it has a lot of loan. The risk will spread, and the risk will lower than only one loan

that why they gave the AAA+ to CDO.

 As this picture show that the CDO is divide into the difference class. In the top class, It got

the rate AAA+ from Moody because it is the loan that lend to the people that have a good credit and

stable incomes. In the second class is the people that have a lower credit and incomes than the top

class. Therefore, Moody give the rate BBB and the less class is the people that have a bad credit and

small incomes.

NEW QUESTION

What is CDS?

REFLECTION

I think the problem is that Moody gave the AAA+ to CDO, so I want to know why they give

this rate to CDO. I think CDO is like a bomb that bust.

REFERENCE: https://www.investopedia.com/terms/c/cdo.asp

https://www.investopedia.com/terms/c/cdo.asp
18/05/18(Friday)

Tien
GOAL: find the reason why the interest rate was low.

WHAT I LEARNED: Banks in that situation are very rich. They can use their money for make a

cycle that called foreclosure. They plan to get a big profit. When they give them a money then they

use that money to buy a house. After that they did not have enough money to pay back then banks

sequestrated their house and sell it in the high price.

At that time the interest rate was very low and people borrowed the money from the bank a

lot, and the easy money was born which is the money that people can easily have it. The easy money

made people have more cash in their hand, so they will buy a house. at that time people happy that

they house price went up a lot. So that they buy another one and they think that this one will go up

too. Therefore, the house’s price skyrocket and hit the very high point.

REFLECTION: I have learned about how the bank use money run the foreclosure. I did not find a

main reason why banks have a lot of money yet. From my own opinion I think that this problem made

people greedier in what they want. At that time people think that they should have a house. However,

they get the money from they will buy a house. At the same time some of people believe that they

going to get a profit from loans that the bank sell. Banks have no risk but the risk was travel along that

group of people like a bomb.

NEW QUESTION: how the cycle work?

REFERENCE:http://money.cnn.com/2014/03/21/real_estate/subprime-mortgages/index.html
Kartoon
GOAL: Find more information about how the low interest rate be one of the cause of the Subprime

Mortgage, and the inflation at that time.

WHAT I LEARNED:

In 2003-2004, Alan Greenspan (The president of the Federal Reserve at that time) put the

interest rate or the federal fund rate down to 1%which lower than the inflation at that time. Therefore,

no one want to buy the US bond at that time because the inflation was higher than the interest rate so,

people had a lot of cash in their hand, not only people, but also the banks had a lot of cash in their

hand to; therefore, they start to buy the asset that is not bond such as the stock, gold and especially a

house. The low interest rate also encouraged people to borrow more and buy the asset that they think

can protect them from the inflation which was at 3%. At this affect the house price and other asset’s

price went up a lot. The banks also took the advantage from the low federal fund rate to borrow more

money from the federal reserve in order to use as a leverage to produce more loan to people.

This graph shows the inflation rate since 2001-2012. As this graph show, the interest rate hit

the highest point at 3% in 2003.

 This graph shows the federal reserve rate since 2000-2009. As this graph show, the federal

fund rate was very low at 1% in 2003 -2004

REFLECTION: After I research this information, I think that may be this crisis will not

happen if the Federal Reserve didn’t low the interest rate below the inflation because it will make

people have more cash during the inflation which mean it will grow to fast and start to be the bubble.

In my opinion, It will better to not low the interest rate during the 2003.

NEW QUESTION: What is CDS?

REFERENCE: http://www.inflation.eu/inflation-rates/united-states/historic-

inflation/cpi-inflation-united-states-2003.aspx
21/05/18(Monday)

Tien
GOAL: Find the information about how the foreclosure work?

WHAT I LEARNED: The American dream is that a lot of American people want to buy and have a

house. At 2000 the interest rate is very low, so that the American dream almost come true. The price

of house rose a lot, more people that have money want to buy a house. People that have house is the

sign of wealth and stable. The easy money made people have more cash in their hand, so they will

buy a house however they don’t know how to pay the money back. Then banks are take their property

and sell it later in the high price.

REFLECTION: I have learned that how the foreclosure work. Bank act like monopoly that they

control all the process that can make money.

NEW QUESTION: What was the role of hedge fund in subprime crisis?

REFERENCE:https://www.theguardian.com/world/2008/jun/25/usa.subprimecrisis
Kartoon

GOAL: What is CDS?

WHAT I LEARNED:

CDS

Credit default swaps (CDSs) are credit that provide protection to buyers against defaults and

risk. CDS Buyers pay periodically to the seller until the due date. In the contract, the seller agrees that

if the issuer defaults, the seller will pay the premiums to the buyer, which will be paid on due date.

Through credit exchange, buyers can take risk control measures by shifting the risk to insurance

companies in exchange for periodic payments. Just like a CDS policy, buyers are allowed to buy

protection from unlikely events that may affect their investment.

How investor can make a profit from CDS

Although at first the CDS was made for protect the investor from the default, later this thing turn

into gambling. A lot of people bet on the stock that they think it going to be bankrupt and then they

buy CDS, in order to when the stock got bankrupt they will get the money from the CDS.

Why it related to the Subprime Mortgages Crisis

During 2000-2008, The bank often sold the CDO that pack with the CDS because the can have

more money than sold only the CDO. The bank think that the CDO will not default; therefore, the

bank will not have to pay for the CDS; however, in fact, the CDO was default and a lot of people lost

their money from the CDO, so the banks have to paid for the CDS. A lot of bank don’t have enough

money to pay for the CDSs because the CDOs that default is a lot; therefore, the banks start to

bankrupt.
 As this graph show, the volume of CDS is in the same shape as the volume of CDO which

mean that the CDO was often sold with the CDS, and both increase a lot since 2000-2007.

The AIG was the one of the insurance company that release a lot of CDS and cause the

domino effect to the economy.

NEW QUESTION: What is the domino effect that happen because of AIG?

REFLECTION: Today, I found that the cause of this crisis doesn’t have only the main factor which

is the CDO but it also has the supporting factor which is the CDS that cause a lot of bank to bankrupt.

REFERENCE: https://www.investopedia.com/terms/c/creditdefaultswap.asp

22/05/18(TUESDAY)

Tien

GOAL: Find the information about the role of hedge fund as the cause of the crisis

WHAT I LEARNED

In 2003 the interest rate was very low their no one what to buy the government bond at that

time, so a lot of people put their money to the hedge fund so, the number of hedge fund at that time

increase a lot and the amount of money that hedge funds had at that time was a lot too. The bank saw

that more people interested in the hedge fund so, they started to create their own hedge fund and put
the CDO in to the fund; therefore, when people buy this fund, they will automatically buy the CDO.

The independent hedge fund that was not the bank also buy the CDO too because at that time CDO

was like the popular asset. Therefore, the amount of people who own CDO was increase a lot because

when people bought fund, it meant they bought CDO too.

Finally, the disaster occurred, the price of CDO went down a lot and that affect the hedge

fund and people who own this fund to lost a lot of money.

This graph shows the number of the hedge funds that open and close during 1996-2015. As

this graph shows, in 2005 the number of the launch hedge funds rose to over 2,000 unit and then in

2008 a lot of hedge fund was closed.

REFLECTION: In my opinion the CDO was like a bomb that can destroy everyone that hold it, in

this case the hedge, it happened with the hedge fund.

Reference: https://www.thebalance.com/how-hedge-funds-created-the-financial-crisis-3306079
Kartoon
GOAL: Find the domino effect that happen because of AIG

WHAT I LEARNED

American International Group(AIG) didn’t satisfy enough to be stable company, they wanted

to grow faster, so they started to jump in the CDS business and selling the CDS which made very high

profit.

When the Subprime Mortgage crisis happen, AIG found that the company own more than

500,000 CDSs so, it causes the biggest lost for AIG at 2008 which is around 90,000million dollar lost.

This also cause the banks that bought the CDSs from the AIG because they didn’t have the

insurance’s fund from the AIG which cause those banks into the bankrupt. This is called the domino

effect. The banks were affect by the AIG was the very big bank such as the Lehman Brother or Fannie

mae.

This is the graph of the AIG share’s price. As this graph show, In 2008 the share price of AIG

dropped a lot from over 150 billion dollar to under 50 billion dollar.

REFLECTION

In my opinion the AIG should not too greedy to put a lot of money in the CDSs because they

may be growing fast and make a high profit, but it was risk that the asset will be default. I think if the

AIG bought less CDSs, may be the effect would not severe as this.

NEW QUESTION

What is the main bank that bankrupt during the Subprime Mortgage?
REFERENCE: https://www.economist.com/finance-and-economics/2013/02/02/americas-

improved-giant

https://www.investopedia.com/articles/economics/09/american-investment-group-aig-bailout.asp

23/05/18

Kartoon
GOAL: find the main bank that bankrupt in America.

WHAT I LEARNED

BANKRUPT

-Lehman brother

-Merill Lynch

-Fannie mae

-American International group

As this graph show that during the subprime Mortgages a lot of company

NEW QUESTION: How to make product.

REFERENCE:https://en.wikipedia.org/wiki/List_of_entities_involved_in_2007–

08_financial_crises

REFLECTION

A lot of the big bank was failed that show how severe the effect was, and it show that this crisis alone

can destroy all of the economic system and put the world economic in to the recession.

Tien

GOAL: Find the banks that write down the subprime Mortgages

WHAT I LEARNED

UBS

Citigroup

Merrill Lynch

Morgan Stanley

Credit Agricole

HSBC

Bank of America

Canadian Imperial Bank of Commerce

Deutsche Bank

Mizuho Financial Group

Barclays

Bear Stearns

Royal Bank of Scotland

Washington Mutual

Swiss Re
Lehman Brother

Landesbank Baden-Wurrttemberg

JPMorgan

Goldman Sachs

Freddie Mac

Credit Suisse

Wells Fargo

Wachovia

Royal Bank of Canada

Fannie Mae

Municipal Bond Insurance Association

Hypo Real

NEW QUESTION: How to make product

REFLECTION: Today I have found the list of the countries that write down a Subprime Mortgages

and also a list of banks that use subprime in that period too. I just know that subprime mortgage

affects a lot of countries because the list of the banks I found, it come from many countries

REFERENCE:https://en.wikipedia.org/wiki/List_of_entities_involved_in_2007–

08_financial_crises
25/5/18 (product)
Tien
GOAL: design the product
WHAT I HAVE DONE: I worked on design the product and start to find the materials. I
decided to use a feature board and post it to make to product and decorate by multi-colors
rope. In this evening I will go shopping these thing for working next class.
Reflection: I have done the design already. I think tomorrow we can start the process.

Kartoon
GOAL: choose graphs to put on the feature board.
WHAT I HAVE DONE: I decided to look a graph that we found before in our journal. I
picked two of them that easy to understand. After I finish I working on finding a pictures that
related to subprime mortgages such as the homeless people and Moody logo.
REFLECTION: Today I have have chosen the pictures and graphs to put on the feature
board. This evening I will print it off and work on it tomorrow

28/5/18(product)
Tien
GOAL: make a product
WHAT I HAVE DONE: I brought a big feature so I cut it in half. I start writing on the the
post it and put it on the feature board. I decided to separate into two side. they are Consumer
side and Banks side. Today I plan to finish a bank side.
REFLECTION: I did not finish a bank side yet. I will continue do it after class with Kartoon
this evening. I put some of the post it on the feature board already but not all of them.

Kartoon
GOAL: help Tien make a feature board.
WHAT I HAVE DONE: I help Tien by told him a information that it should appear in our
project such as an American dream. I also help him to decorate the product. I made a sign that
has a word “Subprime Mortgage Crisis” by my own.

REFLECTION: I think today we did our best but we not finish yet. I will continue the
process in this evening with Tien.

29/5/18 (product)
Tien
GOAL: finish our project up
WHAT I HAVE DONE: Yesterday I finished the bank’s side already and continue to do the
Consumer side because I think if we start to do it today it will be too late. then today I
continue doing what we stop yesterday.

REFLECTION: Today we have finished our job already. I have learned a lot of things not
only learn about subprime mortgages but also learn how to work as a team.

Kartoon
GOAL: Continue doing the project. Finish it up.
What I have done: I continue doing the project form yesterday. Today put all the post its we
wrote om the product already. Then we put the picture that I choose on the project too.

REFLECTION: I finished the project already I hope that our project can present what we
learned to the audient correctly. I have learned how to do works as team and manage the time
to finish the project. This project teaches me a lot of thinks. I also gain a knowledge too. Now
our project is finished. We will write the reflection soon.
.