Collapse of Financial Systems e.g. banks?Somebody tell me cause I really got to know. I saw an article about Bank of America having a 2.2 Billion dollar loss. I dont care who you are or which organization you belong to, you're gonna feel a 2.2 Billion dollar loss. A lot of things have been said through out the ages, from Nostradamus, to ancient... | |
The current financial crisis was precipitated by a bubble in house prices and its subsequent burst, which led to a wave of foreclosures, the seizure by the Federal government of the main vehicle for securitization (the Government Sponsored Enterprises [GSEs] Fannie Mae and Freddie Mac), the obliteration of the “private label” securitization market, the failure of 92 banks so far this year, and bailout costs for the remainder of the banking system. No one has come out smelling like a rose. The question we address is what should happen to the historically most important players in the mortgage market: Fannie Mae, Freddie Mac, and the banks.
Broadly speaking there are two models for funding mortgages (and other loans): the portfolio lender model, which entails financial institutions (e.g., banks) originating and holding loans in their portfolio and funding them with debt (e.g., deposits), and thesecuritization model, which entails buying loans and putting them into pools and selling (perhaps structured [1]) shares in the pools to capital market investors. Many of the current financial arrangements are combinations of the two. The easiest way of looking at the two models is to think of them as applying to institutions called “banks” and “securitizers” and to view the rules and benefits that apply to them as their “charters.”
