Home Owner represents Mortgage , capitalist represents cash. The home-owner is searching for homes , the capitalist is trying forward to take a position to the establishment. The establishments comprise sovereign fund , open-end fund, insurance firms, pension funds etc. Over the past decades the investors were sitting on their cash and continuously searching for a decent investment which could be become more cash. historically they're going to U.S. Federal Reserve. They get Treasury bill as a secure investment however once 911 Federal Reserve chairman scale back the rate of interest to a quarter that is extremely low come back on investment. that the capitalist not invested with. They debt from Japan , China associate degreed there's an abundance of free credit. This makes borrowing cash easier for banks. Banks to travel crazy with Leverage.
How Leverage works:
Leverage is that the borrowing of cash of the amplify the end result of a deal.
A dealer with associate degree quantity of BDT ten,000 would get associate degree robot mobile of BDT ten,000. S/He might sell it to his client in BDT eleven,000. a decent subsume BDT one,000 profit. however victimisation leverage somebody with BDT ten,000 will borrow BDT nine,90,000 more. Then S/He bought equivalent robot phones and create BDT one,10,000 more cash. Then S/He pays back his BDT nine,90,000 and BDT ten,000 interest. once his initial BDT ten,000 He makes BDT ninety,000 additional profit vs the opposite guys profits BDT one,000. Leverage turns bargain. this is often the main means , however banks create their cash. that the exchange takes a lot of credit. Banks become enormously reach. Then pays it back.
Investor see this and securities market got a thought. They planned to attach the capitalist to the householders through mortgages. Here’s however it works.
Family needs a house. They except the deposit and contract to mortgage brokers. The mortgage broker connects the family to a loaner UN agency offers them a mortgage. The broker makes a pleasant commission. The family buys a house. Housing costs are rises much. Everything works out nicely. sooner or later the loaner got a decision from associate degree agent UN agency needs to shop for the mortgage. loaner sales it to the bank and create a pleasant commission . agent then buys thousands of million mortgages and borrow DEBT from others. this implies monthly he gets a payment from householders of all the mortgages. Then they categorised the householders in 3 slices safe , okay and risky. They pack a COLLATERALIZED DEBT OBLIGATION box. CDO work likes 3 cascading trays. As cash comes prime receptacle feel 1st then second then third. If a house owner didn’t pay cash then less cash comes in & the lowest receptacle might not get stuffed.They catch up on the upper risk. Bottom receptacle receives a better rate of come back wherever the highest receptacle receives lower. to form the highest receptacle even safer the bank can introduce a term known as CREDIT DEFAULT SWAP. Then they sell it to all or any credit rating agencies. Then they sale the safer slices to agent UN agency needs safe investment and risky slices to risk takers banker. Investment bankers create millions. He then repays his loss and Debt. Then the investment bankers found a much better platform than one hundred and twenty fifth rate of interest of the Federal Reserve. They therefore happy they require additional CDO. that the investment bankers decision the loaner wanting additional mortgages. The lenders decision to the broker for additional householders. however the broker cannot notice anyone as a result of everybody qualifies for the mortgage already had one. Then they need a thought. once home-owner defaults their mortgage the bankers get their house and homes square measure continuously increasing in price. therefore lenders will adding risk to the new mortgages. that needs no deposit , no proof of financial gain, no documents in the slightest degree. accountable home-owner known as PRIME MORTGAGES. Less accountable home homeowners known as SUB PRIME MORTGAGES. this is often the turning purpose. currently amazingly or adventitiously home homeowners create defaults. this implies he forcloses and one among his monthly payment missing will be changed into a house. however additional additional this monthly payments become house. currently there square measure such a big amount of homes within the market rating additional provides over demand surpassing its utility and therefore the housing costs is amazingly goes down. This creates a remarkable downside for home homeowners. Then the neighbor householders assume through why the square measure planning to pay forty,00,000 lacs wherever this price of this house abate to thirty,00,000 lacs. They decide it doesn't add up to pay any longer. They go forth and lorn their house.Now the capitalist bankers have lots of price less homes. Then he decision his capitalist to sell his CDO however the capitalist isn't interested. Bankers attempt to sell this to each one however no one get his bomb. He freaking out as a result of he borrows millions generally billion bucks to shop for this bomb & he cant pay it back. no matter he tries he cant get eliminate it. Lenders decision up to sell his mortgage however the bank shows no interest and therefore the broker is out of order. the entire financial set-up has frozen and things get dark. one and all starts going BANKRUPT.
How Leverage works:
Leverage is that the borrowing of cash of the amplify the end result of a deal.
A dealer with associate degree quantity of BDT ten,000 would get associate degree robot mobile of BDT ten,000. S/He might sell it to his client in BDT eleven,000. a decent subsume BDT one,000 profit. however victimisation leverage somebody with BDT ten,000 will borrow BDT nine,90,000 more. Then S/He bought equivalent robot phones and create BDT one,10,000 more cash. Then S/He pays back his BDT nine,90,000 and BDT ten,000 interest. once his initial BDT ten,000 He makes BDT ninety,000 additional profit vs the opposite guys profits BDT one,000. Leverage turns bargain. this is often the main means , however banks create their cash. that the exchange takes a lot of credit. Banks become enormously reach. Then pays it back.
Investor see this and securities market got a thought. They planned to attach the capitalist to the householders through mortgages. Here’s however it works.
Family needs a house. They except the deposit and contract to mortgage brokers. The mortgage broker connects the family to a loaner UN agency offers them a mortgage. The broker makes a pleasant commission. The family buys a house. Housing costs are rises much. Everything works out nicely. sooner or later the loaner got a decision from associate degree agent UN agency needs to shop for the mortgage. loaner sales it to the bank and create a pleasant commission . agent then buys thousands of million mortgages and borrow DEBT from others. this implies monthly he gets a payment from householders of all the mortgages. Then they categorised the householders in 3 slices safe , okay and risky. They pack a COLLATERALIZED DEBT OBLIGATION box. CDO work likes 3 cascading trays. As cash comes prime receptacle feel 1st then second then third. If a house owner didn’t pay cash then less cash comes in & the lowest receptacle might not get stuffed.They catch up on the upper risk. Bottom receptacle receives a better rate of come back wherever the highest receptacle receives lower. to form the highest receptacle even safer the bank can introduce a term known as CREDIT DEFAULT SWAP. Then they sell it to all or any credit rating agencies. Then they sale the safer slices to agent UN agency needs safe investment and risky slices to risk takers banker. Investment bankers create millions. He then repays his loss and Debt. Then the investment bankers found a much better platform than one hundred and twenty fifth rate of interest of the Federal Reserve. They therefore happy they require additional CDO. that the investment bankers decision the loaner wanting additional mortgages. The lenders decision to the broker for additional householders. however the broker cannot notice anyone as a result of everybody qualifies for the mortgage already had one. Then they need a thought. once home-owner defaults their mortgage the bankers get their house and homes square measure continuously increasing in price. therefore lenders will adding risk to the new mortgages. that needs no deposit , no proof of financial gain, no documents in the slightest degree. accountable home-owner known as PRIME MORTGAGES. Less accountable home homeowners known as SUB PRIME MORTGAGES. this is often the turning purpose. currently amazingly or adventitiously home homeowners create defaults. this implies he forcloses and one among his monthly payment missing will be changed into a house. however additional additional this monthly payments become house. currently there square measure such a big amount of homes within the market rating additional provides over demand surpassing its utility and therefore the housing costs is amazingly goes down. This creates a remarkable downside for home homeowners. Then the neighbor householders assume through why the square measure planning to pay forty,00,000 lacs wherever this price of this house abate to thirty,00,000 lacs. They decide it doesn't add up to pay any longer. They go forth and lorn their house.Now the capitalist bankers have lots of price less homes. Then he decision his capitalist to sell his CDO however the capitalist isn't interested. Bankers attempt to sell this to each one however no one get his bomb. He freaking out as a result of he borrows millions generally billion bucks to shop for this bomb & he cant pay it back. no matter he tries he cant get eliminate it. Lenders decision up to sell his mortgage however the bank shows no interest and therefore the broker is out of order. the entire financial set-up has frozen and things get dark. one and all starts going BANKRUPT.