Subprime Crisis: The Role of Off Balance Sheet Entities

[loosechangeexposed]

good job explaining the mess, i think we can sum it up with one 5 letter word GREED

[dondido81]

so actualy what problems have arisen from the use and development of off-balance sheet entities - the video doesn't analyse those problems at all

[chasleo]

In partial response to your last question/answer - I think from a psychological standpoint anything which has the word 'off' (as in 'off-balance') sounds a bit 'off' to begin with... I'm sure your answers are just as valid, but I'm also sure this naming convention doesn't help matters either lol.

[pauper101]

ahhh icc, many thanks dave.

[InformedTrades]

Hi Pauper101, Thanks for the comment and for watching. Best Regards, Dave

[pauper101]

hello,

Ive been watchin ur other videos on the subprime crisis and i dont understand when u say the banks will issue out short term debt to buy the longer term mortage back secruities. plz explain abit simplier.. thx

[InformedTrades]

hi, Thanks for the comment and for watching. Because banks are normally very financially stable entities they can borrow money, and pay less of an interest rate on that money, than an individual would pay for borrowing the same amount of money. Secondly in general when someone borrows money for a long period of time for something like a mortgage the interest rate that they pay is higher than for a shorter term loan. So the banks were borrowing money by selling short term debt which they

[InformedTrades]

paid a low interest rate on and then taking the money that they borrowed by selling debt and buying these pools of mortgages whihc were made up of longer term debt that was less financially stable and therefore paid a higher interest rate. So for example they would borrow money at 3% and buy securities which paid 8%, earning them just as an example 5% a year from the difference. Hope that helps, Dave

[whythebailout]

Question, who were they sellling these packages of debt to and how much information do these buyers have about what they bought? Who do these houses really belong to once their debt is packaged up into these security packages and sold?

[InformedTrades]

They were selling them to other banks, hedge funds, pension funds, insurance companies basically anyone who was large enough to invest in them. I don't think many people really understood what they were buying however. The houses still belong to the mortgage holder but the mortgage belongs to whomever bought the debt. Best Regards, Dave

[whythebailout]

So, the investors actually know exactly which homes they own? If a securities package is "slices" how does an investor understand what they own?

[InformedTrades]

I understand it the investment portion of the debt was separated from the servicing rights portion. So in other words the entity that was billing the mortgage borrower and therefore knew which mortgage went with what was separated from the hedge fund or other entity that bought a part of the mortgage pool. The mortgages in that pool were all supposed to be of the same quality so the investor didn't care about the individual loans just the overall quality of the loan pool.

[InformedTrades]

Hi Dbporter, Thanks for the comment will look into upping the quality. Best Regards, Dave

[dbporter]

your background is too busy, and you should put the mic closer, wear a clip on.