Financial derivatives
In the eighties term discovered a smart investment bankers, that one could combine many mortgage loans and convert the cash flows (interest and repayment) in a bond.
The payment flow was of a thousand mortgage was therefore predictable than that of only one.The commercial bank and the money can enter from the sale of the bonds and the Creditwheel could put again in motion.
In the process of securitization is the creditworthiness of the individual bonds be improved greatly, in the example the Investment Bank credit insurance terminates.
If the bond is laced only once this gets a rating by a recognized international Agentur.These are almost Standard & Poor's or Moodys.Regrettaly are also a lot of grotesque ratings assigned .The rebellion from critics was always denied.Often was for the rating assigned AAA credit rating, so Primus and highest financial strengh.If this was so fair, we'd better let it unspoken.With such a rating, the investment bank can then place high and sell.
Investment bankers, Fannie Mae and Freddie Mac had a new and thus very profitable field of activity founded.
Consider: Between 1995 and 2001 the volume of mortgage loans in the U.S. rose more than 5 trillion Dollar.75 % of it was changed into bonds and placed to the investors in their port Portfolios .The height of the last real estate bubble,let 2007 the U.S. collapse and ran almost around the whole globe.
The securitization of credit stopped not at mortgage loans,also auto loans and consumer debt got changed into it,means transformed.So were the credit budget held in bonds set in motion more quickly.
The whole process is good as long as the financial system is not factored into serious problems .Breakdowns were calculated.Regrettaly the drive have to be ensured.The investment bankers take advantage over this clients, providing credit to those they could not afford this.This turned in the housing crisis, that 2007 happened.Here also issued ratings on so-called junk property, came up with bad banks assets.Also it was as it had to happen, the house of cards collapsed.
Investors who thought they had high quality corporate bonds in the portfolio realized suddenly that they had bought junk bonds.
The collapse of investment banks was not able to stop.Many banks had to be supported by the state, to prevent a huge disaster.
Only with this money was again blown fresh liquidity in the banks.
Standard & Poor's and Moody's remain happily and deal happy ahead with their rankings and credit pledge ...
Another and more explosive variant are the so-called financial derivatives .These class is so dangerous that Warren Buffett named them "financial weapons of mass destruction."
Financial derivatives are contracts that derive their value from an underlying asset (= underlying) (derivative = derived). Still relatively easy to understand derivatives are options and appointmentdeals.At an option you acquire the right to a certain date or within a certain time to buy an asset or to sell.
Example:
You will receive an option that you have the right to a DaimlerChrysler share to 40 € .Stand the share price at exercise over this value, the intrinsic value of this business, they make benefit.Is the value of this is under, you let the option expire.
It gets particularly critical with termincontracts.Here you do NOT have the right but the duty, a corresponding asset at a specified time and price to buy or sell.
Ultimatelyit is a betting and a gambling to the future.These actions can quickly lose your entire fortune, but the bank we are always gorgeous erning.Financialderivates can sometimes fullfill legitimate functions .The problem is not their existence, but the reckless and massive use at the peak of a bull market.
Derivate are always odds with expired date.With a very small capital base can be moved huge volumes of speculation.
The 25 largest American banks have been speculative derivatives trading risks, which exceeded the equity of these banks to 10 times.
Example: 2000, the ratio of credit risk to equity at Morgan Guaranty 873.3%, at Chase Manhattan Bank 442.5%, 442.5% at the city bank, with Bank of America 14.5% Insurance Board this action.: AIG.Where AiG is today, is well known ... ..
The derivatives includes Hedgefonds.These are rooffonds subordinated-even in disarmed form.Fonds of this kind, borrow the shares and sell them in the hope that they can later return them at a cheaper prize.Than the fonds can take the whole proceed and have to spend only a small sum to stock up again with the same shares.
Derivatives are not only closely with stupidity, recklessness, self-esteem and inability connected, they can also lead to large fraud .The U.S. energy company Enron is an example for that.In his principle had Enron by using financial derivatives already Revenue from the sale of electricity and gas, making it only in the future .The relevant costs were not shown, although not counted.Sale figures flared up at huge profits, the result of further sellings.Enron fictitious trades more and more electricity or gas to date on their own front companies that could not use the supplies. If a company sells to itself can not be a real sales ... ....
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