Download 1.The role of Investor Bankers and the concept of Collateralized

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Macroeconomics Questions
1.The role of Investor Bankers and the concept of Collateralized Debt Obligations/Subprime
mortgages
The investor banker is responsible for the sale or issuance of new securities or what we
call the primary issue, to raise funds. He purchases the primary issue from cooperations and
plans for the resell immediately to the investors. The investment bankers perform three functions
namely; investment research and analysis, underwriting and distribution.
Collateralized Debt Obligation (CDO) is a security whose worth is backed by a pool of
cash flow generating assets and repackages them into portions that can be sold to investors. This
investment yields regular returns and the payment is based on the pools performance. This is the
financial instrument that most traders use to sell securities that individually would be hard to sell
for instance payments from subprime mortgage. As part of the diverse pool, these securities
represent a small portion of total value of the underlying assets making it lucrative to potential
customers (Slovik, 2011)
2.
a) The economic impact of Subprime crisis.
The subprime crisis happened when banks sold many mortgages to meet the demand for
mortgage-backed securities. The house prices declined in 2006; it resulted to defaults. The risk
spread into mutual funds, the pension funds, and the derivative owning corporations. Its
economic impact was the 2007 banking crisis, the 2008 financial crisis, and the Great Recession
and this was the great recession since the great depression (Hera, 2010). The monthly payments
for those who had interest and subprime loans dependent on the fed funds rate and those
homeowners who didn’t make it purchase conventional mortgages applied interest only loans
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which had lower monthly payments. As the houses prices fell, many customers realized that their
homes worth did not tally with the value of their money that they paid for. In parallel, the interest
rates hiked along with the Fed Fund Rate. Consequently, the home owners were not able to pay
the mortgage nor sell the home for profit thus they defaulted. The rising rates led to the
slackened demand.
b. The plan of Alan Greenspan,Chairman, Federal Reserve
Alan Greenspan Chairman Federal Reserve proposed the waiver of the interest rates to
only 1% to keep the economy strong. It is a very low return on investment thus the investors said
no. I think the plan led to the housing crisis. The new borrowing then was pumped into housing.
The low-interest rates spur home purchasing
C. outline of credit crisis in US housing market in 2007
The financial crisis of 2007 in the US housing market was the biggest since the Great
Depression and realigned the world of housing finance market and the investment banking. The
crisis was due to the combination of the debt and mortgage-backed assets, the house a price in
the US has been raising steadily with few fluctuations though the trend has remained upward.
The crisis was as a result of the explosion in the issuance of bonds backed by mortgages that are
the mortgage backed securities. Reason being the use of securitization in the pooling of debt and
then the issuance of assets based on debt. Collateralized debt obligation (CDO) is the
repackaging of the mortgage after being bought from the issuers and sell off specific tranches of
debt to the investors.
Narvik, the Ice Free Port which is in Norway related to the Wall Street in the sense that
there was housing market crisis in both. This was due to the credit crisis that began due to the
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subprime mortgage market spreading to most parts of the world affecting the economy. The two
leveraged advantage of decreased loan interest rates and borrowed more using future energy
revenue as collateral. They invested the money in diverse securities. As the market deteriorated,
the investment declined in value.
d. Daniel Sadak
He is the founder of the collapsed subprime lender quick loan funding. He is also a
renowned producer and writer in the USA. He made and lost a fortune in the subprime mortgage
which collapsed (Carney, 2009).
The Role of Greed in Market Collapse
Greed role in the market collapse was the contribution of credit markets nearing to
paralysis. The individual consumers were being denied loans for mortgages. His business interest
played a central role making ever large gambles.
3.
Bitcoin is the electronic currency in which high level encryption has been applied to
regulate units of currency generation and funds transfer verification. It doesn’t have or rely on
the central bank. The money exchange process is virtualvia software. It originated in 2008
released by Satoshi Nakamoto as a white paper, he pointed out the idea as peer to peer way of
electronic cash to the universe. He was solving the issue of money copying. The first ever
Bitcoin dubbed Genesis was launched in 2009 allowing the original mining of Bitcoins. The first
ever transaction took place between Satoshi and Hal Finney who was the developer and the
cryptographic.
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The Bitcoin works in this way; as a new user you are supposed to install the Bitcoin
wallet on your device be it the computer of the phone, then it will generate your Bitcoin address,
and you can always create more addresses when you need them, and it is allowed to disclose
them to your friends in which they can pay you. The block chain is shredded public ledger on
which the Bitcoin network and customers depend. The transactions are shown in the block chain.
Transfer of value between Bitcoin wallets that are shown on the block chain. Mining is the
distributed consensus system which is used to confirm the pending transactions by showing in
block chain (Glantz, 2014)
Bitcoin is a threat to the existing monetary system around the globe. It encourages money
laundering which then will affect other monetary institutions leading to them making a loss. It
could also affect the consumer's behavior in future and producers and change the monetary
policy relevance.
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References
Carney, J. (2009). Thugs Mount on Subprime. Business Insider.
Glantz, R. (2014). Pantera Primer. oxford press.
Hera, R. (2010). Forget about housing, the real cause of the crisis as OTC Derivatives. Business
insider, 25.
Slovik, P. (2011). Macroeconomic Impact of Basel III, OECD. oxford press.