Thursday, September 18, 2008

The Credit Crisis

From our fearless reporter/trader Evan: "This is the best explanation of the credit crisis":

A family would borrow $100,000 from Countrywide,

which would sell $100,000 of bonds to hedge funds,

which would borrow $100,000 from Bear Stearns, their prime broker, to buy these bonds.

Bear Stearns would raise this money by selling $100,000 of commercial paper to Lehman Brothers,

which would then borrow $100,000 through the inter-bank market from Bank ofAmerica.

The original borrower is still the same household and the ultimate lender is still Bank ofAmerica, but now a $100,000 mortgage has created $500,000 of new debts.

May the force be with you!

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