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!