Anatomy of a meltdown

Connecting the dots that led to the global financial crisis:

• Quasi privatization of Fannie Mae and Freddie Mac

• Modified Community Reinvestment Act

• NINJA loans are created and issued

• Lender sells a loan to a borrower

• Lender sells the mortgage to an investor (private/GSE)

• Investor buys a CDS to protect their investment from an insurer

• 9/11 terrorist attacks

• Federal Reserve lowers interest rates to 1 percent to ignite economy and consumer spending

• Easy credit allows NINJA homeowners to refinance or take out home-equity loans; borrowers use this money to spend and to pay off new adjusted mortgage payment

• Economy slows and home prices decrease; some homeowners owe more than their home is worth; homeowners start to default

• Economy slows further due to high commodity prices, unemployment rises, and country enters into recession; defaults rise

• Subprime loans default in large numbers; exposed lenders/holders have massive losses, try to raise capital by selling off assets, go into bankruptcy or are taken over by another company or government

• Loan defaults: investor collects payment from insurer

• Insurer has too many payments; company collapses due to a lack of confidence and liquidity; government bails them out

• Global investors that hold any subprime debt lower earnings

• Exposed companies deleverage themselves by selling off good assets to raise capital; the massive global deleveraging causes an avalanche in the global stock markets

• More companies are affected; 1 million jobs are eliminated in the US in six months

• Unemployment rises, affecting the broader mortgage market of higher-quality loans; people who had strong earnings now have no job to make any payments

• The Federal Reserve and Treasury step in to bail out the financial community

• The bailout does not stop defaults or bring certainty to the markets