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In the fall of 2008, it became clear that a cascade of bank failures was happening because of shoddy loans and exotic securities (both which fueled a now popping housing bubble). In an attempt to avoid a depression, the Treasury Secretary (Hank Paulson) wanted to pour $1 Trillion into the same banks that had created the mess.
This tutorial walks us through the beginnings of the mess and possible solutions. Historical note: it was created as the crisis was unfolding.
Video of Sal on CNN on October 10th discussing the credit crisis and a potential solution to it.
Review of balance sheets. Difference between illiquidity and insolvency.
Hypothetical bank balance sheet. What book value means.
What it means when the market value of a stock is different from its book value.
Different ways of accounting for an asset. Mark-to-model vs. mark-to-market.
How the bank can liquidate assets to pay off debt that comes due.
The bank gets bailed out by an equity infusion from a sovereign wealth fund.
What happens when there is no equity infusion and the bank goes in to bankruptcy.
How the banks are connected. What happens when one bank fails.
What Paulson wants to do and why I don't like it.
Alternate plans and moral hazard.
Why a CDO could be worth nothing even though they are "collateralized".
A real life example of a transaction involving CDOs.
Can the bailout work?
A solution that is MUCH fairer that has a MUCH better chance of working!
More on the "Plutsky Plan".