7. Global economic crisis Aa Aa One of the most discussed topics in finance rece

Question

7. Global economic crisis Aa Aa One of the most discussed topics in finance recently is the global economic crisis that is said to have begun in the 2000s. Your professor instructed your team to write an article for the college newspaper. Your friend has written the first draft of the article, which captures the essence of the global economic crisis. She has left some important points for you to review and has asked you to check the summary Which statements belong in the summary? Check all that apply The Global Economic Crisis Summary Mortgage originators issued mortgages to home buyers and sold these mortgages to securitizing firms. These firms bundled these mortgages into pools and created securities that were backed by the mortgage payments. A portion of these pools were called tranches. Groups of tranches were further combined and then divided again into more complex securities called collateralized debt obligations (CDOs). These securities were redivided and recombined to create even more complex securities called CDOs-squared The total amount of risk embedded in the securities created by bundling mortgages did not change. The securitization and resecuritization processes led to a distribution of total risk among different types of collateralized securities Investors across the globe were buying mortgage-backed securities for the rate of return that these securities were generating. Most of these investors chose to be such investments. ignorant of the risks involved in From a borrower's perspective, adjustable-rate This process had important im plications: (1) The total risk embedded in the mortgages did not change; (2) since the risk was spreacd amongst several CDOs, it was difficult mortgages (ARMs) are considered riskier than traditional fixed-rate mortgages, because mortgage payments might increase without an increase in income Mortgages were accessible for borrowers who did not meet income and minimum down payment requi really low to prevent a recession. This led to a decrease in the demand for homes and a further decline in housing prices. rements. Moreover, the Fed kept interest rates Factors that caused the financial crisis Analysts and theorists have debated over the different factors that caused the subprime mortgage meltdown. According to your understanding of the crisis, which of the following factors led to the financial crisis? Check all that apply Home buyers opted for traditional fixed-rate mortgages to avoid any payment delinquency Investors were fully aware of the risks involved, yet still settled with low returns Credit default swaps claimed to insure CDOs Mortgage brokers did not verify borrowers carefully

Explanation / Answer

Among the given options only the last two options contributed to the crisis i.e. credit default swaps claimed to insure CDOs which ultimately led CDS providers defaulting; and mortgage brokers did not verify borrowers carefully thereby providing loans to unworthy borrowers who ultimately defaulted.

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