十分钟搞懂“次贷危机” The crisis of credit visualized英汉对照.doc

The crisis of credit visualizedWhat is the credit crisis? It is a worldwide financial fiasco, involving terms you probably heard like, Sub-prime mortgages, collateralized debt obligations, frozen credit markets and credit default swaps.Who is affected? EVERYONE.How did it happen? Here's how. The crisis of credit brings two groups of people together, home owners and investors. Home owners represent their mortgages and investors represent their money.These mortgages represent houses, and these money represent large institutions, like pension funds, insurance companies, sovereign funds, mutual funds etc.These groups are brought together though the financial system, a bunch of banks and brokers commonly known as Wall Street. Although it might not seem like it, these banks on Wall Street are closely connected to these houses on Main Street. To understand how let's start at the beginning. Years ago the investors were sitting on their pile of money, looking for agood investment to turn into more money. Traditionally they go to the USFederal Reserve, where they buy treasury bills believe to be the safestinvestment. But in the wake of the bust and September 11th,Federal Reserve chairman Alan Greenspan lowers interests rates to only1% to keep the economy strong. One percent is a very low return oninvestment, so the investors say no thanks. On the flip side, this meansbanks on Wall Street can borrow from the Fed for only 1%, add to thosegeneral surpluses from Japan, China and Middle East, and there is anabundance of cheap credit. This makes borrowing money easy for banksand causes them to go crazy with LEVERAGE.LEVERAGE is borrowing money to amplify the outcome of a deal. Hereis how it works: in a normal deal, someone with 10 thousand dollars buysa box for 10,000 dollars, he then sells it to someone else for 11,000dollars, for a 1000 dollars profit, a good deal. But using leverage,someone with 10,000 dollar would go borrow 990,000 more dollars,giving him one million dollars in hand, and then he goes and buys 100boxes with his one million dollars, and sells them to someone else for1100,000 dollars. Then he pays back his 990,000 plus 10,000 in interest,and after his initial 10, 000, he is left with 90,000 dollar profit, versus theother guys 1000. Leverage turns good deals into great deals; this is amajor way banks make their money. So Wall Street takes out a ton ofcredit, makes great deals and grows tremendously rich, and then pays it back. The investors see this and want a piece of action, and this gives Wall Street an idea, they can connect the investors to the home owners through mortgages. Here is how it works: a family wants a house, so they save for a down payment and contact a mortgage broker, mortgage broker connects the family to a lender, who gives them a mortgage. The broker makes a nice commission; the family buys a house and becomes home owners. This is great for them because housing prices have been rising practically forever. Everything works out nicely.One day, the lender gets a call from an investment banker, who wants to buy the mortgage. The lender sells it to him for a very nice fee; the investment banker then borrows millions of dollars and buys thousands more mortgages, and puts them into a nice little box. This means that every month he gets the payments from the home owners of all the mortgages in the box, and then he sets his banker wizards on it to work their financial magic, which is basically cutting it into three slices: safe, okay and risky. They pack the slices back up in the box and call it a Collateralized Debt Obligation, or CDO.A CDO works like three cascading trays. As money comes in, the top tray fills first, then spills over into the middle, and whatever is left into thebottom. The money comes from home owners paying off their mortgages. If some owners don't pay and default on their mortgage, less money comes in and the bottom tray may not get filled, this makes the bottom tray riskier and the top tray safer to compensate for the higher risk. The bottom tray receives a higher rate of return, while the top receives a lower but still nice return. To make the top even safer, the banks will ensure it for a small fee called a Credit Default Swap. The banks do all of this work so that credit rating agencies will stamp the top slice as a safe, triple a rated investment, the highest safest rating there is. The okay slice is triple Bastille pretty good, and they don't bother to rate the risky slice. Because of the triple a rating, the investment banker can sell the safe slice to the investors who only want safe investments. He sells the okay slice to other bankers, and the risky slices to hedge funds and other risk takers. The investment banker makes millions, he then repays his loans.Finally, the investors have found a good investment for their money, much better than the 1% treasury bills, they are so pleases, and they。