The global market is having serious problem because of mortgage crisis. Watch your investment carefully. There are many bad news in the US market and around the world:

• On March 14 2008, JPMorgan Chase, in conjunction with the Federal Reserve Bank of New York, provided a 28-day emergency loan to Bear Stearns in order to prevent the potential market crash that would result from Bear Stearns becoming insolvent. Two days later, Bear Stearns signed a merger agreement with JP Morgan Chase in a stock swap worth $2 a share or less than 10 percent of Bear Stearns’ market value.
• The federal takeover of Fannie Mae and Freddie Mac refers to the placing into conservatorship of government sponsored enterprises Fannie Mae and Freddie Mac by the US Treasury in September 2008.
• Lehman Brothers Holdings Inc., the fourth-largest U.S. investment bank, filed a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today. Lehman was forced into bankruptcy after Barclays Plc and Bank of America Corp. abandoned takeover talks yesterday.
• Bank of America Corp., the biggest U.S. consumer bank, agreed to acquire Merrill Lynch & Co. for about $50 billion as the credit crisis claimed another of America’s oldest financial companies. This news is good for the market. But this also tells us that current subprime mortgage crisis is far from over.
• On the evening of September 16, 2008, the Federal Reserve Bank’s Board of Governors announced that the Federal Reserve Bank of New York had been authorized to create a 24-month credit-liquidity facility from which AIG may draw up to $85 billion. The loan is collateralized by the assets of AIG.
• Washington Mutual Inc. became the nation’s biggest bank to collapse after U.S. government regulators seized the Seattle- based bank on Sept. 25. JPMorgan Chase & Co. agreed to acquire WaMu’s deposits and branches for $1.9 billion.
• Fortis, the largest Belgian financial-services firm, received an 11.2 billion-euro ($16.3 billion) rescue from Belgium, the Netherlands and Luxembourg after investor confidence in the bank evaporated.
• Citigroup Inc., the biggest U.S. bank by assets, will acquire the banking operations of Wachovia Corp., rescuing the Charlotte, North Carolina-based lender beset by mortgage losses for more than $2 billion in stock.

Stocks tumbled worldwide, the dollar fell and U.S. Treasuries surged after the bankruptcy of Lehman Brothers Holdings Inc. drove investors to the safety of government debt.

Tags: AIG, Bear Stearns, Fannie Mae, Fortis, freddie mac, lehman brothers, Merrill Lynch, Wachovia, Washington Mutual

It starts with mortgage. Many Americans borrowed money to buy their own house. After the crash of the dotcom bubble in 2000s many countries including US were facing economic recession. To spur growth, they lowered interest rates. Everybody were lending much money to buy house because it is cheap (low interest rate), making real estate property sky rocketed during this period.

The lenders (example: Washington Mutual) did not have to worry very much about the risk of default, because they created a bond from bundling these mortgages called Mortgage-Backed Securities (MBS), which they then sold to hedge fund, pension funds, and other financial institution (example: Fannie Mae, Freddie Mac, Lehman Brothers). This is a called securitization – conversion of mortgages or loans into bonds. The idea was to reduce risk exposure and raising new fund. The man behind securitization was an Investment Banker of ‘Salomon Brothers’ - Lewis S. Ranieri. In 1980s Salomon launched MBS.

It is hard to sell MBS because of it’s high risk. So they slice the MBS into smaller bond called ‘tranches’ with various risk level from high risk, middle risk, and low risk. Of course higher risk will have higher returns, but if something went wrong, it will be lost first. Salomon used a special purpose vehicle known as Collateralized Mortgage Obligation (CMO). Legally, a CMO is a special purpose entity that is wholly separate from the institution(s) that create it. Monthly instalment from mortgage was used to pay the interest on these bonds. Lender can also minimize risk by insuring the mortgage to other companies like AIG.

When the Fed raise it’s rate until 5.25% in June 2006, people will pay more for monthly instalment. The rate stays there for a long time, making many people unable to pay the instalment. When these people fail, they will also drag financial institution into trouble. That’s why we have seen many troubled institution like Washington Mutual, Fannie Mae, Freddie Mac, and Lehman Brothers. Every institution buying these MBS and it’s derivative around the world will get into trouble.

Tags: CMO, Collateralized Mortgage Obligation, Fannie Mae, freddie mac, lehman brothers, Lewis S. Ranieri, MBS, Mortgage, mortgage crisis, Mortgage-Backed Securities, Salomon Brothers, securitization, Washington Mutual