[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:01.68,0:00:05.54,Default,,0000,0000,0000,,The Crisis of Credit, Visualized.
Dialogue: 0,0:00:08.54,0:00:10.70,Default,,0000,0000,0000,,What is the credit crisis?
Dialogue: 0,0:00:10.70,0:00:12.92,Default,,0000,0000,0000,,It's a worldwide financial fiasco
Dialogue: 0,0:00:12.92,0:00:15.87,Default,,0000,0000,0000,,involving terms you've probably heard,\Nlike
Dialogue: 0,0:00:15.87,0:00:20.16,Default,,0000,0000,0000,,sub-prime mortgages, collateralized debt\Nobligations, frozen
Dialogue: 0,0:00:20.16,0:00:23.51,Default,,0000,0000,0000,,credit markets, and credit default swaps.
Dialogue: 0,0:00:23.51,0:00:24.74,Default,,0000,0000,0000,,Who's affected?
Dialogue: 0,0:00:25.56,0:00:26.40,Default,,0000,0000,0000,,Everyone.
Dialogue: 0,0:00:26.40,0:00:27.93,Default,,0000,0000,0000,,How did it happen?
Dialogue: 0,0:00:27.93,0:00:28.93,Default,,0000,0000,0000,,Here's how.
Dialogue: 0,0:00:28.93,0:00:34.05,Default,,0000,0000,0000,,The credit crisis brings two groups of\Npeople together, homeowners and investors.
Dialogue: 0,0:00:34.05,0:00:39.68,Default,,0000,0000,0000,,Homeowners represent their mortgages and\Ninvestors represent their money.
Dialogue: 0,0:00:39.68,0:00:44.87,Default,,0000,0000,0000,,These mortgages represent houses, and this\Nmoney represents large institutions
Dialogue: 0,0:00:44.87,0:00:50.59,Default,,0000,0000,0000,,like pension funds, insurance companies,\Nsovereign funds, mutual funds, etc.
Dialogue: 0,0:00:50.59,0:00:53.63,Default,,0000,0000,0000,,These groups are brought together through\Nthe financial system, a
Dialogue: 0,0:00:53.63,0:00:57.67,Default,,0000,0000,0000,,bunch of banks and brokers commonly known\Nas Wall Street.
Dialogue: 0,0:00:57.67,0:01:00.20,Default,,0000,0000,0000,,While it may not seem like it, these banks\Non
Dialogue: 0,0:01:00.20,0:01:04.63,Default,,0000,0000,0000,,Wall Street are closely connected to these\Nhouses on Main Street.
Dialogue: 0,0:01:04.63,0:01:07.47,Default,,0000,0000,0000,,To understand how, let's start at the\Nbeginning.
Dialogue: 0,0:01:07.47,0:01:11.15,Default,,0000,0000,0000,,Years ago, the investors are sitting on\Ntheir pile of
Dialogue: 0,0:01:11.15,0:01:15.62,Default,,0000,0000,0000,,money looking for a good investment to\Nturn into more money.
Dialogue: 0,0:01:15.62,0:01:18.54,Default,,0000,0000,0000,,Traditionally, they go to the US Federal\NReserve, where
Dialogue: 0,0:01:18.54,0:01:22.62,Default,,0000,0000,0000,,they buy treasury bills believed to be the\Nsafest investment.
Dialogue: 0,0:01:22.62,0:01:28.33,Default,,0000,0000,0000,,But in the wake of the dot-com bust and\NSeptember 11, Federal Reserve Chairman,
Dialogue: 0,0:01:28.33,0:01:33.64,Default,,0000,0000,0000,,Alan Greenspan, lowers interest rates to\Nonly 1% to keep the economy strong.
Dialogue: 0,0:01:33.64,0:01:39.99,Default,,0000,0000,0000,,1% is a very low return on investments, so\Nthe investors say, no thanks.
Dialogue: 0,0:01:40.70,0:01:43.11,Default,,0000,0000,0000,,On the flip side, this means banks on Wall
Dialogue: 0,0:01:43.11,0:01:46.34,Default,,0000,0000,0000,,Street can borrow from the Fed for only\N1%.
Dialogue: 0,0:01:46.34,0:01:50.59,Default,,0000,0000,0000,,Add to that, general surpluses from Japan,\NChina, and
Dialogue: 0,0:01:50.59,0:01:54.37,Default,,0000,0000,0000,,the Middle East, and there's an abundance\Nof cheap credit.
Dialogue: 0,0:01:54.37,0:02:00.82,Default,,0000,0000,0000,,This makes borrowing money easy for banks\Nand causes them to go crazy with leverage.
Dialogue: 0,0:02:03.02,0:02:06.87,Default,,0000,0000,0000,,Leverage is borrowing money to amplify the\Noutcome of a deal.
Dialogue: 0,0:02:07.99,0:02:09.08,Default,,0000,0000,0000,,Here's how it works.
Dialogue: 0,0:02:09.08,0:02:16.21,Default,,0000,0000,0000,,In a normal deal, someone with\N$10,000 buys a box for $10,000.
Dialogue: 0,0:02:16.21,0:02:25.54,Default,,0000,0000,0000,,He then sells it to someone else for\N$11,000, for a $1,000 profit, a good deal.
Dialogue: 0,0:02:25.54,0:02:29.50,Default,,0000,0000,0000,,But using leverage, someone with $10,000
Dialogue: 0,0:02:29.50,0:02:34.12,Default,,0000,0000,0000,,would go borrow 990,000 more dollars,
Dialogue: 0,0:02:37.47,0:02:40.67,Default,,0000,0000,0000,,giving him $1 million in hand.
Dialogue: 0,0:02:40.67,0:02:46.27,Default,,0000,0000,0000,,Then he goes and buys 100 boxes with his\N$1 million
Dialogue: 0,0:02:47.94,0:02:53.99,Default,,0000,0000,0000,,and sells them to someone else for\N$1.1 million.
Dialogue: 0,0:02:56.03,0:03:00.89,Default,,0000,0000,0000,,Then he pays back his 990,000 plus\N10,000 in
Dialogue: 0,0:03:00.89,0:03:05.10,Default,,0000,0000,0000,,interest, and after his initial 10,000,\Nhe's left with
Dialogue: 0,0:03:05.10,0:03:09.54,Default,,0000,0000,0000,,a $90,000 profit versus the other guy's\N1,000.
Dialogue: 0,0:03:09.54,0:03:13.12,Default,,0000,0000,0000,,Leverage turns good deals into great\Ndeals.
Dialogue: 0,0:03:13.12,0:03:15.77,Default,,0000,0000,0000,,This is a major ways banks make their\Nmoney.
Dialogue: 0,0:03:16.89,0:03:19.00,Default,,0000,0000,0000,,So, Wall Street takes out a ton of
Dialogue: 0,0:03:19.00,0:03:24.27,Default,,0000,0000,0000,,credit, makes great deals, and grows\Ntremendously rich.
Dialogue: 0,0:03:25.46,0:03:27.03,Default,,0000,0000,0000,,And then pays it back.
Dialogue: 0,0:03:28.77,0:03:30.89,Default,,0000,0000,0000,,The investors see this and want a piece of
Dialogue: 0,0:03:30.89,0:03:34.12,Default,,0000,0000,0000,,the action, and this gives Wall Street an\Nidea.
Dialogue: 0,0:03:34.12,0:03:40.78,Default,,0000,0000,0000,,They can connect the investors to the\Nhomeowners through mortgages.
Dialogue: 0,0:03:43.65,0:03:45.40,Default,,0000,0000,0000,,Here's how it works.
Dialogue: 0,0:03:45.40,0:03:48.03,Default,,0000,0000,0000,,A family wants a house, so they save
Dialogue: 0,0:03:48.03,0:03:51.80,Default,,0000,0000,0000,,for a down payment and contact a mortgage\Nbroker.
Dialogue: 0,0:03:51.80,0:03:57.64,Default,,0000,0000,0000,,The mortgage broker connects the family to\Na lender, who gives them a mortgage.
Dialogue: 0,0:03:57.64,0:03:59.73,Default,,0000,0000,0000,,The broker makes a nice commission.
Dialogue: 0,0:04:00.32,0:04:04.03,Default,,0000,0000,0000,,The family buys a house and becomes\Nhomeowners.
Dialogue: 0,0:04:04.03,0:04:05.80,Default,,0000,0000,0000,,This is great for them because
Dialogue: 0,0:04:05.80,0:04:09.50,Default,,0000,0000,0000,,housing prices have been rising\Npractically forever.
Dialogue: 0,0:04:09.50,0:04:11.79,Default,,0000,0000,0000,,Everything works out nicely.
Dialogue: 0,0:04:11.79,0:04:13.82,Default,,0000,0000,0000,,One day, the lender gets a call from
Dialogue: 0,0:04:13.82,0:04:16.64,Default,,0000,0000,0000,,an investment banker who wants to buy the\Nmortgage.
Dialogue: 0,0:04:16.64,0:04:19.99,Default,,0000,0000,0000,,The lender sells it to him for a very nice\Nfee.
Dialogue: 0,0:04:19.99,0:04:25.29,Default,,0000,0000,0000,,The investment banker then borrows\Nmillions of dollars and buys
Dialogue: 0,0:04:25.29,0:04:30.18,Default,,0000,0000,0000,,thousands more mortgages and puts them\Ninto a nice little box.
Dialogue: 0,0:04:30.18,0:04:32.74,Default,,0000,0000,0000,,This means that every month, he gets the\Npayments
Dialogue: 0,0:04:32.74,0:04:36.28,Default,,0000,0000,0000,,from the homeowners of all the mortgages\Nin the box.
Dialogue: 0,0:04:37.15,0:04:42.44,Default,,0000,0000,0000,,Then he sics his banker wizards on it to\Nwork their financial magic, which
Dialogue: 0,0:04:42.44,0:04:49.48,Default,,0000,0000,0000,,is basically cutting it into three slices,\Nsafe, okay, and risky.
Dialogue: 0,0:04:49.48,0:04:51.85,Default,,0000,0000,0000,,They pack the slices back up in the box
Dialogue: 0,0:04:51.85,0:04:57.02,Default,,0000,0000,0000,,and call it a collateralized debt\Nobligation, or CDO.
Dialogue: 0,0:04:57.02,0:05:00.26,Default,,0000,0000,0000,,A CDO works like three cascading trays.
Dialogue: 0,0:05:01.00,0:05:04.77,Default,,0000,0000,0000,,As money comes in, the top tray fills\Nfirst, then spills
Dialogue: 0,0:05:04.77,0:05:08.55,Default,,0000,0000,0000,,over into the middle, and whatever is left\Ninto the bottom.
Dialogue: 0,0:05:08.55,0:05:12.31,Default,,0000,0000,0000,,The money comes from homeowners paying off\Ntheir mortgages.
Dialogue: 0,0:05:12.31,0:05:16.20,Default,,0000,0000,0000,,If some owners don't pay and default on\Ntheir mortgage, less
Dialogue: 0,0:05:16.20,0:05:19.64,Default,,0000,0000,0000,,money comes in and the bottom tray may not\Nget filled.
Dialogue: 0,0:05:19.64,0:05:24.05,Default,,0000,0000,0000,,This makes the bottom tray riskier and the\Ntop tray safer.
Dialogue: 0,0:05:24.05,0:05:28.64,Default,,0000,0000,0000,,To compensate for the higher risk, the\Nbottom tray receives a higher
Dialogue: 0,0:05:28.64,0:05:33.47,Default,,0000,0000,0000,,rate of return, while the top receives a\Nlower, but still nice return.
Dialogue: 0,0:05:33.47,0:05:36.81,Default,,0000,0000,0000,,To make the top even safer, banks will\Ninsure
Dialogue: 0,0:05:36.81,0:05:41.14,Default,,0000,0000,0000,,it for a small fee, called a credit\Ndefault swap.
Dialogue: 0,0:05:41.14,0:05:46.41,Default,,0000,0000,0000,,The banks do all of this work so that\Ncredit rating agencies will stamp the top
Dialogue: 0,0:05:46.41,0:05:52.11,Default,,0000,0000,0000,,slice as a safe, AAA-rated investment, the\Nhighest, safest rating there is.
Dialogue: 0,0:05:52.11,0:05:55.13,Default,,0000,0000,0000,,The okay slice is BBB, still pretty good,
Dialogue: 0,0:05:55.13,0:05:58.49,Default,,0000,0000,0000,,and they don't bother to rate the risky\Nslice.
Dialogue: 0,0:05:58.49,0:06:02.02,Default,,0000,0000,0000,,Because of the AAA rating, the investment\Nbanker can sell
Dialogue: 0,0:06:02.02,0:06:07.03,Default,,0000,0000,0000,,the safe slice to the investors who only\Nwant safe investments.
Dialogue: 0,0:06:07.03,0:06:10.31,Default,,0000,0000,0000,,He sells the okay slice to other bankers,\Nand
Dialogue: 0,0:06:10.31,0:06:14.29,Default,,0000,0000,0000,,the risky slices to hedge funds and other\Nrisk takers.
Dialogue: 0,0:06:14.29,0:06:17.75,Default,,0000,0000,0000,,The investment banker makes millions.
Dialogue: 0,0:06:18.46,0:06:20.48,Default,,0000,0000,0000,,He then repays his loans.
Dialogue: 0,0:06:21.59,0:06:24.76,Default,,0000,0000,0000,,Finally, the investors have found a good\Ninvestment for their money.
Dialogue: 0,0:06:24.76,0:06:27.56,Default,,0000,0000,0000,,Much better than the 1% treasury bills.
Dialogue: 0,0:06:27.56,0:06:31.05,Default,,0000,0000,0000,,They're so pleased, they want more CDO\Nslices.
Dialogue: 0,0:06:31.05,0:06:35.47,Default,,0000,0000,0000,,So, the investment banker calls up the\Nlender, wanting more mortgages.
Dialogue: 0,0:06:35.47,0:06:37.35,Default,,0000,0000,0000,,The lender calls up the broker for
Dialogue: 0,0:06:37.35,0:06:41.81,Default,,0000,0000,0000,,more homeowners, but the broker can't find\Nanyone.
Dialogue: 0,0:06:41.81,0:06:45.99,Default,,0000,0000,0000,,Everyone that qualifies for a mortgage\Nalready has one.
Dialogue: 0,0:06:45.99,0:06:47.51,Default,,0000,0000,0000,,But they have an idea.
Dialogue: 0,0:06:51.84,0:06:55.35,Default,,0000,0000,0000,,When homeowners default on their mortgage,\Nthe lender gets
Dialogue: 0,0:06:55.35,0:06:59.48,Default,,0000,0000,0000,,the house, and houses are always\Nincreasing in value.
Dialogue: 0,0:06:59.48,0:07:04.19,Default,,0000,0000,0000,,Since they're covered if the homeowners\Ndefault, lenders can start adding risk to
Dialogue: 0,0:07:04.19,0:07:08.13,Default,,0000,0000,0000,,new mortgages, not requiring down\Npayments, no
Dialogue: 0,0:07:08.13,0:07:11.25,Default,,0000,0000,0000,,proof of income, no documents at all.
Dialogue: 0,0:07:11.25,0:07:13.62,Default,,0000,0000,0000,,And that's exactly what they did.
Dialogue: 0,0:07:13.62,0:07:19.02,Default,,0000,0000,0000,,So, instead of lending to responsible\Nhomeowners, called prime mortgages,
Dialogue: 0,0:07:19.02,0:07:23.31,Default,,0000,0000,0000,,they started to get some that were, well,\Nless responsible.
Dialogue: 0,0:07:23.31,0:07:26.28,Default,,0000,0000,0000,,These are sub-prime mortgages.
Dialogue: 0,0:07:26.75,0:07:29.04,Default,,0000,0000,0000,,This is the turning point.
Dialogue: 0,0:07:31.95,0:07:35.23,Default,,0000,0000,0000,,So, just like always, the mortgage broker\Nconnects the
Dialogue: 0,0:07:35.23,0:07:39.40,Default,,0000,0000,0000,,family with the lender and a mortgage,\Nmaking his commission.
Dialogue: 0,0:07:39.40,0:07:42.14,Default,,0000,0000,0000,,The family buys a big house.
Dialogue: 0,0:07:42.14,0:07:45.22,Default,,0000,0000,0000,,The lender sells the mortgage to the\Ninvestment banker,
Dialogue: 0,0:07:47.22,0:07:53.83,Default,,0000,0000,0000,,who turns it into a CDO and sell\Nslices to the investors and others.
Dialogue: 0,0:07:54.48,0:07:59.34,Default,,0000,0000,0000,,This actually works out nicely for\Neveryone and makes them all rich.
Dialogue: 0,0:07:59.34,0:08:01.74,Default,,0000,0000,0000,,No one was worried because as soon as they\Nsold
Dialogue: 0,0:08:01.74,0:08:04.42,Default,,0000,0000,0000,,the mortgage to the next guy, it was his\Nproblem.
Dialogue: 0,0:08:04.42,0:08:07.29,Default,,0000,0000,0000,,If the homeowners where to\Ndefault,
Dialogue: 0,0:08:07.29,0:08:09.44,Default,,0000,0000,0000,,they didn't care, they were selling off\Ntheir
Dialogue: 0,0:08:09.44,0:08:16.05,Default,,0000,0000,0000,,risk to the next guy and making millions,\Nlike playing hot potato with a time bomb.
Dialogue: 0,0:08:16.05,0:08:19.60,Default,,0000,0000,0000,,Not surprisingly, the homeowners default\Non their mortgage,
Dialogue: 0,0:08:19.60,0:08:22.65,Default,,0000,0000,0000,,which at this moment, is owned by the\Nbanker.
Dialogue: 0,0:08:22.65,0:08:28.60,Default,,0000,0000,0000,,This means, he forecloses, and one of his\Nmonthly payments turns into a house.
Dialogue: 0,0:08:28.60,0:08:29.74,Default,,0000,0000,0000,,No big deal.
Dialogue: 0,0:08:29.74,0:08:31.22,Default,,0000,0000,0000,,He puts it up for sale.
Dialogue: 0,0:08:33.54,0:08:37.13,Default,,0000,0000,0000,,But more and more of his monthly payments\Nturn into houses.
Dialogue: 0,0:08:40.69,0:08:44.16,Default,,0000,0000,0000,,Now, there are so many houses for sale on\Nthe market, creating
Dialogue: 0,0:08:44.16,0:08:49.11,Default,,0000,0000,0000,,more supply than there is demand, and\Nhousing prices aren't rising anymore.
Dialogue: 0,0:08:49.11,0:08:51.35,Default,,0000,0000,0000,,In fact, they plummet.
Dialogue: 0,0:08:52.72,0:08:57.83,Default,,0000,0000,0000,,This creates an interesting problem for\Nhomeowners still paying their mortgages.
Dialogue: 0,0:08:57.83,0:09:00.14,Default,,0000,0000,0000,,As all the houses in their neighborhood go\Nup
Dialogue: 0,0:09:00.14,0:09:03.61,Default,,0000,0000,0000,,for sale, the value of their house goes\Ndown, and
Dialogue: 0,0:09:03.61,0:09:06.39,Default,,0000,0000,0000,,they start to wonder why they're paying\Nback their
Dialogue: 0,0:09:06.39,0:09:12.77,Default,,0000,0000,0000,,$300,000 mortgage when the house is now\Nworth only $90,000.
Dialogue: 0,0:09:12.77,0:09:16.24,Default,,0000,0000,0000,,They decide that it doesn't make sense to\Ncontinue paying, even
Dialogue: 0,0:09:16.24,0:09:19.59,Default,,0000,0000,0000,,though they can afford to, and they walk\Naway from their house.
Dialogue: 0,0:09:19.59,0:09:23.57,Default,,0000,0000,0000,,Default breaks sweep the country, and\Nprices plummet.
Dialogue: 0,0:09:23.57,0:09:28.28,Default,,0000,0000,0000,,Now, the investment banker is basically\Nholding a box full of worthless houses.
Dialogue: 0,0:09:28.28,0:09:30.94,Default,,0000,0000,0000,,He calls up his buddy, the investor, to\Nsell his
Dialogue: 0,0:09:30.94,0:09:35.78,Default,,0000,0000,0000,,CDO, but the investor isn't stupid and\Nsays, no thanks.
Dialogue: 0,0:09:35.78,0:09:39.86,Default,,0000,0000,0000,,He knows that the stream of money isn't\Neven a dribble anymore.
Dialogue: 0,0:09:39.86,0:09:44.53,Default,,0000,0000,0000,,The banker tries to sell to everyone, but\Nnobody wants to buy his bomb.
Dialogue: 0,0:09:44.53,0:09:48.14,Default,,0000,0000,0000,,He's freaking out because he borrowed\Nmillions, sometimes billions of
Dialogue: 0,0:09:48.14,0:09:51.60,Default,,0000,0000,0000,,dollars to buy this bomb, and he can't pay\Nit back.
Dialogue: 0,0:09:51.60,0:09:54.80,Default,,0000,0000,0000,,Whatever he tries, he can't get rid of it.
Dialogue: 0,0:09:56.95,0:09:59.82,Default,,0000,0000,0000,,But he's not the only one.
Dialogue: 0,0:09:59.82,0:10:04.39,Default,,0000,0000,0000,,The investors have already bought\Nthousands of these bombs.
Dialogue: 0,0:10:04.39,0:10:09.81,Default,,0000,0000,0000,,The lender calls up trying to sell his\Nmortgage, but the banker won't buy it.
Dialogue: 0,0:10:09.81,0:10:12.00,Default,,0000,0000,0000,,And the broker is out of work.
Dialogue: 0,0:10:12.00,0:10:17.68,Default,,0000,0000,0000,,The whole financial system is frozen and\Nthings get dark.
Dialogue: 0,0:10:22.39,0:10:24.94,Default,,0000,0000,0000,,Everybody starts going bankrupt.
Dialogue: 0,0:10:27.49,0:10:29.14,Default,,0000,0000,0000,,But that's not all.
Dialogue: 0,0:10:29.14,0:10:31.41,Default,,0000,0000,0000,,The investor calls up the homeowner and
Dialogue: 0,0:10:31.41,0:10:35.30,Default,,0000,0000,0000,,tells him that his investments are\Nworthless.
Dialogue: 0,0:10:35.30,0:10:40.27,Default,,0000,0000,0000,,And you can begin to see how the crisis\Nflows in a cycle.
Dialogue: 0,0:10:41.12,0:10:44.47,Default,,0000,0000,0000,,Welcome to the Crisis of Credit.