[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:01.85,0:00:05.66,Default,,0000,0000,0000,,The Crisis of Credit Visualized
Dialogue: 0,0:00:09.03,0:00:10.68,Default,,0000,0000,0000,,What is the credit crisis?
Dialogue: 0,0:00:10.68,0:00:17.00,Default,,0000,0000,0000,,It’s a worldwide financial fiasco involving terms \Nyou’ve probably heard, like sub-prime mortgages
Dialogue: 0,0:00:17.01,0:00:23.02,Default,,0000,0000,0000,,Collateralized Debt Obligations, frozen\Ncredit markets and Credit Default Swaps.
Dialogue: 0,0:00:23.03,0:00:26.02,Default,,0000,0000,0000,,Who’s affected? Everyone.
Dialogue: 0,0:00:26.03,0:00:28.08,Default,,0000,0000,0000,,How did it happen? Here’s how.
Dialogue: 0,0:00:28.09,0:00:31.08,Default,,0000,0000,0000,,The credit crisis brings \Ntwo groups of people together
Dialogue: 0,0:00:31.10,0:00:33.10,Default,,0000,0000,0000,,Home owners and investors.
Dialogue: 0,0:00:34.01,0:00:39.03,Default,,0000,0000,0000,,Home owners represent their mortgages, \Nand investors represent their money.
Dialogue: 0,0:00:39.04,0:00:44.07,Default,,0000,0000,0000,,These mortgages represent houses, and this \Nmoney represents large institutions
Dialogue: 0,0:00:44.08,0:00:50.04,Default,,0000,0000,0000,,Like pension funds, insurance companies, \Nsovereign funds, mutual funds, etc.
Dialogue: 0,0:00:50.05,0:00:54.03,Default,,0000,0000,0000,,These groups are brought together \Nthrough the financial system,
Dialogue: 0,0:00:54.03,0:00:57.03,Default,,0000,0000,0000,,a bunch of banks and brokers \Ncommonly known as Wall Street.
Dialogue: 0,0:00:57.03,0:01:04.05,Default,,0000,0000,0000,,Although it may not seem like it, these banks on \NWall Street are closely connected to these houses on Main Street.
Dialogue: 0,0:01:04.06,0:01:07.03,Default,,0000,0000,0000,,To understand how, let’s start at the beginning.
Dialogue: 0,0:01:07.04,0:01:11.07,Default,,0000,0000,0000,,Years ago, the investors are sitting on their pile of money
Dialogue: 0,0:01:11.08,0:01:15.02,Default,,0000,0000,0000,,Looking for a good investment to turn into more money.
Dialogue: 0,0:01:15.04,0:01:22.01,Default,,0000,0000,0000,,Traditionally, they go to the US Federal Reserve where they buy Treasury Bills, believed to be the safest investment.
Dialogue: 0,0:01:22.02,0:01:26.06,Default,,0000,0000,0000,,But on the wake of the dot.com bust and September 11th,
Dialogue: 0,0:01:26.07,0:01:33.08,Default,,0000,0000,0000,,Federal Reserve Chairman Allen Greenspan lowers interest rates to only 1% to keep the economy strong.
Dialogue: 0,0:01:33.09,0:01:39.07,Default,,0000,0000,0000,,1% is a very low return on investments so the investors say “no, thanks.”
Dialogue: 0,0:01:39.08,0:01:46.05,Default,,0000,0000,0000,,On the flipside, this means banks on Wall Street can borrow from the Fed for only 1%.
Dialogue: 0,0:01:46.08,0:01:51.06,Default,,0000,0000,0000,,Add to that general surpluses from Japan, China and the Middle East
Dialogue: 0,0:01:51.07,0:01:54.03,Default,,0000,0000,0000,,And there’s an abundance of cheap credit.
Dialogue: 0,0:01:54.03,0:02:00.06,Default,,0000,0000,0000,,This makes borrowing money easy for banks and causes them to go crazy with… leverage.
Dialogue: 0,0:02:01.04,0:02:07.00,Default,,0000,0000,0000,,Leverage is borrowing money \Nto amplify the outcome of a deal.
Dialogue: 0,0:02:07.06,0:02:15.08,Default,,0000,0000,0000,,Here’s how it works: in a normal deal someone \Nwith $10,000 buys a box for $10,000
Dialogue: 0,0:02:16.02,0:02:20.00,Default,,0000,0000,0000,,He then sells it to someone else for $11,000
Dialogue: 0,0:02:22.04,0:02:25.05,Default,,0000,0000,0000,,For a $1,000 profit, a good deal.
Dialogue: 0,0:02:25.06,0:02:33.08,Default,,0000,0000,0000,,But using leverage, someone with $10,000 \Nwould go borrow 990,000 more dollars
Dialogue: 0,0:02:37.03,0:02:40.04,Default,,0000,0000,0000,,Giving him $1,000,000 in hand.
Dialogue: 0,0:02:40.08,0:02:47.00,Default,,0000,0000,0000,,Then he goes and buys 100 boxes \Nwith his $1,000,000
Dialogue: 0,0:02:47.06,0:02:53.02,Default,,0000,0000,0000,,And sells them to someone else \Nfor $1,100,000.
Dialogue: 0,0:02:55.09,0:03:01.08,Default,,0000,0000,0000,,Then he pays back his $990,000 \Nplus $10,000 in interest
Dialogue: 0,0:03:02.02,0:03:09.06,Default,,0000,0000,0000,,And after his initial $10,000, he’s left with \Na $90,000 profit versus the other guy’s $1,000.
Dialogue: 0,0:03:09.07,0:03:16.00,Default,,0000,0000,0000,,Leverage turns good deals into great deals. \NThis is a major way banks make their money.
Dialogue: 0,0:03:16.05,0:03:24.81,Default,,0000,0000,0000,,So Wall Street takes out a ton of credit, makes \Ngreat deals and grows tremendously rich.
Dialogue: 0,0:03:25.01,0:03:27.23,Default,,0000,0000,0000,,And then pays it back.
Dialogue: 0,0:03:28.07,0:03:34.01,Default,,0000,0000,0000,,The investors see this and want a piece of the action, \Nand this gives Wall Street an idea
Dialogue: 0,0:03:34.04,0:03:40.05,Default,,0000,0000,0000,,They can connect the investors to \Nthe home owners through mortgages.
Dialogue: 0,0:03:43.05,0:03:45.00,Default,,0000,0000,0000,,Here’s how it works
Dialogue: 0,0:03:45.03,0:03:51.05,Default,,0000,0000,0000,,A family wants a house so they save for a down \Npayment and contact the mortgage broker.
Dialogue: 0,0:03:51.06,0:03:57.03,Default,,0000,0000,0000,,The mortgage broker connects the family \Nto a lender who gives them a mortgage.
Dialogue: 0,0:03:57.04,0:03:59.07,Default,,0000,0000,0000,,The broker makes a nice commission.
Dialogue: 0,0:04:00.03,0:04:03.08,Default,,0000,0000,0000,,The family buys a house, \Nbecomes home owners.
Dialogue: 0,0:04:03.10,0:04:08.06,Default,,0000,0000,0000,,This is great for them because housing prices \Nhave been rising practically forever.
Dialogue: 0,0:04:08.06,0:04:11.06,Default,,0000,0000,0000,,Everything works out nicely.
Dialogue: 0,0:04:11.06,0:04:16.04,Default,,0000,0000,0000,,One day, the lender gets a call from an investment\Nbanker who wants to buy the mortgage.
Dialogue: 0,0:04:16.06,0:04:19.08,Default,,0000,0000,0000,,The lender sells it to him for a very nice fee.
Dialogue: 0,0:04:20.08,0:04:27.02,Default,,0000,0000,0000,,The investment banker then borrows millions of dollars and buys thousands more mortgages
Dialogue: 0,0:04:27.03,0:04:29.09,Default,,0000,0000,0000,,And puts them into a nice little box.
Dialogue: 0,0:04:30.00,0:04:35.07,Default,,0000,0000,0000,,This means that every month he gets the payments from the home owners of all the mortgages in the box.
Dialogue: 0,0:04:37.02,0:04:41.08,Default,,0000,0000,0000,,Then he fixes his banker wizards on it to work their financial magic
Dialogue: 0,0:04:42.02,0:04:45.04,Default,,0000,0000,0000,,Which is basically cutting it into three slices
Dialogue: 0,0:04:45.08,0:04:49.02,Default,,0000,0000,0000,,“Safe, Okay and Risky”.
Dialogue: 0,0:04:49.03,0:04:56.07,Default,,0000,0000,0000,,They pack the slices back up in the box and call it a Collateralized Debt Obligation, or CDO.
Dialogue: 0,0:04:56.08,0:05:00.02,Default,,0000,0000,0000,,A CDO works like three cascading trays
Dialogue: 0,0:05:00.08,0:05:08.02,Default,,0000,0000,0000,,As money comes in, the top tray fills first, then spills over into the middle, and whatever is left into the bottom.
Dialogue: 0,0:05:08.05,0:05:11.07,Default,,0000,0000,0000,,The money comes from home owners paying off their mortgages.
Dialogue: 0,0:05:12.01,0:05:15.06,Default,,0000,0000,0000,,If some owners don’t pay and default on their mortgage
Dialogue: 0,0:05:15.08,0:05:19.02,Default,,0000,0000,0000,,Less money comes in and the bottom tray may not get filled.
Dialogue: 0,0:05:19.06,0:05:23.10,Default,,0000,0000,0000,,This makes the bottom tray riskier and the top tray safer.
Dialogue: 0,0:05:24.01,0:05:26.05,Default,,0000,0000,0000,,To compensate for the higher risk
Dialogue: 0,0:05:26.06,0:05:33.05,Default,,0000,0000,0000,,The bottom tray receives a higher rate of return while the top receives a lower, but still nice, return.
Dialogue: 0,0:05:33.06,0:05:40.07,Default,,0000,0000,0000,,To make the top even safer, banks will insure it for a small fee called the Credit Default Swap.
Dialogue: 0,0:05:41.01,0:05:49.03,Default,,0000,0000,0000,,The banks do all of this work so the credit rating agencies will stamp the top slice as a safe, triple-A rated investment
Dialogue: 0,0:05:49.04,0:05:51.07,Default,,0000,0000,0000,,The highest safest rating there is.
Dialogue: 0,0:05:52.02,0:05:57.07,Default,,0000,0000,0000,,The Okay slice is triple-B, still pretty good, and they don’t bother to rate the risky slice.
Dialogue: 0,0:05:58.02,0:06:06.05,Default,,0000,0000,0000,,Because of the triple-A rating, the investment banker can sell the safe slice to the investors who only want safe investments.
Dialogue: 0,0:06:07.00,0:06:13.10,Default,,0000,0000,0000,,He sells the "Okay" slice to other bankers, \Nand the risky slices to hedge funds and other risk takers.
Dialogue: 0,0:06:14.01,0:06:17.03,Default,,0000,0000,0000,,The investment banker makes millions.
Dialogue: 0,0:06:18.02,0:06:20.09,Default,,0000,0000,0000,,He then repays this loans.
Dialogue: 0,0:06:21.03,0:06:24.04,Default,,0000,0000,0000,,Finally the investors have found a good \Ninvestment for their money,
Dialogue: 0,0:06:24.04,0:06:27.04,Default,,0000,0000,0000,,much better than \Nthe 1% Treasury Bills.
Dialogue: 0,0:06:27.04,0:06:30.07,Default,,0000,0000,0000,,They’re so pleased \Nthey want more CDO slices
Dialogue: 0,0:06:30.10,0:06:35.01,Default,,0000,0000,0000,,So the investment banker calls up \Nthe lender wanting more mortgages
Dialogue: 0,0:06:35.02,0:06:38.05,Default,,0000,0000,0000,,The lender calls up the broker \Nfor more home owners
Dialogue: 0,0:06:39.00,0:06:41.03,Default,,0000,0000,0000,,But the broker can’t find anyone.
Dialogue: 0,0:06:41.06,0:06:45.04,Default,,0000,0000,0000,,Everyone that qualifies for \Na mortgage already has one.
Dialogue: 0,0:06:45.08,0:06:47.03,Default,,0000,0000,0000,,But they have an idea
Dialogue: 0,0:06:51.09,0:06:58.09,Default,,0000,0000,0000,,When home owners default on their mortgage, \Nthe lender gets the house and houses are always increasing in value.
Dialogue: 0,0:06:59.03,0:07:01.09,Default,,0000,0000,0000,,Since they’re covered \Nin the home owners' default
Dialogue: 0,0:07:02.00,0:07:07.06,Default,,0000,0000,0000,,Lenders can start adding risk to new \Nmortgages, not requiring down payments
Dialogue: 0,0:07:07.08,0:07:10.06,Default,,0000,0000,0000,,No proof of income, no documents at all!
Dialogue: 0,0:07:11.00,0:07:13.00,Default,,0000,0000,0000,,And that’s exactly what they did.
Dialogue: 0,0:07:13.04,0:07:18.06,Default,,0000,0000,0000,,So instead of lending to responsible \Nhome owners, called prime mortgages
Dialogue: 0,0:07:18.09,0:07:23.00,Default,,0000,0000,0000,,They started to get some that were, \Nwell, less responsible.
Dialogue: 0,0:07:23.02,0:07:25.09,Default,,0000,0000,0000,,These are sub-prime mortgages.
Dialogue: 0,0:07:26.06,0:07:28.09,Default,,0000,0000,0000,,This is the turning point.
Dialogue: 0,0:07:31.08,0:07:37.08,Default,,0000,0000,0000,,So, just like always, the mortgage broker connects \Nthe family with the lender and the mortgage
Dialogue: 0,0:07:37.10,0:07:39.03,Default,,0000,0000,0000,,Making his commission.
Dialogue: 0,0:07:39.04,0:07:41.08,Default,,0000,0000,0000,,The family buys a big house.
Dialogue: 0,0:07:42.01,0:07:45.00,Default,,0000,0000,0000,,The lender sells the mortgage \Nto the investment banker
Dialogue: 0,0:07:47.02,0:07:49.06,Default,,0000,0000,0000,,Who turns it into a CDO
Dialogue: 0,0:07:50.06,0:07:53.06,Default,,0000,0000,0000,,And sells slices to the investors and others.
Dialogue: 0,0:07:53.07,0:07:58.06,Default,,0000,0000,0000,,This actually works out nicely for everyone \Nand makes them all rich.
Dialogue: 0,0:07:59.05,0:08:04.07,Default,,0000,0000,0000,,No one was worried because as soon as they \Nsold the mortgage to the next guy, it was his problem.
Dialogue: 0,0:08:05.02,0:08:08.03,Default,,0000,0000,0000,,If the home owners were to default, \Nthey didn’t care
Dialogue: 0,0:08:08.04,0:08:12.00,Default,,0000,0000,0000,,They were selling off their risk \Nto the next guy and making millions
Dialogue: 0,0:08:12.03,0:08:15.00,Default,,0000,0000,0000,,Like playing hot potato \Nwith a time bomb.
Dialogue: 0,0:08:16.00,0:08:22.04,Default,,0000,0000,0000,,Not surprisingly, the home owners default on \Ntheir mortgage, which at this moment is owned by the banker.
Dialogue: 0,0:08:22.05,0:08:28.02,Default,,0000,0000,0000,,This means, he forecloses and one of his monthly \Npayments turns into a house.
Dialogue: 0,0:08:28.03,0:08:31.02,Default,,0000,0000,0000,,No big deal, he puts it up for sale.
Dialogue: 0,0:08:33.02,0:08:37.03,Default,,0000,0000,0000,,But more and more of his monthly \Npayments turn into houses.
Dialogue: 0,0:08:39.10,0:08:46.01,Default,,0000,0000,0000,,Now there are so many houses for sale \Non the market, creating more supply than there is demand
Dialogue: 0,0:08:46.03,0:08:50.09,Default,,0000,0000,0000,,And housing prices aren’t rising anymore. In fact, they plummet.
Dialogue: 0,0:08:52.04,0:08:57.03,Default,,0000,0000,0000,,This creates an interesting problem for home \Nowners still paying their mortgages
Dialogue: 0,0:08:57.06,0:09:03.01,Default,,0000,0000,0000,,As all the houses in their neighborhood go up \Nfor sale, the value of their house goes down
Dialogue: 0,0:09:03.02,0:09:08.00,Default,,0000,0000,0000,,And they start to wonder why \Nthey’re paying back their $300,000 mortgage
Dialogue: 0,0:09:08.02,0:09:12.04,Default,,0000,0000,0000,,When the house is now \Nworth only $90,000.
Dialogue: 0,0:09:12.05,0:09:17.04,Default,,0000,0000,0000,,They decide that it doesn’t make sense \Nto continue paying, even though they can afford to
Dialogue: 0,0:09:17.06,0:09:22.08,Default,,0000,0000,0000,,And they walk away from their house. \NDefault rates sweep the country and prices plummet.
Dialogue: 0,0:09:23.04,0:09:27.08,Default,,0000,0000,0000,,Now the investment banker is basically holding \Na box full of worthless houses.
Dialogue: 0,0:09:27.10,0:09:35.05,Default,,0000,0000,0000,,He calls up his buddy the investor to sell his CDO, \Nbut the investor isn’t stupid and says “no, thanks”.
Dialogue: 0,0:09:35.06,0:09:39.07,Default,,0000,0000,0000,,He knows that the stream of money \Nisn’t even a dripple anymore.
Dialogue: 0,0:09:39.08,0:09:43.09,Default,,0000,0000,0000,,The banker tries to sell to everyone \Nbut nobody wants to buy his bomb.
Dialogue: 0,0:09:44.03,0:09:49.07,Default,,0000,0000,0000,,He’s freaking out because he borrowed millions, \Nsometimes billions, of dollars to buy this bomb
Dialogue: 0,0:09:49.08,0:09:54.09,Default,,0000,0000,0000,,And he can’t pay it back. \NWhatever he tries, he can’t get rid of it.
Dialogue: 0,0:09:57.02,0:09:58.10,Default,,0000,0000,0000,,But he’s not the only one
Dialogue: 0,0:09:59.09,0:10:03.08,Default,,0000,0000,0000,,The investors have already bought \Nthousands of these bombs.
Dialogue: 0,0:10:04.07,0:10:11.03,Default,,0000,0000,0000,,The lender calls up trying to sell his mortgage, \Nbut the banker won’t buy it, and the broker is out of work.
Dialogue: 0,0:10:11.09,0:10:16.10,Default,,0000,0000,0000,,The whole financial system is frozen, \Nand things get dark…
Dialogue: 0,0:10:22.01,0:10:24.04,Default,,0000,0000,0000,,Everybody starts going bankrupt.
Dialogue: 0,0:10:27.06,0:10:28.09,Default,,0000,0000,0000,,But that’s not all
Dialogue: 0,0:10:29.00,0:10:35.04,Default,,0000,0000,0000,,The investor calls up the home owner \Nand tells him that his investments are worthless.
Dialogue: 0,0:10:35.07,0:10:39.07,Default,,0000,0000,0000,,And you can begin to see \Nhow the crisis flows in a cycle.
Dialogue: 0,0:10:40.09,0:10:43.08,Default,,0000,0000,0000,,Welcome to the crisis of credit.