Essay on Credit

2202 Words Aug 21st, 2012 9 Pages
Published in The Hindu - Sunday Magazine on Oct 5, 2008

The bursting of the speculative bubble in the U.S. housing market has destroyed billions of dollars in investor wealth across the world, crippled the banking system, expunged close to a million jobs…and India has not been spared either. With banks failing by the day…definitely, these are uncertain times for the financial services industry. While many people who have lost their jobs, are faced with permanent shrinkage of their lifestyle, others in the industry are going through the trauma of not knowing if and when their turn would come. Who is to blame? Flashback to year 2003: Rohit (name changed to protect identity), a good friend of mine and someone who was officially considered
…show more content…
Me: Wow! I would’ve never guessed that boring home loans could transform into something that sounds so cool! Rohit: hahaha…actually we create multiple funds categorized based on the nature of the CDO packages they contain and investors can buy shares in any of these funds (almost like mutual funds…but called Structured Investment Vehicles or SIV’s) Me: Dude, you make your job sound like a meat shop…chopping and packaging. So, in effect when an investor purchases the CDO’s (or the fund containing the CDO’s), he is expected to receive a share of the monthly EMI paid by the actual guys who have taken the underlying home loans? Rohit: Exactly, the banks from whom we purchased these home loans send us a monthly cheque, which we in turn distribute to the investors in our funds

Me: Why do the banks sell these home loans to you guys? Rohit: Because we allow them to keep a significant portion of the interest rate charged on the home loans and we pay them upfront cash, which they can use to issue more home loans. Otherwise home loans go on for 20-30 years and it would take a long time for the bank to recover its money. Me: and, why does Lehman buy these loans? Rohit: Because we get a fat commission when we convert the loans into CDO’s and sell it to investors Me: Who are these investors? Rohit: They include everyone from pension funds in Japan to Life Insurance companies in Finland Me: But tell me, why are these funds so

Related Documents