Form 2220 Credits 2023-2024

The crisis of credit visualized. What is the credit crisis? It's a worldwide financial fiasco involving terms you've probably heard, like subprime mortgages, collateralized debt obligations, frozen credit markets, and credit default swaps. Who's affected? Everyone. How did it happen? Here's how the credit crisis brings two groups of people together: homeowners and investors. Homeowners represent their mortgages, and investors represent their money. These mortgages represent houses, and this money represents large institutions like pension funds, insurance companies, sovereign funds, mutual funds, etc. These groups are brought together through the financial system, a bunch of banks and brokers commonly known as Wall Street. While it may not seem like it, these banks on Wall Street are closely connected to these houses on Main Street. Who understands how? Let's start at the beginning. Years ago, the investors are sitting on their pile of money, looking for a good investment to turn into more money. Traditionally, they go to the US Federal Reserve, where they buy Treasury bills believed to be the safest investment. But in the wake of the dot-com bust and September 11th, Federal Reserve Chairman Alan Greenspan lowers interest rates to only 1% to keep the economy strong. 1% is a very low return on investment, so the investors say no thanks. On the flip side, this means banks on Wall Street can borrow from the Fed for only 1%. Add to that general surpluses from Japan, China, and the Middle East, and there's an abundance of cheap credit. This makes borrowing money easy for banks and causes them to go crazy with leverage. Leverage is borrowing money to amplify the outcome of a deal. Here's how it works: In a normal deal, someone with $10,000 buys a for $10,000. He then sells it to someone else for $11,000, for...