Sub-Prime Mortgages continued...
Sub-prime mortgages not only affected those who partook in the risky process of lending the money and borrowing the money, it also affected the investment bankers. Before the sub-prime mortgage problem occurred, it was common practice for investment bankers to buy mortgages, bundle them up in what are called Collateralized Debt Obligations (CDOs), and then sell them to outside investors.
During President George W. Bush’s tenure in the White House, he provided a tax relief to home owners. This sparked a massive increase in home ownership, along with an increase for loans from banks. With a massive increase in home ownership, along with the foresight into potential profit to be gained from the loans, banks started to offer more sub-prime mortgages to the masses.
Investment bankers became to include sub-prime mortgages in their CDOs that they sell to outside investors. To combat the risk taken on by buying these CDOs, these investors took out large insurance policies on the CDOs.
The massive increase in ownership caused an artificial increase in property value. Eventually, sub-prime mortgages began to default and the housing market collasped. Since some sub-prime mortgages were included in some CDOs, the CDOs soon became worthless. Investors in these CDOs lost a vast amount of money. Furthermore, the insurance agencies “protecting” the investors who bought the CDOs could not live up to their obligations. They would end up losing vast amounts of money as well.