Question 1 [30 marks]

This question refers to the financial crisis that exploded in October 2008.

The US banking crisis 2007-2008 was a financial cyclone with eye in collateral debt obligations and a subset of US financial institutions. In October 2008, there was a bank run in the US, a drastic reduction of the money supply and the credit market was frozen. Explain the following points:

(a)Precise description of Sub-prime mortgage, Securitization, and Collateral Debt Obligations [9 marks];

(b)The reason for the sudden stop of credit markets in 2008 [10 marks]; and

(c)The reason for the reduction in the money supply [11 marks]