Chapter 7, World's financial mess, as explained by Phua Chu Kang

it's coming...it's coming =/

Chapter Seven: Not The End Of Story

As usual, eveything that can generate income, people on the the wall street will create a unit trust fund for it.

So, over the last few years, Many Unit Trust Fund that invest in CDS were created.

However, in order to generate good sales for these Trust, these unit trusts must get good rating from the rating agency..

So, the people on wall street used their creativity to 100% and came out with a brand new idea - Assuming the companies already made $80 Billion in the CDS over the years, they will allocate a portion of it lets say $10 Billion to secured the Unit Trust Fund. Using the $10 Billion as 10% securities, the Fund will sell to the public $100 Billion of the Unit Trust.

That means, if the Fund lost money, the first 10% ($10 Billion) of the loses will be covered by the Insurance.

But when it makes money, everything belongs to you!

Good Deal or not?

Therefore, the rating agency also give the fund AAA (highest) rating!

Since the deal is so good and with AAA rating somemore, everyone also bought! Old man bought!

Young man bought!

Pension fund bought!

Education fund Bought!

It was such good business, the Unit Trust decided to issue more Units to be sold!

However, the problem is they never increase the $100 Billion securities! which also means the "reserve" for the losses has decrease from its original 10% to god knows what.

One more chapter to go...