Text 2. Read this article and give Russian equivalents to the  underlined expressions.

How a Housing Bubble Burst Into a Global Financial Crisis

There are many players in the story of the financial crisis, a crisis that raised fears of a Second Great Depression. At the heart of that story, though, is one thing: housing.

 

Owning a home has long been considered part of the American Dream. To help finance homeownership, Congress created Fannie Mae and Freddie Mac. These two companies buy home loans. That way, the lenders have more money to lend.

 

Fannie Mae and Freddie Mac are called government-sponsored enterprises. Congress gave ownership to shareholders. But the companies could borrow private money atreduced cost because investors believed the government would guarantee their debts. Belief became reality in September, 2008. Both companies had too much debt and notenough capital to protect against huge losses. The government took control to preventtheir collapse.

 

Fannie Mae and Freddie Mac own or guarantee more than five trillion dollars in home mortgages, around half the nation's total. They keep some as investments. But others are combined and sold as mortgage-backed securities.

 

Another government-sponsored enterprise, Ginnie Mae, created the first mortgage-backed securities in 1970. Creating these securities became very profitable. Big investment banks even bought their own mortgage lenders. But other lenders were happy to sell their mortgages. They could count the deals toward profit. And if the loans were not repaid -- well, they were someone else's problem.

 

Philip Budwick is a finance professor at George Washington University in Washington,

D.C. He explains how lenders used to think about risk. "In the old days, you lent out money, you kept that loan on your books, which means you had to have really tight riskmanagement in place. You had to verify who the borrower was, their ability to pay, what kind of credit risk they were. And you were limited to how much money you could lend outbased on your balance sheet. "

 

Securitization grew, f e d b y inve sto rs’ h u n ge r f o r h igh retu rns. Lenders, not surprisingly, became less interested in the quality of the loans they were making. But something else also changed in the years leading up to the crisis.

 

Growing numbers of homebuyers were people with poor or limited credit histories. The higher risk of these "subprime" borrowers meant that lenders could charge them more.

Many people borrowed more than they should have. There were borrowers who lied to get loans, and lenders who did not care. Banks and other lenders also began to offer products that borrowers did not always understand. Buyers were able to make small payments for the first two or three years, often on loans for the full value of the home. Such plans can work -- as long as home values continue to go up. And for years they did. Nationally, the S&P/Case-Schiller index of home prices rose one hundred twenty-four percent between nineteen ninety-seven and two thousand six. It was easy to believe that the sky was the limit.

 

The addition of large numbers of subprime mortgages meant a bigger market for investors. Credit rating agencies rated many of these securities as high quality investments. The agencies are paid by the companies that issue securities. But this was only the start. Investment banks created even more complex securities based on home loans and other debt products. Even their name is complex. Collateralized debt obligations were designed to offer investors different levels of return based on different levels of risk. Many of these

C.D.O.s had a form of insurance called a credit default swap. Credit default swaps can protect bond buyers against losses. The idea behind collateralized debt obligations is that they spread the risk among many investors. More than half a trillion dollars in C.D.O.s were sold in two thousand six. By then, however, the housing market had already started to collapse.

 

The collapse started with the failure of subprime borrowers to pay their loans. Homeforeclosures grew. And subprime lenders started to go out of business. The trouble quickly spread to Wall Street investment banks. Hedge funds were next. Among the hedge funds were two operated by the investment bank Bear Stearns. By July of two thousand seven, both funds were almost worthless. They had mainly invested in collateralized debt obligations. No one wanted to buy their C.D.O.s at anything near the stated value.

 

The failure of the two fundswas a tipping point. It then became clear to investors that thehousing bubble had burst. Mortgage-related securities were far riskier than anyone had believed. The following months brought concerns and suspicions about risky investments in so-called toxic assets. Banks became afraid to lend to each other. Credit markets froze. This set off a chain of events that threatened the whole financial system.

 

By March of two thousand eight, thing really started to go wrong. Lenders cut off loans to Bear Stearns. And investors wanted to get their money out. The Federal Reserve led by Chairman Ben Bernanke and the Treasury Department under its former secretary, Henry Paulson, intervened. A thirty billion dollar loan from the government helped get JPMorgan to buy Bear Stearns.

 

Then, in September, Wall Street lost all four of its other big investment banks. The government persuaded Bank of America to buy Merrill Lynch. But officials decided not to rescue Lehman Brothers. Lehman's failure not only became the biggest bankruptcy in American history. It also shook whatever trust remained in the markets, deepening the crisis.

 

The last of the investment banks -- Goldman Sachs and Morgan Stanley -- became bank holding companies. That change meant they were agreeing to accept greater supervision.

 

And what about the insurance that was supposed to protect investors in the C.D.O.s? Many of the companies guaranteeing that debt did not have enough capital to pay claims when mortgage securities went bad.

A.I.G., the American International Group, was the world's largest insurance company. In a free-market economy, companies are supposed to be free to fail. But the government was aggressively trying to contain the crisis. It decided that A.I.G. was "too big to fail." A.I.G. and the bond insurers that guaranteed mortgage securities took the same chance that the investment banks did. They thought housing prices would continue to climb. In short, says finance professor Matthew Richardson, they made a bet without enough money in case they lost.

 

The conditions that led to the financial crisis -- a housing bubble and too much debt -- were not new to financial markets. But today's globally connected financial system was new.

 

Task 1. Answer the following questions:

1. What triggered the US subprime crisis?

2. What role did Fannie Mae and Freddie Mac have in this crisis?

3. What are "subprime" borrowers?

4. What role did credit rating agencies play in the crisis?

5. What financial instruments contributed to the crisis?