Giant Pool of Money

In: Business and Management

Submitted By jayrefer1
Words 898
Pages 4
The Giant Pool of Money
The individuals in the radio story fell prey to the confirmation bias/heuristic and availability bias/heuristic. The confirmation bias refers to “The tendency to search for or interpret information in a way that confirms Preconceptions”.

The giant pool of money, which refers the subset of global savings allocated for fixed income securities, amounted to $70 trillion in 2006. In this case, the central banker held fed interest rate to a low level of 1%. The global army of investment managers, who managed the $70 trillion giant pool of money, wanted a low-risk high-return investment as the US treasury bonds didn’t look attractive at 1% interest. These investment managers invested in mortgage backed-securities (MBS) via big investment firms at Wall Street. Mike Francis, executive director at Morgan Stanley on the residential mortgage trading desk, sold financial instrument MBS to the global pool of money. To meet the high demands of global pool of money for MBS, Mike Francis needed to buy as many mortgages as possible to make MBS. Mike bought mortgages from mortgage banks and repacked them to MBS. People like Mike Francis were link to the global of money.

Mike Garner, an employee at Silver State Mortgage, the largest private mortgage bank in Nevada, bought the individual mortgages and bundled 200 or 300 of them together, and then sold them up the chain to Wall Street investment banks, to guys like Mike Francis. The pool of money demand for these bundled mortgages was increasing. Mike Garner’s bank had to lend to people who would not qualify for traditional loans. Many of these people had no income and no assets. Mike Garner’s bank lowered the standards to issue as many as mortgages. People didn’t have to show W-2 to get loan approval from Mike Garner’s bank. Mike Garner approved more and more risky loans as he and other employee were paid…...

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