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1. Costs to MAKE a product or provide a service are a production cost
2. BUY decision involves coordination costs- anything to buy a product
Make=production
Buy=coordination
You should MAKE when:
production costs < coordination costs
You should BUY when:
production costs > coordination costs
Ex. To sell electricty, you could MAKE (land, plants, fuel, labor) or BUY ("gas bank" spot market, price, legal, verification)
In California, production costs are very high, so the BUY decision is best
-decision should always be made upon lowest costs
This considers cost only, not control 1) FDR- New Deal
>Works Progress Administration (WPA)
>CCC- gave the people something to work for so they would have something to lose & reason not to overthrow govt
>Federal Housing Admin (FHA)- redlining was drawing lines on a map to decide which minority areas wouldnt get a loan
>Fannie Mae/Freddie Mac- banker sells loan, gets reward, sells loan to govt at no risk
2) Glass Steagal 1932
>law that separated people's life savings from investment banks
>ended up w JP Morgan Chase & Morgan Stanley
3) Mortage Bonds- Salomon Brothers (Public)
>"AAA" rating scale was a way of organizing mortages into these bonds
-these stabilized income stream & discouraged ppl from paying off early
4) Financial Services Modernization Act 1999
>this ended Glass Stegal & allowed commercial investment banks to merge
5) Derivatives
>Enron was 1st to come up w weather derivatives
>snowmobile company needed protection if its warm outside for too long so investors hedged this risk by betting on a longer winter in florida
>Derivatives are ways of hedging against unforeseen events like an insurance policy except there were no collateral requirements.
>They are also used for speculation. Speculation are legal bets
>guy from The Big Short started looking at these bonds that banks would sell mortgages & they would be packed into bonds. These mortgages were rated AAA but were bound to default. So he bet against the market. He had bet 1 billion against them, & in order to do this he had to pay premiums (SIVs-Structured Investment Vehicles) to the banks
6) Exotic Loans- not FHA
>FHA verifies you have capital, savings, income, FICO score to make sure you will pay back what you borrowed
>"interest only" loans where you only pay the interest on a house & when it increases in value the next year, you sell it & pocket the profit. but housing prices going up is a huge assumption
7) NINJA- No Income No Job Approved loan
>scene from Big Short where stripper owns 5 houses
>banks sold these loans & then sold them off so they were risk free. Countrywide did this
8) Rating Agencies (S&P, Moody's, Fitch)
>they look at these bonds & then rate them, but they only looked at the top "AAA"
>so why are agencies rating them? bc Solomon Brothers became public & shareholders wanted growth
9) Adjustable Rate Mortgages (ARM)
>start at an interest rate & can either go up or down but they always go up
>"Teaser rates" will go up & people w these expensive homes can no longer pay the rates so they default on their loans
-The bubble burst when the value of homes went down & people started walking away from their homes
-companies began to 'restate' their balance sheets, went from black to in the red
-banks didnt completely collapse bc they'd fake the loans & bet against their products- SWAPS
-AIG was the biggest sucker in all of this 