Description
subprime crisis in US in detail. Who were the players involved in the crisis, how did bubble create, how did the bubble burst led to the crisis. What were the direct impacts of the crisis. Which countries were most affected. The ppt also explains the impact of subprime crisis in India.
Sub Prime & its Impact
Click to edit Master subtitle style
2/1/13
CONTENTS
?Subprime ?Traditional Model Vs Subprime Model ?Players in the Game ?Bubble burst ? Crisis Impact ?Indian story ?Bailouts
2/1/13
SUB PRIME
?Subprime lending is a general term that refers
to the practice of making loans to borrowers who do not qualify for market interest rates because of problems with their credit history or the ability to prove that they have enough income to support the monthly payment on the loan for which they are applying.
2/1/13
2/1/13
2/1/13
PALYER IN GAME
2/1/13
?Player 1: Federal ? Federal kept the interest rate low during
much of 1990s and particularly 2001-2005 (low oil prices, and low inflation prompted the policy), fueling the market ? During the 2001-2005, FFR was in the 1% to 3% range, and mostly in the 1% range Federal encouraged more risky ARM(adjustable rate mortgage) lending
2/1/13
2/1/13
?Player 2: Mortgage Salespersons
Worked on commission based on the number of arms successfully twisted ?Player 3: Primary Lenders - No incentives for judicious lending Banks no longer needed to hold on to the mortgage, as use of mortgage-backed securities made risk taking more appealing -Use of ARMs with low teaser rates (below market rates for a while, followed by much higher rates tied to index, LIBOR + some %). Teaser rates are popular when long2/1/13
?Player 4: Other Financial Institutions
Freddie Mac and Fannie Mae issued many Mortgage Backed Securities Other financial institutions that traded in these as well as derivatives based on real estate assets. Many of these were global institutions
2/1/13
?Player 5: Credit rating Agencies and
Analysts -Lack of market for many of these securities, so models were used to price them Inflated ratings, mostly in A range (similar to T-Bills) -Conflict of Interest: Investment bankers’ analysts were rating investment bankers’ clients (scandal) For example, 3 months prior to its demise, AIG was 2/1/13 rated strong buy (8 analysts), buy(3), hold
?Player 6: Home Buyers (Taking Excessive
Risk) Home buyers were enjoying the ride , new ones were joining the ride, even if unqualified Home ownership up from 60% in 1990s to 70%
2/1/13
How bubble burst led to crisis???
?Step 1 - The housing boom in the US started
fading out in 2007 ?Step 2 - Boom had led to massive increase in supply of housing ?Step 3 - Thus House prices started falling ?Step 4 - This increased the default rate among sub-prime borrowers ?Step 5 - These borrowers were no longer able/willing to pay high price for a house that was declining in value ?Step 6 – Security/Guarantee being the house 2/1/13 being bought , this increased the supply of
2/1/13
Why housing bubble burst????
2/1/13
Direct Impacts of the Crisis
? Stock Market
? 15/08/07 Dow Jones had dropped below
13,000 from July’s 14000 ? First 3 weeks of 08, the Dow Jones Industrial Average fell 9% ? 18/1/08 Dow Jones/0.5%, S&P 500/0.6%, and NASDAQ/0.3% ? 21/1/08 (black Monday) the world’s biggest falls since Sept. 11, 2001
2/1/13
2/1/13
? Financial Institutions – Bankruptcy
? New Century Financial (USA)– Apr. 2, 2007 ? American Home Mortgage (USA) – Aug. 6, ? ? ? ? ?
2/1/13
2007 Sentinel management Group (USA) – Aug. 17, 2007 Ameriquest (USA) – Aug. 31, 2007 NetBank (USA) – Sept. 30, 2007 Terra Securities (Norway) – Nov. 28, 2007 American Freedom Mortgage Inc. (USA) – Jan. 30, 2007
2/1/13
? Home Owners
? ? ? ?
Housing prices down 10.4% in Dec. 07 vs. year-ago Sales of new homes dropped by 26.4% in 07 vs. 06 By Jan. 2008, the inventory of unsold new homes stood at 9.8 months, the highest level since 1981. Two million families will be homeless from their homes
? Minorities
? ?
Disproportionate level of foreclosures in minority 46% Hispanics, 55% blacks got higher cost loans
2/1/13
Country wise Action
?United kingdom
?Has lined up a $850-billion rescue plan, May
nationalize Royal Bank of Scotland Will recapitalize banks by up to $88 billion. Abbey, Barclays, HSBC, Lloyds, Standard Chartered, HBOS and Nationwide Building Society can draw from an aggregate of $44 billion to boost their Tier 1 capital ?Bank of England will infuse liquidity of $351 billion through loans ?The government will guarantee $439 billion 2/1/13
?Belgium
?The government took partial control of the
struggling Fortis Bank ?France, Belgium and Luxembourg stumped up $93 billion to recapitalize Dexia, a FrenchBelgian lender that ran up huge losses in its US operations ?Alarm: Fortis Bank's liabilities are several times larger than the GDP of Belgium (leverage ratio of 33) ?Iceland 2/1/13
?United states
?May pick up ownership in failing US banks
(Morgan Stanley is reported to be one) ?Fed ready to lend directly to stressed companies
?Germany
?Has guaranteed all bank deposits ?Has organized a credit lifeline of euros 35
billion for blue-chip commercial real estate lender Hypo Real Estate Holding 2/1/13 ?Alarm: The total liabilities of Deutsche Bank
?Singapore
? Eased monetary policy for the first time since
2003 after sinking into its first recession in six years, hit by the meltdown in financial markets. ? The government revised its 2008 growth forecast to around 3 per cent from an earlier estimate of 4 to 5 ?Italy ? Uni Credit Bank has announced plans to raise its 2/1/13capital ratio by spinning of property assets
?Spain
?Will spend 50 billion Euros ($68 billion) to buy
bank assets, almost a third of the proposed 2009 central government budget
?Japan
?Yamato Life Insurance failed with $2.7 billion
in debt ?The government may revive a bank-rescue law of the 1990s banking crisis ?Tokyo may set up a $100-billion fund to prop 2/1/13smaller lenders up
2/1/13
Impact of Subprime Crisis in India
?No direct impact: ?Structured finance undeveloped ?No deleveraging ?On the contrary India and China were seen as
saviors of a ‘decoupling’ global economy ?Result: Capital influx, currency appreciation, stock market boom
2/1/13
?The second round effect of Sub Prime + spike
in oil prices was devastating for Asian countries, including India ?But for the macroeconomic cushion of low external debt Ratio and fiscal deficits and comfortable reserves this had the ingredients of a classic currency crisis
2/1/13
The Devastation
?Oil shock – worsening current account
balance ?India’s merchandise trade deficit in April-July 2008 increased by 50% ?BRIC may split – prospects of Brazil/Russia brightened& that of India/China darkened ?Sharp increase in inflation – food & oil the culprits ?Governments could no longer fully insulate consumers from increase in retail oil prices ?Spike in food prices through biofuels link 2/1/13
?Increase in fiscal deficit
Government absorbed part of the increase in oil and food prices – lower savings ?EAC’s estimate of off balance sheet deficit on account of rising food and oil prices – 4.5% of GDP ?Threat of credit downgrade
?Decline in Capital flows
?Sharp decline in stock market capitalization
and bearish markets 2/1/13 ?Rupee under pressure – feeds inflation
2/1/13
2/1/13
2/1/13
Bailout
?Government/central bank credit (liquidity) helps
banks pay their debts and may “unfreeze” credit markets and creditors
?But, bailouts create moral hazard for borrowers
2/1/13
Outcomes
2/1/13
2/1/13
? Internet & media resources:
http://en.wikipedia.org/wiki/Causes_of_the_United_States_housing_bubble
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Housing_downturnhttp://news.bbc.co.uk/2/hi/business/7073131.stm ? Book and papers
'The Subprime Solution,’ by Robert Shillerhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1112467http://www.nera.com/image/SEC_SubprimeSeries_Part_II_FINAL_2-08.pdfhttp://www.nera.com/image/SEC_SubprimeSeries_Part1_June2007_FINAL.pdf (Accounting is responsible for the crisis?!) ?http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1108556 (Michael Brennan) ?http://ideas.repec.org/p/fip/fednsr/318.html (understanding
? ? ? ?
securitization)
2/1/13
doc_875536929.pptx
subprime crisis in US in detail. Who were the players involved in the crisis, how did bubble create, how did the bubble burst led to the crisis. What were the direct impacts of the crisis. Which countries were most affected. The ppt also explains the impact of subprime crisis in India.
Sub Prime & its Impact
Click to edit Master subtitle style
2/1/13
CONTENTS
?Subprime ?Traditional Model Vs Subprime Model ?Players in the Game ?Bubble burst ? Crisis Impact ?Indian story ?Bailouts
2/1/13
SUB PRIME
?Subprime lending is a general term that refers
to the practice of making loans to borrowers who do not qualify for market interest rates because of problems with their credit history or the ability to prove that they have enough income to support the monthly payment on the loan for which they are applying.
2/1/13
2/1/13
2/1/13
PALYER IN GAME
2/1/13
?Player 1: Federal ? Federal kept the interest rate low during
much of 1990s and particularly 2001-2005 (low oil prices, and low inflation prompted the policy), fueling the market ? During the 2001-2005, FFR was in the 1% to 3% range, and mostly in the 1% range Federal encouraged more risky ARM(adjustable rate mortgage) lending
2/1/13
2/1/13
?Player 2: Mortgage Salespersons
Worked on commission based on the number of arms successfully twisted ?Player 3: Primary Lenders - No incentives for judicious lending Banks no longer needed to hold on to the mortgage, as use of mortgage-backed securities made risk taking more appealing -Use of ARMs with low teaser rates (below market rates for a while, followed by much higher rates tied to index, LIBOR + some %). Teaser rates are popular when long2/1/13
?Player 4: Other Financial Institutions
Freddie Mac and Fannie Mae issued many Mortgage Backed Securities Other financial institutions that traded in these as well as derivatives based on real estate assets. Many of these were global institutions
2/1/13
?Player 5: Credit rating Agencies and
Analysts -Lack of market for many of these securities, so models were used to price them Inflated ratings, mostly in A range (similar to T-Bills) -Conflict of Interest: Investment bankers’ analysts were rating investment bankers’ clients (scandal) For example, 3 months prior to its demise, AIG was 2/1/13 rated strong buy (8 analysts), buy(3), hold
?Player 6: Home Buyers (Taking Excessive
Risk) Home buyers were enjoying the ride , new ones were joining the ride, even if unqualified Home ownership up from 60% in 1990s to 70%
2/1/13
How bubble burst led to crisis???
?Step 1 - The housing boom in the US started
fading out in 2007 ?Step 2 - Boom had led to massive increase in supply of housing ?Step 3 - Thus House prices started falling ?Step 4 - This increased the default rate among sub-prime borrowers ?Step 5 - These borrowers were no longer able/willing to pay high price for a house that was declining in value ?Step 6 – Security/Guarantee being the house 2/1/13 being bought , this increased the supply of
2/1/13
Why housing bubble burst????
2/1/13
Direct Impacts of the Crisis
? Stock Market
? 15/08/07 Dow Jones had dropped below
13,000 from July’s 14000 ? First 3 weeks of 08, the Dow Jones Industrial Average fell 9% ? 18/1/08 Dow Jones/0.5%, S&P 500/0.6%, and NASDAQ/0.3% ? 21/1/08 (black Monday) the world’s biggest falls since Sept. 11, 2001
2/1/13
2/1/13
? Financial Institutions – Bankruptcy
? New Century Financial (USA)– Apr. 2, 2007 ? American Home Mortgage (USA) – Aug. 6, ? ? ? ? ?
2/1/13
2007 Sentinel management Group (USA) – Aug. 17, 2007 Ameriquest (USA) – Aug. 31, 2007 NetBank (USA) – Sept. 30, 2007 Terra Securities (Norway) – Nov. 28, 2007 American Freedom Mortgage Inc. (USA) – Jan. 30, 2007
2/1/13
? Home Owners
? ? ? ?
Housing prices down 10.4% in Dec. 07 vs. year-ago Sales of new homes dropped by 26.4% in 07 vs. 06 By Jan. 2008, the inventory of unsold new homes stood at 9.8 months, the highest level since 1981. Two million families will be homeless from their homes
? Minorities
? ?
Disproportionate level of foreclosures in minority 46% Hispanics, 55% blacks got higher cost loans
2/1/13
Country wise Action
?United kingdom
?Has lined up a $850-billion rescue plan, May
nationalize Royal Bank of Scotland Will recapitalize banks by up to $88 billion. Abbey, Barclays, HSBC, Lloyds, Standard Chartered, HBOS and Nationwide Building Society can draw from an aggregate of $44 billion to boost their Tier 1 capital ?Bank of England will infuse liquidity of $351 billion through loans ?The government will guarantee $439 billion 2/1/13
?Belgium
?The government took partial control of the
struggling Fortis Bank ?France, Belgium and Luxembourg stumped up $93 billion to recapitalize Dexia, a FrenchBelgian lender that ran up huge losses in its US operations ?Alarm: Fortis Bank's liabilities are several times larger than the GDP of Belgium (leverage ratio of 33) ?Iceland 2/1/13
?United states
?May pick up ownership in failing US banks
(Morgan Stanley is reported to be one) ?Fed ready to lend directly to stressed companies
?Germany
?Has guaranteed all bank deposits ?Has organized a credit lifeline of euros 35
billion for blue-chip commercial real estate lender Hypo Real Estate Holding 2/1/13 ?Alarm: The total liabilities of Deutsche Bank
?Singapore
? Eased monetary policy for the first time since
2003 after sinking into its first recession in six years, hit by the meltdown in financial markets. ? The government revised its 2008 growth forecast to around 3 per cent from an earlier estimate of 4 to 5 ?Italy ? Uni Credit Bank has announced plans to raise its 2/1/13capital ratio by spinning of property assets
?Spain
?Will spend 50 billion Euros ($68 billion) to buy
bank assets, almost a third of the proposed 2009 central government budget
?Japan
?Yamato Life Insurance failed with $2.7 billion
in debt ?The government may revive a bank-rescue law of the 1990s banking crisis ?Tokyo may set up a $100-billion fund to prop 2/1/13smaller lenders up
2/1/13
Impact of Subprime Crisis in India
?No direct impact: ?Structured finance undeveloped ?No deleveraging ?On the contrary India and China were seen as
saviors of a ‘decoupling’ global economy ?Result: Capital influx, currency appreciation, stock market boom
2/1/13
?The second round effect of Sub Prime + spike
in oil prices was devastating for Asian countries, including India ?But for the macroeconomic cushion of low external debt Ratio and fiscal deficits and comfortable reserves this had the ingredients of a classic currency crisis
2/1/13
The Devastation
?Oil shock – worsening current account
balance ?India’s merchandise trade deficit in April-July 2008 increased by 50% ?BRIC may split – prospects of Brazil/Russia brightened& that of India/China darkened ?Sharp increase in inflation – food & oil the culprits ?Governments could no longer fully insulate consumers from increase in retail oil prices ?Spike in food prices through biofuels link 2/1/13
?Increase in fiscal deficit
Government absorbed part of the increase in oil and food prices – lower savings ?EAC’s estimate of off balance sheet deficit on account of rising food and oil prices – 4.5% of GDP ?Threat of credit downgrade
?Decline in Capital flows
?Sharp decline in stock market capitalization
and bearish markets 2/1/13 ?Rupee under pressure – feeds inflation
2/1/13
2/1/13
2/1/13
Bailout
?Government/central bank credit (liquidity) helps
banks pay their debts and may “unfreeze” credit markets and creditors
?But, bailouts create moral hazard for borrowers
2/1/13
Outcomes
2/1/13
2/1/13
? Internet & media resources:
http://en.wikipedia.org/wiki/Causes_of_the_United_States_housing_bubble
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Housing_downturnhttp://news.bbc.co.uk/2/hi/business/7073131.stm ? Book and papers
'The Subprime Solution,’ by Robert Shillerhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1112467http://www.nera.com/image/SEC_SubprimeSeries_Part_II_FINAL_2-08.pdfhttp://www.nera.com/image/SEC_SubprimeSeries_Part1_June2007_FINAL.pdf (Accounting is responsible for the crisis?!) ?http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1108556 (Michael Brennan) ?http://ideas.repec.org/p/fip/fednsr/318.html (understanding
? ? ? ?
securitization)
2/1/13
doc_875536929.pptx