Research Seminar - The Role of Morale Hazard in the Creation of Subprime Mortgage Crisis

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This is a presentation I did for my research paper. I explained the roles of morale hazard in subprime mortgage crisis and proposed several solutions that I believe could address these problems

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  • Research Seminar - The Role of Morale Hazard in the Creation of Subprime Mortgage Crisis

    1. 1. The Role of Moral Hazard in Subprime Crisis
    2. 2. Moral hazard: The possibility of a party with limited exposure to risks of its own action has the tendency to behave differently from the way they would if it were fully exposed to risks.
    3. 3. Moral Hazard is Demonstrated in 4 Key Components of the Financial Market
    4. 4. 1
    5. 5. The unintended consequence of Fed’s expansionary monetary policy
    6. 6. Greenspan cut interest rate aggressively to revive economy after the burst of Internet Bubble.
    7. 7. However, underestimated inflation led Fed to cut interest rate too much and kept it low for too long.
    8. 8. Two Unintended Consequence
    9. 9. Two Unintended Consequence 1.Excessively low cost of borrowing led investors to take on much greater risks
    10. 10. Two Unintended Consequence 1.Excessively low cost of borrowing led investors to take on much greater risks
    11. 11. Two Unintended Consequence 1.Excessively low cost of borrowing led investors to take on much greater risks 2.Gave rise to the Shadow Banking System
    12. 12. 2
    13. 13. Shadow Banking System George Soros
    14. 14. Shadow Banking System • Hedge funds, pension funds and private equity groups George Soros
    15. 15. Shadow Banking System • Hedge funds, pension funds and private equity groups • Largely unregulated George Soros
    16. 16. Shadow Banking System • Hedge funds, pension funds and private equity groups • Largely unregulated • Highly-leveraged George Soros
    17. 17. Shadow Banking System • Hedge funds, pension funds and private equity groups • Largely unregulated • Highly-leveraged • Dependent on short-term borrowing to invest in long- term assets (e.g. real estates) George Soros
    18. 18. Shadow Banking System • Hedge funds, pension funds and private equity groups • Largely unregulated • Highly-leveraged • Dependent on short-term borrowing to invest in long- term assets (e.g. real estates) • Partially responsible for creating subprime crisis George Soros
    19. 19. $600-700 Billions of Mortgage-backed Securities (MBS) Issued Annually Since 2002
    20. 20. Collapse of Housing Market
    21. 21. Collapse of Housing Market MBS Collapsed
    22. 22. Collapse of Housing Market MBS Collapsed Redemption
    23. 23. Collapse of Housing Market MBS Collapsed Redemption
    24. 24. 2
    25. 25. 3
    26. 26. The Flawed Compensation Structure
    27. 27. Maximizing Profit Through Securitization
    28. 28. Traditional Mortgage Business Mortgage Borrower House Bank
    29. 29. How Securitization of Subprime Mortgage Works
    30. 30. How Securitization of Subprime Mortgage Works
    31. 31. How Securitization of Subprime Mortgage Works
    32. 32. $1.3 Trillion Loss in Subprime MBS at U.S. Banks
    33. 33. 3
    34. 34. 4
    35. 35. Poor Implementation of Gov’t Policy on Increasing Home Ownership
    36. 36. Gov’t Sponsored Enterprise (GSP) Subsidized by U.S. gov’t to increase lending to low-income families 52% of their lending went to families with below median household income
    37. 37. Poor regulatory oversight Little incentives to manage risk “Too large to fail” mentality Both were nationalized by U.S. gov’t
    38. 38. Proposed Solution
    39. 39. Treasurer Geithner proposed overhauls of regulatory frameworks and establishment of “Systematic Regulator”
    40. 40. Reform of Compensation Structure

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