Financial Crisis-2008
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Financial Crisis-2008

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Financial Crisis explained in brief

Financial Crisis explained in brief

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Financial Crisis-2008 Financial Crisis-2008 Presentation Transcript

  • Created By: Parshwadeep Lahane
  • PARTNERS IN CRIME Customers FED Mortgage Brokers Investment Banks Investors Credit Rating Agencies Insurers
  • Modus Operandi
    • Bank would come out with schemes to give loans to just anyone with the help of mortgage brokers
    Principal + interest payable over long term Loan Loan + Premium Documents Documents BANK(Lender) Mortgage Broker Subprime Customer
  • MBS for loan
    • Bank would package the loan into a security and pass on to Investment banks
    Principal + interest payable over long term Loan Loan + Premium Documents Documents BANK(Lender) Mortgage Broker Subprime Customer SIV Investment Bank Loan + Premium Documents converted to Securities(MBS/ABS ) Off balance sheet entity
  • CDO
    • The investment banks will package these with other securities and slice them into different categories of CDO
    CDO Securities(MBS)
  • Certification
    • Credit Rating agencies(CRA) would certify these securities
    Principal + interest payable over long term Loan Loan + Premium Documents Documents BANK(Lender) Mortgage Broker Subprime Customer SIV Investment Bank Loan + Premium Documents converted to Securities(MBS/ABS ) Off balance sheet entity CDO CRA Rating Premium
  • Investors
    • Investment bank Structured Investment Vehicle(SIV) will sell CDOs to the Investors across the globe
    Principal + interest payable over long term Loan Loan + Premium Documents Documents BANK(Lender) Mortgage Broker Subprime Customer SIV Investment Bank Loan + Premium Documents converted to Securities(MBS/ABS ) Off balance sheet entity CRA Rating Premium CDO Investors Loan + Premium
  • Insured Principal + interest payable over long term Loan Loan + Premium Documents Documents BANK(Lender) Mortgage Broker Subprime Customer SIV Investment Bank Loan + Premium Documents converted to Securities(MBS/ABS) Off balance sheet entity CRA Rating Premium CDO Investors Loan + Premium Insurer Insurance Premium
  • Other linkages Bank Mortgage Broker Investment Bank Insurer CRA
  • Mistakes
    • Wrong belief of housing prices always going up
    • FED overlooked warnings
    • Past data reference illusion
    • High leveraging
    • Miscalculated ratings fooled investors
    • Appetite beyond capacity
    • Slicing and dicing spread the risk but did not eliminate it
  • Result- Mortgage Market Housing market nose dives
  • Sub prime borrower
  • Investors
  • Investment Banks Nationalized Bankrupt
  • Credit Rating Agencies
  • Insurers
    • Saved by
    • government
    • funding
  • Global Equity Markets
    • Lose 45% of
    • wealth
  • Money market
  • Confidence in Market
  • Someone got lucky! Alternate investment saw a surge
  • LEARNING
    • THINK BEFORE YOU ACT
  • THANK YOU