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S&L Vs Subprime Crisis

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A Comparative analysis of Savings & Loan Crisis and Sub Prime Crisis

A Comparative analysis of Savings & Loan Crisis and Sub Prime Crisis

Published in: Economy & Finance, Business

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  • nice and useful website for all the ppt
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  • Hey Chris, will you please send me this presentation on crisis for making me understand and present in seminar. I have to present Global Financial Crisis alongwith East asian crisis.
    So please send me this at hitzassudani@gmail.com
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  • This website can be a useful resource to find out what started the financial crisis http://www.financialcrisis2009.org
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  • DIDMCA - Depository Institutions Deregulation and Monetary Control Act FIRREA - Federal Institutions Reform, Recovery, and Enforcement Act FHLBB – Federal Home Loan Bank BoardFSLIC - Federal Savings and Loan Insurance Corporations<number>
  • This mismatch between borrowing and lending rates wreaked havoc on bank earnings and net worth.They made too many risky loans to too many high-risk borrowers, and when the economy slowed, losses surged. The oil price bust of the mid-1980s made a bad problem worse, helping wipe out scores of S&Ls in Texas.The use of brokered deposits — where S&Ls chased “hot money” depositors by offering high interest rates — caused its own set of problems. <number>
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    • 1. SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 Prepared By: Amar Ranu (905) Deepak Thakkar (909) Dhananjay Kumar (917) Rohitesh Hota (927) Shakti Satapathy (930) Under Guidance of: Dr. S K Ghosh Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 2. What are we here for ? Lets understand the CRISIS - 1980’s . . . SAVINGS & LENDING Objective SUBPRIME CRISIS - 2008 What is Crisis all about ? Lets Understand the Crisis . . . Numbers Speak . . . Lets have a look at the facts & figures. . . When did all this occur? Lets understand the Time Line of Events . . . What went Wrong ? Lets Compare the Causes . . . . What was the fallout ? Lets Understand the Effects . . . What was the Action taken ? Lets Understand the Role of Government . . . What are the Lessons Learnt? Analysis Comparative Lets Conclude. . . SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 3. SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 What are we here for ? Lets understand the Objective . . . Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 4. Objective SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 To compare and analyze Similarities and Differences in the Savings & Loan Crisis of 1980s vis-à-vis Subprime Crisis of 2008. Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 5. SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 What is Crisis all about ? Lets Understand the Crisis . . . Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 6. What was Crisis all about? SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 The savings and loan crisis of the 1980s and The subprime mortgage crisis is an ongoing 1990s (commonly referred to as the S&L crisis) financial crisis triggered by a dramatic rise in was the failure of 745 savings and loan mortgage delinquencies and foreclosures in the associations (S&Ls aka thrifts). United States, with major adverse consequences for banks and financial markets around the globe. Saving and Loan Associations (thrift institutions) The crisis, which has its roots in the closing years of are deposit-taking institutions initially created for the 20th century, became apparent in 2007 and has the purpose of taking in deposits from private exposed pervasive weaknesses in financial industry citizens and using them to make home mortgage regulation and the global financial system. loans. The ultimate cost of the crisis is estimated to Approximately 80% of U.S. mortgages issued in have totaled around $160.1 billion, about $124.6 recent years to subprime borrowers were billion of which was directly paid for by the U.S. adjustable-rate mortgages. When U.S. house prices government—that is, the U.S. taxpayer, either began to decline in 2006-07, refinancing became directly or through charges on their savings and more difficult and as adjustable-rate mortgages loan accounts—which contributed to the large began to reset at higher rates, mortgage budget deficits of the early 1990s. delinquencies soared. Securities backed with subprime mortgages, widely held by financial firms, lost most of their value. The result has been a large decline in the capital of many banks and USA government sponsored enterprises, tightening credit around the world. Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 7. Some Common Ingredients SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 Incompetence Greed Fraud Policy Blunders Inadequate Regulatory Oversight Sharply Shifting Financial landscape Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 8. SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 Numbers Speak? Lets have a look at the facts & figures. . . Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 9. Facts & Figures SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 1. Core Loan Assets Portfolio 1. Derived Loan Assets Portfolio (Real Estate & Commercial Loans) (Structured Products) 4. Introduction of “FIRREA “ with $ 50 bn 2. Introduction of “TARP” with a corpus of as Toxic Asset Buyer $ 700 bn as “Toxic Asset Buyer”. (Financial Inst. Reform, Recovery & Enforcement Act) 8. RTC (Resolution Trust Corp) acted as Reselling Agent 8. $ 1 tn “TALF” SPV established for “AAA” ABS lending. 4. Total Cost of Crisis: $ 1.53 tn 4. Total Cost is more than $ 7.7 tn till date. Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 10. Facts & Figures SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 Fig: Unemployment Rate of USA Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 11. Facts & Figures SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 12. Facts & Figures SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 13. SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 When did all this occur? Lets understand the Time Line of Events . . . Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 14. Time Line of Events SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 Stable Interest Rate & Focus on Long Term Home Mortgage Lending Leeds to S&L Growth (1950s-1960s) Cut in Interest Rate 2000-2001 Due to High Inflation in The US, Deposit Funds Begin to Triggered Borrowings and Availability of Cheap Money Flow out of S&Ls (1970s) S&L Industry Starts Showing First Sign of Becoming Growing Demand Led to Irrational Rise in Prices Insolvent (Late 1970s) DIDMCA Began Phasing Out Interest Rate Ceilings on Prices Fell and The Housing Bubble (in Aug 2006) Deposits (1980s) Recession Hits The U.S. economy. Major Increase in Lending Industry Resorted to Exotic Loans and Riskier S&L Failures. (1981-82) Practices (to keep this boom going) FIRREA Finally Eliminated FHLBB and the Bankrupt Assumptions That The Situation will Remain Same and FSLIC. (1989) Refinancing Would Be Possible Recession Hits the U.S. economy. Likely connections Defaults / Foreclosures between savings inst. And drops in GDP. (1990-91) Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 15. SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 What went Wrong ? Lets Compare the Causes . . . . Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 16. Causes SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 • Interest rate gyrations caught many institutions 1. Boom and bust in the housing market borrowing money at high rates and lending at Low interest rates and large inflows of foreign funds relatively low ones. created easy credit conditions for a number of years prior to the crisis, fueling a housing market boom and • Banks overextended themselves in the encouraging debt-financed consumption. commercial real estate sector. • Speculation in residential real estate • Weak regulation and disturbingly low capital • High-risk mortgage loans and lending/borrowing levels made S&Ls vulnerable to failure. practices • Non-performing loans leading to forced In the years before the crisis, the behavior of lenders liquidations and resulting losses. changed dramatically. Lenders offered more and more loans to higher-risk borrowers, including illegal • Losses on poor investments; junk bonds, immigrants, just one indication of poor underwriting commercial real estate. • Securitization practices • Bank management fraud and embezzlement; • Inaccurate credit ratings long list of “players”. • Financial institution debt levels and incentives • Investment in U.S. by foreigners of their proceeds from America's net imports Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 17. SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 What was the fallout ? Lets Understand the Effects . . . Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 18. Effects SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 2.Impact on the GDP of US was less severe, 1. The impact on the GDP of US was a in the case of S&L crisis. The GDP fell to the lot severe in the case of the Subprime range of 1.8% to 2% as a result of the crisis. The GDP fell to sub zero levels systemic shock. in 2008-09. 4.The impact on the rest of the world was less 3. The impact had a systemic effect and it severe in S&L crisis. has now turned around as a Global Financial Turmoil, impacting practically 6.Tough it turned out as a big shock to the the entire globe which is even distantly economy as a whole, comparatively less related to US. impact was felt when it came to failures and filling Chapter XI. 5. The crisis led to the failures of a number of once ‘Stalwarts’ of the Wall Street. Lehman Bros, Meril Lynch, Bear Sterns to name a few. Apart from that it also lead to a number of M&A in the specific domain. Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 19. SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 What was the Action taken ? Lets Understand the Role of Government . . . Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 20. Action Taken SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 1. Provisions of FIRREA (Financial Inst. Reform, 1. Federal Reserve and central banks Recovery & Enforcement Act) 1989 The central bank of the USA, the Federal Reserve, in a) Increased authority over state chartered institutions partnership with central banks around the world, has b) Abolished FSLIC and FHLBB. FDIC reorganized into BIF, taken several steps to address the crisis. SAIF divisions c) Lowered the target for the Federal funds rate from c) Created the RTC and Office of Thrift Supervision 5.25% to 2%, and the discount rate from 5.75% to d) Permitted Bank Holding Companies (BHC) to acquire 0-0.25%. healthy thrifts d) Undertaken, along with other central banks, open e) Stiffened penalties for fraud and embezzlement market operations to ensure member banks remain f) Created the Federal Housing Finance Board to oversee 12 FHL Banks liquid. g) Required regulators to develop and enforce minimum standards for property appraisal 6. Economic Stimulus h) Lowered tax benefits to acquirers of failed or failing thrifts g) A $168 billion economic stimulus package, mainly taking the form of income tax rebate checks mailed 2. Provisions of FDICIA (Federal Deposit Insurance directly to taxpayers. Corp. Improvement Act ) 1991 h) American Recovery and Reinvestment Act of 2009, an a) Deposit insurance premiums based on riskiness of $800 billion stimulus package with a broad spectrum institution of spending and tax cuts. b) Detailed rules for the conduct of federal regulators c) Increased borrowing authority for FDIC and reserve requirements • Bank solvency and capital replenishment d) Established a quot;tripwirequot; system for early problem Losses on mortgage-backed securities and other detection assets purchased with borrowed money have e) Expanded FDIC authority over foreign bank expansion and dramatically reduced the capital base of financial termination's in US required foreign banks to obtain institutions, rendering many either insolvent or less insurance. capable of lending. Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 21. Action Taken SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 • The U.S. government ultimately appropriated 105 • Homeowner assistance billion dollars to resolve the crisis. After banks repaid Both lenders and borrowers may benefit from avoiding loans through various procedures, there was a net foreclosure, which is a costly and lengthy process. Some loss to taxpayers of approximately $124 billion lenders have offered troubled borrowers more favorable mortgage terms (i.e., refinancing, loan modification dollars by the end of 1999. or loss mitigation). Borrowers have also been encouraged to contact their lenders to discuss alternatives. • The concomitant slowdown in the finance industry and the real estate market may have been a 4. Homeowners Affordability and Stability Plan contributing cause of the 1990–1991 economic A $75 billion program to help up to nine million recession. Between 1986 and 1991, the number of homeowners avoid foreclosure, which was supplemented new homes constructed dropped from 1.8 to 1 by $200 billion in additional funding for Fannie Mae million, the lowest rate since World War II. and Freddie Mac to purchase and more easily refinance mortgages. • Some commentators believe that a taxpayer-funded government bailout related to mortgages during the savings and loan crisis may have created a moral hazard and acted as encouragement to lenders to make similar higher risk loans during the 2007 subprime mortgage financial crisis. Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 22. SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 What are the Lessons Learnt? Lets Conclude. . . Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 23. Lessons Learnt SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 1. We have learned the damaging effects of high 1. Distorted Incentives without Accountability can inflation and interest rates on financial spell disasters intermediaries, an obvious argument for controlling domestic inflation. 3. Risk Allocation does not mean Risk Elimination 3. We have learned the negative effects of quick 5. Complex mathematic al Models can also fail deregulation and lack of oversight as well as the moral-hazard and adverse-selection problems 7. True Risk Assessments of Securities is Crucial caused by deposit insurance. Also, the lack of depositor oversight caused by insurance cannot be 9. Resist pressure for bailouts ignored either. Deposit insurance should be Losses should be dispersed to exposed investors rather established so that it minimizes these problems than taken over by taxpayers. and yet provides the stability and protection needed by small depositors. 12. Improve consumer protection With lending standards tightening, the appropriate policy 5. S&L failures were a leading cause of the recessions response needs to balance improving consumer protection of the early 1980s and early 1990s. The failed with maintaining the viability of the securitization model institutions may have had as much as a 23% effect that has successfully dispersed credit risk away from on GDP. This is much greater than previously systemically important financial institutions. believed. The recessions partially caused by the S&L crisis were from deadweight losses, slow 15. Tighten Oversight payouts to depositors, and unemployment. Also Federal banking regulators have recently tightened guidance on nontraditional and hybrid ARM mortgage there was a general loss of faith in deposit lending.  institutions. Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 24. Action Taken SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 1. Standard capitalization ratios in general do not go far in determining savings and loan failures. Risk-based ratios may be more reliable indicators. Risk assessments were not required during the period of the savings and loan crisis. Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
    • 25. SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008 THANK YOU . . . . Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)