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The Financial Tsunami Credit Crisis


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  • 2. Starring
      • Merchant Bankers
      • Uncle Sam’s Federal Reserve
      • Lehman Bros.
      • Merrill Lynch
      • AIG, FM & FM
      • Morgan Stanley
  • 3. Story written by
  • 4. Directed by
  • 5. Merchant Bankers
    • “ Masters of the Universe” ( to quote best selling author ‘Tom Wolfe’ )
    • Don’t like our PSBs or private banks
    • Assess different financial proposals for investments worldwide
    • International portfolio investments
    • Global & corporate strategies formulation
    • Measure & manage political risks involved
  • 6. The Devil Behind the Scene US Mortgage Crisis A Sub primer
  • 7. What is it?
    • Two Types of US Borrowers
    • Prime & Subprime
    • Loans by subsidiaries in 2002-07 to SP Borrowers
    • Due to Real Estate boom
    • Rising of home price to more than double since 1997
    • Encouragement by Govt. to lend SPB to help poor & young
  • 8.
    • With stock mkt. booming & system flush with liquidity, big fund investors like Hedge funds & MFs saw SP loan portfolios as attractive investment
    • Bought such portfolios from original lenders
    • Lenders had fresh funds to lend
  • 9.
    • Typically 2% higher interest rate than Prime because of higher default risk, resulting in higher EMIs
    • Only added to risk of SPB defaulting rate
    • Lenders compromised with prudential norms & devise new instruments
  • 10. Turning into a Crisis
    • US Housing boom bubble busted in 2007
    • Boom had led to a massive housing supply
    • Prices fell down
    • Default rate shoot up
    • SPB no longer ready to pay through their nose
    • Collateral was typically the home being bought, again this vicious cycle started
  • 11.
    • Coincidence with US Economy slowdown made the matter worse
    • Price dropped to 50% of their peak in 2006
    • Lenders left with less the value of their loans to book hefty losses
  • 12. Turning into a systematic crisis
    • Original lenders had further sold their portfolios to other players
    • Some complex derivatives were also developed based on the loan portfolios which sold further, one after another
    • As a result, nobody is quite sure about the exact sizes of losses & who had taken how much hit
  • 13.
    • Fannie Mae & Freddi Mac owned half of roughly $12 trillion outstanding in home mortgage
    • Suffered $14bn in last 4 Qs
    • Forced retreat of these two giants from market created ripples of fear across the players
  • 14. Impact of crisis: on USA
    • Global banks & brokerages had to write off an estimated $512 bn
    • Heaviest punch on CITI group ($55.1bn) & Merrill Lynch ($52.2bn)
    • More than half of total losses are suffered by US based firms ($260bn)
    • European firms tanks $227bn
    • Relatively modest $24bn hit on Asian firms
  • 15.
    • Bear Sterns, one of the largest investment bank & securities traders collapsed
    • Bought up by JP Morgan Chase with help of Federal Reserve
    • Lehman went bankrupt
    • ML bought by Bank of America
    • Nationalization of FM & FM
  • 16. On global front
    • US being the biggest borrower in the world since most countries hold their foreign exchange reserve in dollars & invest them in US Securities, any crisis in US has a direct bearing on them
    • Countries with large reserves like Japan China and India are at high risk
    • Global interconnectivity of financial markets makes the situation worse
  • 17.
  • 18. Lehman Brothers
    • 158 years old
    • HQ in Manhattan
    • CEO Richard Fuld
    • 4 th largest investment bank
    • 26,000 employees worldwide
    • Market value in Feb. 2007 was $45.5bn
    • Posted $4bn losses in Q4
    • File for Bankruptcy under chapter 11
    • Barclays to buy its core capital mkt. business for $1.75bn, a paltry
    • Could save 10,000 jobs of Lehmannites
  • 19. Merrill Lynch
    • 94 years old
    • 60,000 employees
    • HQ in Manhattan
    • Market value in Feb.2007 was $86bn
    • Bought by Bank of America for $50bn in a all stock transaction
  • 20. Other banks on sale
    • Morgan Stanley, 2 nd largest investment bank across the globe
    • Mutual Washington
    • Some others are also in the pipeline
  • 21. Rescue Measures by Central banks
    • SEC Securities & Exchange Commission, a US Regulator banned short selling in 799 financial companies stocks
    • $800 bn pumped in worldwide
    US Federal Reserve $180bn Russian Govt. $130bn Bank of Japan $108bn US Federal guarantors $50bn Bank of England $40bn ECB $40bn RBI $18bn
  • 22. AIG’s Adoption by Uncle SAM
    • World’s largest Insurer
    • Lost $13.2bn in first 6 months of 2008
    • Sought to raise $40bn to avoid crippling credit rating downgrade
    • Was also in talks with Warren Buffets
    • US take it over for $86bn, ½ of India’s Annual Budget
  • 23. Other Bailouts by USA
    • So far $900bn bailed out by US in 2008
    Federal’s housing administrator $300bn Federal’s term auction facility $200bn FM & FM $200bn JP Morgan Chase $87bn AIG $85bn Bear Stern $29bn Grant to local gov. $4bn
  • 24. International Stampede
    • Race against time to prevent global financial collapse
    • Domino’s effect
    • Bank to sit on cash
    • Interbanking relations and faith touched a new low
    • Several commit suicide across the world
  • 25.
    • RTS (Russia), Hangseng (Singapore), Shanghai comp, FTSE 100 (UK), Sensex, DAX 30 (Germany), S&P 500, Nikkei (Japan), Dow Jones (USA), NASDAQ comp, CAC40 (France), KOSPI (S.Korea) all crashed like a plane
    • Dow Jones tanks 500 pts within 10 min of opening on Monday
    • 10 major banks in US to create $70bn emergency crisis fund
  • 26. Ripples in India
    • Rupee hit a 10 year low to Rs.47 A dollar
    • FIIs withdraw $800 million on Monday, the biggest withdrawal on a single day after 9/11
    • RBI not to increase CRR in its Oct. Monetary Review
    • RBI to cut SLR (statutory liquidity ratio) by 1% to 24%
    • RBI to go for 2 LAF (liquidity adjustment facility) in a single day
  • 27.
    • Call money rates up to 15-17% from 6-8% of one week ago
    • ICICI worst hit as its London subsidiary Had purchased Lehman bonds to the tune of Rs. 375 crore
    • IRDA asks TATA-AIG to submit reports on solvency
    • Real estate sector, Hardest hit
    • Could loose 26,000 jobs across the sectors
  • 28. Blessings in Disguise
    • Every tunnels has a ray of hope at its end
    • Crude price dipping
    • Service sector growing at double digit
    • Comparatively insulated Indian mkt. as 2/3 of Indian economy is domestically driven
    • More local investors in equity as a replacement of global one
    • Talent crunched A- Indians can now seek to hire A+ talent
  • 29. My Question
    • Is it good to dwell out taxpayers hard earned money for the losses of those who were playing ROULETTE for long?
    • Is it not the “ privatisation of profits and civilisation of losses? ”
  • 30. Presented By: