Collapsed (Individuals + Corporate + Banks) = Collapsed System <ul><li>Sub-Prime Crisis  </li></ul><ul><li>An Economic Per...
<ul><li>The days of high levels of employment and high disposable income in the hands of individuals saw </li></ul>1995 – ...
1995 – 2006: The Bright and Sunny Days… <ul><li>Increasing demand led to increased production levels </li></ul><ul><li>Job...
1995 – 2006: The Bright and Sunny Days… Source: www.ofm.wa.gov PaisaMatters.com
Source: epress.anu.edu.au  1995 – 2006: The Bright and Sunny Days…
1995 – 2006: The Bright and Sunny Days… <ul><li>The consumer generated organic infusion of money generated strong liquidit...
<ul><li>High   income levels and desire to own a dream home had already created a good mortgage loan portfolio </li></ul>1...
<ul><li>Borrowers   with  less than perfect credit  - the Subprime borrowers, presented a mouthwatering opportunity for ba...
1995 – 2006: The Bright and Sunny Days… Welcome  to the world of   Sub-Prime Mortgages PaisaMatters.com
1995 – 2006: The Bright and Sunny Days… <ul><li>Subprime loans are mortgages given to borrowers with ‘ less than perfect ’...
1995 – 2006: The Bright and Sunny Days… <ul><li>Borrowers were happy to get loans without worrying about credit worthiness...
1995 – 2006: The Bright and Sunny Days… PaisaMatters.com
1995 – 2006: The Bright and Sunny Days… <ul><li>The bankers who originated subprime loans converted them to bundles of sec...
1995 – 2006: The Bright and Sunny Days… <ul><li>In the “High Risk – High Reward” equation, the involved risks were grossly...
1995 – 2006: The Bright and Sunny Days… <ul><li>Low interest rates </li></ul><ul><li>+ </li></ul><ul><li>Rising property p...
1995 – 2006: The Bright and Sunny Days… PaisaMatters.com
Q4 2006 – Q2 2007: The Gloomy Evenings <ul><li>Too much money chasing too few goods resulted in increase in commodity pric...
Q4 2006 – Q2 2007: The Gloomy Evenings.. <ul><li>Falling demand for properties led to a rapid decrease in property prices ...
Q4 2006 – Q2 2007: The Gloomy Evenings.. <ul><li>Rising oil prices and  falling stock markets saw an erosion of investment...
Q3 2007 Onwards: The Scary Nights… <ul><li>The subprime borrowers with inconsistent and low incomes could not pay the incr...
Q3 2007 Onwards: The Scary Nights… <ul><li>Improving cash flows was a distant possibility for sub-prime borrowers, missing...
Q3 2007 Onwards: The Scary Nights… PaisaMatters.com
Q3 2007 Onwards: The Scary Nights… <ul><li>Because there were not many buyers for foreclosed properties, banks could not r...
Q3 2007 Onwards: The Scary Nights… <ul><li>In deteriorating economic conditions, sub-prime loan defaults were followed by ...
PaisaMatters.com Q3 2007 Onwards: The Scary Nights…
Q3 2007 Onwards: The Scary Nights… <ul><li>Tons of outstanding credit with no recovery in sight saw financial institutions...
Q3 2007 Onwards: The Scary Nights… <ul><li>The panic started to spread </li></ul><ul><li>Stock markets crashed </li></ul><...
Q3 2007 Onwards: The Scary Nights… Financial Times – 20 September 2008 “… bank boards and bank executives have failed to u...
?: The Dawn Ahead… Costly though, surely, a lesson for the economy Is the worst over yet?  …  Probably not ! How long befo...
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Sub-Prime Crisis: An Economic Perspective

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The seeds of subprime crisis and current credit crisis were sown in the booming economy.

Published in: Economy & Finance, Business
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Sub-Prime Crisis: An Economic Perspective

  1. 1. Collapsed (Individuals + Corporate + Banks) = Collapsed System <ul><li>Sub-Prime Crisis </li></ul><ul><li>An Economic Perspective </li></ul>PaisaMatters.com
  2. 2. <ul><li>The days of high levels of employment and high disposable income in the hands of individuals saw </li></ul>1995 – 2006: The Bright and Sunny Days… <ul><li>High demand for commodities and goods </li></ul>Source: www.bloomberg.com PaisaMatters.com
  3. 3. 1995 – 2006: The Bright and Sunny Days… <ul><li>Increasing demand led to increased production levels </li></ul><ul><li>Jobs creation and an all around industrial and economic growth </li></ul>PaisaMatters.com
  4. 4. 1995 – 2006: The Bright and Sunny Days… Source: www.ofm.wa.gov PaisaMatters.com
  5. 5. Source: epress.anu.edu.au 1995 – 2006: The Bright and Sunny Days…
  6. 6. 1995 – 2006: The Bright and Sunny Days… <ul><li>The consumer generated organic infusion of money generated strong liquidity in the economy </li></ul><ul><li>The increasing aspirations and risk taking ability coupled with low interest rates fuelled strong credit growth </li></ul><ul><li>Banking system flushed with liquidity felt a need to accelerate the credit growth </li></ul>PaisaMatters.com
  7. 7. <ul><li>High income levels and desire to own a dream home had already created a good mortgage loan portfolio </li></ul>1995 – 2006: The Bright and Sunny Days… <ul><li>Low interest rates made the housing more affordable and allowed to borrow more </li></ul><ul><li>The prime mortgage loan market was falling short of propelling the desired exponential credit growth </li></ul><ul><li>There was a huge population with ‘ less than perfect credit ’ to be tapped </li></ul>PaisaMatters.com
  8. 8. <ul><li>Borrowers with less than perfect credit - the Subprime borrowers, presented a mouthwatering opportunity for bankers in the mortgages market </li></ul>1995 – 2006: The Bright and Sunny Days… <ul><li>Banks started chasing the subprime borrowers with easy loans </li></ul><ul><li>People who otherwise could not have afforded a home, bought homes with the high interest rate loans </li></ul>PaisaMatters.com
  9. 9. 1995 – 2006: The Bright and Sunny Days… Welcome to the world of Sub-Prime Mortgages PaisaMatters.com
  10. 10. 1995 – 2006: The Bright and Sunny Days… <ul><li>Subprime loans are mortgages given to borrowers with ‘ less than perfect ’ credit or poor credit history </li></ul><ul><li>Most subprime borrowers are ones with low and inconsistent income </li></ul><ul><li>Because subprime loans are riskier, they carry a higher rate of interest </li></ul><ul><li>Not all subprime mortgage loans were used for buying houses but to refinance other obligations like credit card debts, making them even more risky </li></ul>PaisaMatters.com
  11. 11. 1995 – 2006: The Bright and Sunny Days… <ul><li>Borrowers were happy to get loans without worrying about credit worthiness </li></ul><ul><li>Mortgage brokers were happy as they were paid to underwrite these easy selling subprime loans without a responsibility to recover </li></ul><ul><li>Bankers were happy with the credit growth and higher returns from subprime loans </li></ul><ul><li>A Win-Win for all, but not for long. </li></ul>PaisaMatters.com
  12. 12. 1995 – 2006: The Bright and Sunny Days… PaisaMatters.com
  13. 13. 1995 – 2006: The Bright and Sunny Days… <ul><li>The bankers who originated subprime loans converted them to bundles of securities and sold the packaged Mortgage Backed Securities (MBS) in financial markets </li></ul><ul><li>This allowed banks to pass on the risk of default to investors of MBS </li></ul><ul><li>This allowed banks to get these loans off their balance sheet and borrow more, only to originate more subprime loans </li></ul><ul><li>The buyers of these subprime MBS thought they were taking a calculated risk of default in lieu of higher returns </li></ul>PaisaMatters.com
  14. 14. 1995 – 2006: The Bright and Sunny Days… <ul><li>In the “High Risk – High Reward” equation, the involved risks were grossly overlooked for the lucrative rewards </li></ul>PaisaMatters.com
  15. 15. 1995 – 2006: The Bright and Sunny Days… <ul><li>Low interest rates </li></ul><ul><li>+ </li></ul><ul><li>Rising property prices </li></ul><ul><li>+ </li></ul><ul><li>Banks chasing after borrowers with </li></ul><ul><li>easy loan offers </li></ul><ul><li>Result </li></ul><ul><li>Swollen sub-prime mortgage portfolio </li></ul><ul><li>& </li></ul><ul><li>huge debt ridden population </li></ul>Source: i.ehow.com Source: Flickr.com PaisaMatters.com
  16. 16. 1995 – 2006: The Bright and Sunny Days… PaisaMatters.com
  17. 17. Q4 2006 – Q2 2007: The Gloomy Evenings <ul><li>Too much money chasing too few goods resulted in increase in commodity prices and rising inflation rate </li></ul><ul><li>The interest rates started moving northwards </li></ul><ul><li>Because most of these loans were Adjustable Rate Mortgages (ARMs), the loan installment amount increased </li></ul><ul><li>Pressure started to mount on borrowers monthly cash outflows to meet the fixed obligations </li></ul>PaisaMatters.com
  18. 18. Q4 2006 – Q2 2007: The Gloomy Evenings.. <ul><li>Falling demand for properties led to a rapid decrease in property prices </li></ul>PaisaMatters.com
  19. 19. Q4 2006 – Q2 2007: The Gloomy Evenings.. <ul><li>Rising oil prices and falling stock markets saw an erosion of investments </li></ul><ul><li>Decreasing demand all around resulted in reduced production levels and job losses </li></ul><ul><li>Economic slowdown was slowly making an entry </li></ul>PaisaMatters.com
  20. 20. Q3 2007 Onwards: The Scary Nights… <ul><li>The subprime borrowers with inconsistent and low incomes could not pay the increased loan installments </li></ul><ul><li>Banks started to tighten the credit norms preventing subprime borrowers to refinance existing debts to lower payments </li></ul><ul><li>Borrowers could not sell the property to repay debts as the house was worth less that what they bought for </li></ul><ul><li>This left borrowers with an option to bring in more money or miss the loan payments </li></ul>PaisaMatters.com
  21. 21. Q3 2007 Onwards: The Scary Nights… <ul><li>Improving cash flows was a distant possibility for sub-prime borrowers, missing payments was obvious </li></ul><ul><li>The sub-prime loan defaults started mounting </li></ul><ul><li>With a further continuous increase in interest rates, it became almost impossible for borrowers to repay the increased mortgage bills </li></ul><ul><li>Loan foreclosures started increasing </li></ul>PaisaMatters.com
  22. 22. Q3 2007 Onwards: The Scary Nights… PaisaMatters.com
  23. 23. Q3 2007 Onwards: The Scary Nights… <ul><li>Because there were not many buyers for foreclosed properties, banks could not recover their outstanding loans by selling the foreclosed properties </li></ul><ul><li>With tightened credit norms, fewer borrowers qualified for new loans leading to more homes to sell to fewer buyers </li></ul><ul><li>Banks left with no other option but to write off the outstanding defaulted loans </li></ul><ul><li>Once considered cash cows, the high return fetching mortgage backed securities (MBS) became worthless </li></ul>PaisaMatters.com
  24. 24. Q3 2007 Onwards: The Scary Nights… <ul><li>In deteriorating economic conditions, sub-prime loan defaults were followed by defaults in </li></ul><ul><ul><li>prime mortgages </li></ul></ul><ul><ul><li>home equity loans </li></ul></ul><ul><ul><li>unsecured consumer loans (car loans, student loans, credit cards) and </li></ul></ul><ul><ul><li>commercial loans </li></ul></ul>PaisaMatters.com
  25. 25. PaisaMatters.com Q3 2007 Onwards: The Scary Nights…
  26. 26. Q3 2007 Onwards: The Scary Nights… <ul><li>Tons of outstanding credit with no recovery in sight saw financial institutions broke </li></ul><ul><li>This caused more than two dozen lenders to close, sell themselves to larger firms or report unprecedented losses </li></ul><ul><li>Once massive, some financial institutions filed for bankruptcy </li></ul>Source: nancarrow-webdesk.com PaisaMatters.com
  27. 27. Q3 2007 Onwards: The Scary Nights… <ul><li>The panic started to spread </li></ul><ul><li>Stock markets crashed </li></ul><ul><li>Lost confidence in financial system </li></ul><ul><li>Wall street pillars started crumbling </li></ul><ul><li>USA is witnessing one of the largest systemic collapse in its history </li></ul>Source: newsimg.bbc.co.uk PaisaMatters.com
  28. 28. Q3 2007 Onwards: The Scary Nights… Financial Times – 20 September 2008 “… bank boards and bank executives have failed to understand complex mortgage-backed banking products, as have central bankers, regulators and credit rating agencies.” PaisaMatters.com
  29. 29. ?: The Dawn Ahead… Costly though, surely, a lesson for the economy Is the worst over yet? … Probably not ! How long before the economy starts looking-up again? … Nobody knows! Hopefully Sooner, is the Dawn Ahead… PaisaMatters.com
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