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Subprime Mortgage Crisis 2008
 

Subprime Mortgage Crisis 2008

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Study about on-going Subprime mortgage crisis during 2007 and 2008, which lead to global finance crisis

Study about on-going Subprime mortgage crisis during 2007 and 2008, which lead to global finance crisis

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  • Good evening everyone, today our group would like to share some of our studies and opinions about the subprime mortgage crisis. We are Allen, Dandan, me, and Wendy. Before getting start, I would like to thank professor gave us a chance to learn and understand this one-in-lifetime crisis. And I would love to honor all of my teammates who have been working hard and sacrificing their leisure time for today final presentation.

Subprime Mortgage Crisis 2008 Subprime Mortgage Crisis 2008 Presentation Transcript

  • Group: Allen Chen Dan Chen Robin Thieu Wendy Chen
  • Created by Robin Thieu, 2008 Fall
  • What caused the financial industry crisis?
    • Congress: for overzealously pushing homeownership
    • Fed: for keeping interest rate so low
    • Predatory lenders: for taking advantage of unqualified and vulnerable home buyers
    • Home buyers: for getting over the heads
    • White House: for letting banking regulations become too loose
    • Finance executives: for selling products they didn’t understand while enjoying outsized profits
    • Mark-to-market accounting: for accelerating downturn
    • Rating agencies: for mischaracterizing paper
    • Short-selling hedge funds: for betting on doomsday
    • The transformation of investment banks from private partnerships into publicly traded companies
    Source : Jack , Suzy Welch (2008, September 25). BusinessWeek
  • The Debt Trap Source : The New York Times
  • Financial Ratio Created by Robin Thieu, 2008 Fall
  • Created by Robin Thieu, 2008 Fall House Income Mortgage Lenders (Countrywide, Indy Mac, Fannie & Freddie) Banks ( Citibank, BOA) SPV Investors ( Banks, Funds, Insurance) Investment Banks (Bear Stearns, Lehman, Merrill Lynch) CDOs MBSs Mortgage Subprime Insurers ( AIG) Rating Credit Crunch
  • Macroeconomic Analysis Created by Robin Thieu, 2008 Fall
  • GDP and housing market Source : The Federal Reserve
  • Mortgage Rates Source : Federal Home Loan Mortgage Corporation's (Freddie Mac)
  • Home Price Indices Source : Standard & Poor’s
  • Total Subprime Mortgage Originations Growth
  • Homeowners Equity vs. Mortgage Source : The Federal Reserve
  • Unemployment Rate Source : State of the USA and BBC
  • US Homeownership Rate Source : State of the USA
  • Macroeconomic Analysis
    • Observations
    • - Housing bubble is pushed much higher than the GDP growth
    • - From year 2000 to 2006, when the mortgage rate is low, housing price keeps going up
    • - Subprime borrowing was a major contributor to an increase in home ownership rates and the demand for housing
  • Macroeconomic Analysis
    • Observations
    • - The growth of subprime mortgage results in homeowners’ mortgage is greater than their equity
    • - Homeownership and housing price keep growing from year1994 to 2005 even though unemployment rate goes up and down
    • Conclusion
    • Subprime mortgage is the main contributor for “housing bubble”
  • Mortgage Lenders & Banks Created by Robin Thieu, 2008 Fall
  • Making MBS Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=980&hasAd=1&settings=normaSubprime0712
  • Making MBS Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=980&hasAd=1&settings=normaSubprime0712
  • Making MBS Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=980&hasAd=1&settings=normaSubprime0712
  • Fannie Mae Source : Analyticalwealth.com
  • Mortgage Default Source : The New York Times
  • Stock price of FNM Source : Thomson Financial
  • FNM’ net losses in holding MBS
  • Citigroup
    • 11.7 billion wrote-off, in Q2 2008
    • 55.1 billion write down in total asset
  • Where AIG went wrong
    • Exposed to the U.S housing bubble:
    • Mortgage insurance
    • ABS, MBS, CDO investment
    • Derivative contracts: CDS
  • Investment Banks
    • Business Model
    • The Process of Making CDOs
    • Risk Factors and Risk Exposure
    • The Future of Investment Banks
  • Investment Banks Created by Robin Thieu, 2008 Fall
  • Investment Banks
    • The Process of Making CDOs – Create CDOs based on MBS
    Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=980&hasAd=1&settings=normaSubprime0712
  • Investment Banks
    • The Process of Making CDOs – Cut it slices and then issue bonds
    Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=980&hasAd=1&settings=normaSubprime0712
  • Investment Banks
    • The Process of Making CDOs – the relationship between Slices Rating and interest payments
    Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=980&hasAd=1&settings=normaSubprime0712
  • Investment Banks Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=980&hasAd=1&settings=normaSubprime0712
    • The Process of Making CDOs – the Impact of Downgrade
  • Investment Banks
    • Risk Factors
    • - Fare Value of Subprime Mortgage Loan
    • - The Cost of Short-term Borrowing
    • Risk Exposure
    • - Market Price of CDOs
  • Investment Banks
    • The Future of Investment Banks
    • In the Short – term :
    • the example of Goldman Sachs & Morgan Stanley
    • In the Long- term : Performance Matter!
  • Credit Crunch
      • less funds available
      • more expensive cost of capital
    “ If companies around the globe are unable to borrow, they'll begin to cut jobs, cease investment, and default on their debt in larger numbers. “ Peter Coy BW, Oct 3, 2008 Created by Robin Thieu, 2008 Fall
  • Credit Manipulation Created by Robin Thieu, 2008 Fall
    • Thank you very much.
    PQ + CQ > IQ