Presented byValliappan P (128939)SOM NIT Warangal
Why the financial crisis of 2008 happened?The answer is simple: The housing bubbleburst (U.S. subprime mortgage crisis )What is subprime lending?Subprime lending means giving loans to people who may havedifficulty in maintaining the repayment schedule. These loans arecharacterized by higher interest rates, poor quality collateral, andless favorable terms in order to compensate for higher credit risk.Example: Student loans in India are considered to be subprime.
Lending decision by Financial Institutions Housing Bubble formation Borrowing decisions by individuals
Causes of crisis • Relaxation in lending regulations1 • Poor creditworthiness of borrowers • Rising EMI due to higher interest costs2 • Borrowers Unable to pay • Failure of Banks and Financial3 Institutions
Prime Asset Sub Prime Mortgage backedMortgage Securities
Impacts of Subprime crisis1) Major banks suffered from huge losses.2) Lehman Brothers went out of business.3) Merrill Lynch had to sell itself to Bank of America for a fraction of its former value4) Countrywide Financial Corporation, the biggest U.S. mortgage lender, eventually gets taken over by Bank of America.5) In Sept 2008, AIG collapses as it could not afford to pay for all of these US mortgage defaults. The US government nationalises AIG by becoming 80% shareholder.
Direct Impacts of the CrisisFinancial Institutions – Bankruptcy New Century Financial (USA)– Apr. 2, 2007 American Home Mortgage (USA) – Aug. 6, 2007 Sentinel management Group (USA) – Aug. 17, 2007 Ameriquest (USA) – Aug. 31, 2007 NetBank (USA) – Sept. 30, 2007 Terra Securities (Norway) – Nov. 28, 2007 American Freedom Mortgage Inc. (USA) – Jan. 30, 2007
Financial Institutions – Write-Downs Citigroup (USA) - $24.1 bln Merrill Lynch (USA) - $22.5 bln UBS AG (Switzerland) - $16.7 bln Morgan Stanley (USA) - $10.3 Credit Agricole (France) - $4.8 bln HSBC (United Kingdom) - $3.4 bln Bank of America (USA) - $5.28 bln CIBC (Canada) – 3.2 bln Deutsche Bank (Germany) - $3.1 bln Total Write downs and losses were around $300 - $350 billion US dollars
1 • Sub Prime Mortgage Crisis2 • Collapse of Financial System3 • Economic Crisis4 • Job Loss5 • Low consumer spending6 • Recession Low Economic activities7 • Very low GDP growth8 • Poor Prosperity of the countries
Global Impacts of the Crisis Investors lost confidence in the stock market. Consumer spending slowed down due to lack of cash/ unwillingness. U.S.A’s economic condition affected the global economy. World economy slipped into recession. Exports from China, Korea, Taiwan and India decreased.
Impact on India FIIs pulled out of money from the Indian stock market Public Sector Banks, viz State Bank Of India, Bank Of Baroda, Canara Bank, Punjab National Bank etc did not have major exposure to credit derivatives market due to their limited overseas operations. Stock market Crashed and BSE sensex crashed from 24000 level to 8000 level. ICICI Bank incurred a loss of close to Rs.1000 Crores because of exposure to international securities market
“If companies around the globe are unable to borrow, theyllbegin to cut jobs, cease investment, and default on their debtin larger numbers.“ - Peter Coy BW, Oct 3, 2008
References:1)www.worldbank.org2)World Bank (2008), World Development Indicators 20083)Blanchard, Olivier (2009), “Sustaining a Global Recovery”,Finance & Development, September, International Monetary Fund4)Calvo, Guillermo (1998), “Capital Flows and Capital-market Crises:The SimpleEconomics of Sudden Stops”, Journal of Applied Economics 1(1),pp 35-54.