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Presented by
Valliappan P (128939)
SOM NIT Warangal
Why the financial crisis of 2008 happened?
The answer is simple: The housing bubble
burst (U.S. subprime mortgage crisis )

What is subprime lending?
Subprime lending means giving loans to people who may have
difficulty in maintaining the repayment schedule. These loans are
characterized by higher interest rates, poor quality collateral, and
less 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 regulations
1   • Poor creditworthiness of borrowers

    • Rising EMI due to higher interest costs
2   • Borrowers Unable to pay

    • Failure of Banks and Financial
3     Institutions
Prime                   Asset
           Sub Prime
           Mortgage
                        backed
Mortgage
                       Securities
Lenders – the biggest culprits
2006

 2008

  2009
Impacts of Subprime crisis
1) 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 value
4) 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 Crisis

Financial 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 Crisis
2 • Collapse of Financial System
3 • Economic Crisis
4 • Job Loss
5 • Low consumer spending
6 • Recession  Low Economic activities
7 • Very low GDP growth
8 • 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, they'll
begin to cut jobs, cease investment, and default on their debt
in larger numbers.“ - Peter Coy BW, Oct 3, 2008
References:

1)www.worldbank.org

2)World Bank (2008), World Development Indicators 2008

3)Blanchard, Olivier (2009), “Sustaining a Global Recovery”,
Finance & Development, September, International Monetary Fund

4)Calvo, Guillermo (1998), “Capital Flows and Capital-market Crises:
The SimpleEconomics of Sudden Stops”, Journal of Applied Economics 1(1),
pp 35-54.
Thank You..!

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Global financial crisis 2008

  • 1. Presented by Valliappan P (128939) SOM NIT Warangal
  • 2. Why the financial crisis of 2008 happened? The answer is simple: The housing bubble burst (U.S. subprime mortgage crisis ) What is subprime lending? Subprime lending means giving loans to people who may have difficulty in maintaining the repayment schedule. These loans are characterized by higher interest rates, poor quality collateral, and less favorable terms in order to compensate for higher credit risk. Example: Student loans in India are considered to be subprime.
  • 3. Lending decision by Financial Institutions Housing Bubble formation Borrowing decisions by individuals
  • 4.
  • 5. Causes of crisis • Relaxation in lending regulations 1 • Poor creditworthiness of borrowers • Rising EMI due to higher interest costs 2 • Borrowers Unable to pay • Failure of Banks and Financial 3 Institutions
  • 6.
  • 7. Prime Asset Sub Prime Mortgage backed Mortgage Securities
  • 8. Lenders – the biggest culprits
  • 9. 2006 2008 2009
  • 10.
  • 11. Impacts of Subprime crisis 1) 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 value 4) 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.
  • 12. Direct Impacts of the Crisis Financial 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
  • 13. 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
  • 14. 1 • Sub Prime Mortgage Crisis 2 • Collapse of Financial System 3 • Economic Crisis 4 • Job Loss 5 • Low consumer spending 6 • Recession  Low Economic activities 7 • Very low GDP growth 8 • Poor Prosperity of the countries
  • 15. 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.
  • 16.
  • 17.
  • 18. 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
  • 19.
  • 20. “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
  • 21. References: 1)www.worldbank.org 2)World Bank (2008), World Development Indicators 2008 3)Blanchard, Olivier (2009), “Sustaining a Global Recovery”, Finance & Development, September, International Monetary Fund 4)Calvo, Guillermo (1998), “Capital Flows and Capital-market Crises: The SimpleEconomics of Sudden Stops”, Journal of Applied Economics 1(1), pp 35-54.