The financial crisis began with the bursting of the US housing bubble in 2007. Securitization played a key role as mortgages were pooled and tranched into securities. Rating agencies underestimated the risk. When home prices fell and defaults increased, losses mounted. The crisis spread globally as financial firms like banks incurred large losses. Regulators have since implemented reforms like Basel III to strengthen bank capital requirements and increase oversight of derivatives markets.

2. Roushanara Islam
Associate Professor
Department of Finance
Jagannath University

3. Sl no Name ID
1 Naomee Nahrin M22010203101 Presentor
2 Mariyam Islam Nabila M22010203117 Presentor
3 Liza Akter M22010203118
4 Mahanaj Binta Faiz M22010203139
5 Shanjida Haque Shampa M22010203141
6 Pranto paul M22010203144
7 Durjoy Sen M22010203148

4. CONTEXT
The 2008 financial crisis began with
cheap credit and lax lending standards
that fueled a housing bubble. When
the bubble burst, the banks were left
holding trillions of dollars of worthless
investments in subprime mortgages.
The Great Recession that followed
cost many their jobs, their savings, and
their homes.

5. Overview
In this Chapter we will know about
securitization, Asset Backed Securities
& the tranches of Securities, The
housing market of USA during 2000-
2008(The Relaxation of Lending
Standards, Subprime home Mortgages,
Credit Spreads), The Financial crisis of
2007-2008 (Real Estate Bubble
burst,The losses, Regulatory Arbitrage,
Incentives) & the Aftermath of the
Crisis.

6. Securitization
Securitization is the financial practice of pooling
various types of contractual debt such as
residential mortgages, commercial mortgages,
auto loans or credit card debt obligations (or
other non-debt assets which generate receivables)
and selling their related cash flows to third party
investors as securities, which may be described
as bonds, pass-through securities, or
collateralized debt obligations (CDOs).

7. Process of securitization
Step 1: Originator
Step 2: Special Purpose
Vehicle(SPV)
Step 3: Dividing Securities
Step 4: Disbursement of
funds for securities
Step 5: Credit Rating.

8. TYPES OF SECURITIZATION
Asset Backed
Securities
Residential
mortgage
Backed
Securities
Commercial
Mortgage
Backed
Securities
Collateralized
Debt
Obligation
Future Flow
Securitization

9. ABS(Asset Backed Security)
❖An asset-backed security is a security
whose income payments, and hence value
are derived from and collateralized by a
specified pool of underlying assets.
❖The pool of assets is typically a group of
small and illiquid assets which are unable
to be sold individually.
❖This type of securitization is most used
during 2000 to 2007.

10. THE PROCESS OF ASSET BASED
SECURITIZATION
A portfolio of income
producing assets such as
loans is sold by the
originating banks to a
special purpose vehicle
(SPV) and the cash flows
from the Assets are than
allocated to Tranches.

11. TRANCHE
❖Tranches are segments
created from a pool of
securities usually debt
instrument such as bond or
mortgages that are divided up
by risk, time to maturity and
other characteristics in order
to be marketable to different
investors.
❖Senior tranches contain
assets
with higher credit ratings than
junior tranches.

12. Cash Waterfall System
❖A cash waterfall
structure is an obligation
settlement mechanism
whereby all the cash
that is generated by the
asset pool is paid in
order of payment
priority.
❖Lower-tiered creditors
receive principal
payments only after the
higher-tiered creditors
have been paid back in
full.

13. Estimated losses to
tranches of ABS
Underl
-ying
Asset
Equity
Tranch
e
Equity
Tranch
e of
Abs
CDO
Mezza
-nine
Tranch
e of
Abs
CDO
Senior
Tranche
of Abs
CDO
Senior
Tranch
15% 100% 0% 0% 0% 0%
20% 100% 100% 75% 0% 0%
30% 100% 100% 100% 41.33% 0%
35% 100% 100% 100% 100% 16.7%
Losses on % (According to Figure 1)
Figure 1

14. Thank you
End of topic 8.1

17. Roushanara Islam
Associate Professor
Department of Finance Jagannath University

18. name Id no
* Md. Abdur Rafi M22010203114
* Abdullah Andalib Zahin M22010203115
* Subrath Debnath M22010203122
* Md. Mahamudur Rahman M22010203125
* Md. Ashraful Hasan M22010203140
* Md. Sajib ulla Sikder M22010203150
* Abdul Awal M19160203336

19. *Securitization played a part in the financial crisis that started in
2007
*Tranches were created from subprime mortgages and new
tranches were then created from these tranches
*The origins of the crisis can be found in the U.S. Housing
market. The U.S. Government was keen to encourage home
ownership
*Interest rates were low
*Mortgage brokers and mortgage lenders found it attractive to do
more business by relaxing their lending standards

20. *The 2000s United States housing bubble was a real estate
bubble affecting over half of the U.S. states
*It was the impetus for the subprime mortgage crisis.
Housing prices peaked in early 2006, started to decline in
2006 and 2007, and reached new lows in 2011
*On december 30, 2008, the case–shiller home price
index reported the largest price drop in its history
*The credit crisis resulting from the bursting of the housing
bubble is an important cause of the great recession in the
united states you may have heard, the US housing market is
booming
*But booms often end in a bust, and the housing situation
across the country has led experts to debate the possibility
of the whole market imploding

21. *Collapsing home prices from subprime mortgage defaults and
risky investments on mortgage-backed securities burst the
housing bubble in 2008
*The end result was a global recession. Interest rates remained
in an affordable range throughout the mid-1990s and early
2000s, making homeownership even more affordable
*As with other investments, housing market couldn't possibly
appreciate year over year at such a pace forever, and soon the
bubble burst.
*The united states was not alone in having declining real estate
prices
*Prices declined in many other countries as well. Real estate
prices in the united kingdom were particularly badly affected.

22. *As foreclosures increased, the losses on mortgages also
increased.
*Investors in tranches that were formed from the mortgages
incurred big losses.

23. *A credit spread is relatively straightforward—the
difference in yield between two debt securities that
mature at the same time but come with different
risks
*The losses on securities backed by residential
mortgages led to a severe financial crisis
*In 2006, banks were reasonably well capitalized,
loans were relatively easy to obtain, and credit
spreads were low
*By 2008, the situation was totally different. The
capital of banks had been badly eroded
by their losses

24. *The US housing market has witnessed strong demand and short
inventory of homes this year, making it a seller’s market
*In 2021, experts believe that new housing construction will start
to rise
*Cities with the most construction include dallas, houston &
austin, reflecting texas real estate market’s strong recovery

26. Group-3
Topic-8.3: What Went Wrong?

27. Sl no Name ID
1 Ridoy Biswas Biplop M22010203104
2 Jannatul Masqat M22010203107 Presenter
3 MD Sayidur Rahman M22010203116 Presenter
4 MD Saiful Islam M22010203127
5 MD Arif Rayhan Ratul M22010203130
6 MD Shahinur Islam M22010203142
7 MD Mahabub Alam M22010203124

28. Securitization is a process used by banks to create securities
from loans and other income generating assets.
In another word, securitization is risk transferring.
Securitization
Securitiza
tion
Pooling
set of
asset to
Interest
bearing
securities
impli
es
Repackage
them into

29. • The government national mortgage
association (GNMA)
• The federal national mortgage association
(FNMA)
• The federal home loan mortgage corporation
(FHLMC)
Organizations that were active in this
market:

30. WHAT WENT WRONG?

31.  The first loans to be securitized were mortgages in the UNITED STATES
in the 1960s and 1970s. Investors who bought the mortgage backed
securities were not exposed to the risk of borrowers defaulting because
the loans were backed by the Government National Mortgage
Association.
 Later automobile loans, corporate loans, credit card receivables, and
subprime mortgages were securitized. In many cases, investors did not
have a guarantee against defaults in the securities created from these
instruments.
 Rating agencies gave AAA ratings to the senior tranches. There was no
shortage of buyer for these AAA rated tranches because their yields
were higher than the yields on other AAA rated securities. Bank thought
the good times would continue. When loans are were fallen defaults,
the crisis were started.

32. There are some factors that contributed to the financial crisis
which started in 2007-8 are discussed below-
1. Excessive risk-taking in a favorable macroeconomic
environment
Banks and other lenders were willing to make increasingly large
volumes of risky loans for a range of reasons:
• Competition increased between individual lenders to extend
ever-larger amounts of housing loans
• Many lenders providing housing loans did not closely assess
borrowers’ abilities to make loan repayments.
• Investors who purchased MBS products mistakenly thought
that they were buying a very low risk asset: even if some
mortgage loans in the package were not repaid.

33. 2. Increased borrowing by banks and investors
Banks and some investors increasingly borrowed money for very
short periods, including overnight, to purchase assets that could
not be sold quickly. Consequently, they became increasingly
reliant on lenders – which included other banks – extending new
loans as existing short-term loans were repaid.
3. Regulation and policy errors
As the crisis unfolded, many central banks and governments did
not fully recognize the extent to which bad loans had been
extended during the boom and the many ways in which
mortgage losses were spreading through the financial system.

34. As these three are the main reasons for global financial
crisis there has some other outcome of Securitization &
the Financial Crisis of 2007-8

35. 4. US house prices fell, borrowers missed repayments
The catalysts for the GFC were falling US house prices and a
rising number of borrowers unable to repay their loan. House
prices in the United States peaked around mid 2006,
coinciding with a rapidly rising supply of newly built houses
in some areas. As house prices began to fall, the share of
borrowers that failed to make their loan repayments began to
rise.
5. Stresses in the financial system
Stresses in the financial system first emerged clearly around mid
2007. Some lenders and investors began to incur large losses
because many of the houses they repossessed after the
borrowers missed repayments could only be sold at prices below
the loan balance.

36. 6. Failure of financial firms, panic in financial markets
Investors began pulling their money out of banks and
investment funds around the world as they did not know who
might be next to fail and how exposed each institution was to
subprime and other distressed loans is the main reason for
failure of financial firms.
Financial markets became dysfunctional as everyone tried to sell
at the same time and many institutions wanting new financing
could not obtain it. Businesses also became much less willing to
invest and households less willing to spend as confidence
collapsed.
As a result, the United States and some other economies fell
into their deepest recessions since the Great Depression.

39. *Prior to the crisis, over-the-counter derivatives markets were
largely unregulated. An over-the-counter (OTC) derivative is a
financial contract that is arranged between two counterparties but
with minimal intermediation or regulation.
*As a part of post crisis measure there is now a requirement that
most standardized over-the-counter derivatives be cleared through
central counterparties (CCPs). This means that they are treated
similarly to derivatives such as futures that trade on exchanges.

40. *Banks are usually members of one or more CCPs. When trading
standardized derivatives, they are required to post initial margin and
variation margin with the CCP and are also required to contribute to a
default fund.
*Initial margin is the percentage of the purchase price of a security that
must be covered by cash or collateral when using a margin account.
*The variation margin is a variable margin payment made by clearing
members, such as a futures broker, to their respective clearing houses
based on adverse price movements of the futures contracts these members
hold.

41. *Before the crisis it was common for a trader’s bonus for a year to
be paid in full at the end of the year with no possibility of the
bonus having to be returned.
*It is now more common for this bonus to be spread over several
years so that part of the bonus can be clawed back if results are
not as good as expected.
*The bonuses paid by banks have come under more scrutiny and in
some jurisdictions there are limits on the size of the bonuses that
can be paid.

42. *The Dodd-Frank Act is a legislation to make the U.S. financial
system safer and prevent a repeat of the excessive risk-taking that
led to the 2007-2008 financial crisis.
*The financial crisis that swept the world in 2008 required massive
bank bailouts to avoid an even deeper economic collapse. In 2010,
U.S. lawmakers passed the Dodd-Frank Act, which sought to reduce
risk in the banking system.
*The collapse of Silicon Valley Bank and other regional lenders in
2023 spurred renewed debate over Dodd-Frank among regulators,
the private sector, and Congress.

43. *Financial Stability
*Consumer Financial Protection Bureau
*Volcker Rule
*Securities and Exchange Commission (SEC) Office of Credit
Ratings
*Whistleblower Program

44. *Banks throughout the world are regulated by the Basel Committee on Banking
Supervision
*Prior to the crisis, the committee implemented regulations known as Basel I
and Basel II.
*Following the crisis, it has implemented what is known as “Basel II.5.” This
increases the capital requirements for market risk.
*Basel III was published in 2010 has been implemented over a period lasting
until 2019. It increases the amount of capital and quality of capital that
banks are required to keep.
*Basel IV, to be implemented between 2022 and 2027, revises some of the
rules in Basel III and reduces the extent to which banks can use their own
internal models to determine their capital requirements.

45. *Since the crisis, European regulation has tightened significantly. In
particular, it has targeted the negative effects of securitisation on
bank behaviour and increased transparency in the markets.
*Banks must hold more capital for asset-backed securities, they
must take more responsibility for their own risk and investors are
now required to perform due diligence.
*The securitisation framework had been revised repeatedly to
revive the market. Europe’s new securitisation regulatory
framework came into effect fully on January 1, 2019.
*The new framework is expected to broaden investment
opportunities for long-term investors.

46. *