How crisis happen in us, what are the reasons behind it

1. HOUSING CRISIS IN US
Submitted by:
Apruvi Mahajan
Chetan Sood
Jyotika
Pooja bajaj
Ragini Malhotra
Shivani Sharma
Submitted to:
Ms. Shefali Saluja

2. PRESENTATION OUTLINE
 What is Sub Prime and Prime?
 Housing crisis Build up
 When did it all started?
 Culprits of the Crisis
 Impacts on economy
 Solutions given by Govt.

3. SUB PRIME AND PRIME
 Prime Families: Loan offered to borrower
with good credit history and good income,
involving less family members
 Sub Prime: Loan offered to the borrower with
less income and bad credibility and late
payment history who have 7-8 family
members

4. HOUSING CRISIS BUILD UP
Many factors lead to build up of the crises:
 Assumption that markets will always go up
 In 1999, US Govt. passed Gramm-leach-
bilely Financial modernization act
1. it replaced the Glass Stegall Act
2. Breaks the boundaries between
Commercial Banks, Investment Banks and
Insurance Companies
3. Gramm-leach-bilely Act lead to 2007
crises

5. HOW DID SUBPRIME CRISIS
SPREAD?

7. FINANCIAL CRISIS IN BRIEF
 The US subprime mortgage crisis was a set of
events and conditions that led to a financial
crisis and subsequent recession that began in
2008
 Characterized by a rise in the inability to pay
housing mortgages resulting in the decline of
securities backed by mortgages
 These mortgage-backed securities (MBS)
initially offered attractive rates of return

8.  However, the lower credit quality ultimately caused
massive defaults
 The money was sucked out of several banks, financial
institutions and the economy as a whole in September
2008
 Several European and developing countries had invested
heavily in American banks
 The subsequent loss of funds resulted in the Global
Recession of 2008

9. THE AMERICAN DREAM
 Owning the home in America for subprime borrowers
was a Dream
 To keep recession away federal reserve lower fund
rates from 6.5% in may 2000 to 1.75% in Dec 2001
 It creates flood of liquidity in economy as money
becomes cheap
 Sub prime borrowers started taking loans
 More Buyers lead to appreciation in home prices,
which made higher investment
 Everything was sold at huge discount without any
down payments

10. DECLINE BEGINS
 In 2004, US home ownership peaked at
70%; no one was interested in buying more
houses
 During last quarter of 2005, home prices
started to fall; 40% declines in US
 Home construction was stopped
 Many subprime borrowers could not
withstand with higher interest rate and they
started defaulting

11. 2007
 In Feb , more than 25 sp lenders file for
bankruptcy
 After this crisis started

12. WHO IS TO BE BLAMED FOR SUB PRIME
CRISIS?

13. BIGGEST CULPRITS: FEDERAL BANK
 Lends funds to people to poor Credit and
high risk of default
 Federal Bank flooded the market with capital
liquidity
 Lowers the interest rates
 To increase their Investment Returns federal
bank lends ample capital in the form of loan
to the sub prime borrowers.

14. INVESTMENT BANKS
 Increases the no. of Subprime Borrowers
 They pooled Mortgage papers into CDOs
 Investments Banks would buy mortgages
from lenders and securitize these mortgages
into bonds
 Mortgages were Sold to investors through
CDOs

15. BROKERS
 In order to earn more commission, they lend
loans to sub prime families
AIG ( American International Group)
 AIG is a multinational insurance company.
 It sold CDS ( credit default swaps) without
checking mortgage paper whether they were
real or fake.

16. IMPACT OF SUBPRIME CRISIS
 Real estate sector was highly effected
because of this housing crisis. As the supply
of houses increased, it lead to reduction in
prices of property
 It lead to fall in GDP
 Exports from China, Korea, and India
decreased

17. IMPACT OF SUBPRIME CRISIS
 Lehman Brothers declared their bankruptcy on 15
September 2008, facing a refusal by the Federal
Government to Bail it out
 The Investment Bank, Bear Stearns was acquired
by JP Morgan Chase, a commercial bank, for
US$1.2 Billion
 In Sept. 2008, AIG collapsed as it could not afford
to pay for all of these US mortgage defaults. The
US government nationalised AIG by becoming
80% shareholder

19. STEPS TAKEN BY GOVT.
 Bailout was given to AIG After it was
declared bankrupt
 Fed started QE
 Trouble assets Relief Programme was
started by US govt., reduced the taxation
with interest rate

20.  http://www.investopedia.com/articles/econom
ics/09/financial-crisis-review.asp