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UBS & Subprime Mortgage Crises


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Published in: Business, Economy & Finance

UBS & Subprime Mortgage Crises

  1. 1. BY Karoline Puma Richa Arora Vivian Atonya
  2. 2. Introduction: <ul><li>UBS the largest bank in Europe started lending to other countries after War World II. </li></ul><ul><li>UBS origins in Switzerland in 1854, in 2000 acquired a full service securities firm based in NY. </li></ul><ul><li>They were determined to “be the best global financial services company”. </li></ul><ul><li>UBS operated through different business groups: Global Wealth Management, Global Asset Management, and Investment Bank. </li></ul><ul><li>The bank was governed by the Group Executive Board and the Board of Directors. </li></ul>
  3. 3. The Subprime Mortgage Crisis: <ul><li>In order to overcome the crisis caused by the dot com and 9/11 attacks the US government adopted a policy of credit driven consumption led growth for it’s economy. </li></ul><ul><li>Reducing in 2003 the Fed Funds Rate to 1% which increase the borrowers of housing loans. </li></ul><ul><li>The two government Sponsored Enterprises: Freddie Mac and Fannie Mae also played an important role in improving liquidity in the housing market. </li></ul><ul><li>Real estate as an asset class became very attractive as the returns were very high. </li></ul>
  4. 4. <ul><li>Several banks reduced required down payment and more aggressive lenders to 100% financing. </li></ul><ul><li>Subprime borrowers were offered Adjustable Rates which started with a very low interest rate and then increase after a fix period. </li></ul><ul><li>Operations of lending were carried out by mortgage brokers that were paid a commission for underwriting mortgages without being responsible for recovering those loans in </li></ul><ul><li>case of default. </li></ul><ul><li>Mortgage broker driven by the commissions attached to </li></ul><ul><li>the sales approved loan to borrowers even were there was </li></ul><ul><li>not proper documentation. </li></ul><ul><li>Banks which had been providing mortgage loans took the securitization route to transfer the risk off their balance </li></ul><ul><li>sheets, selling to private banks to raise more money. </li></ul>
  5. 5. Risk Management: <ul><li>They hired 130 more people to expand offices in Tokyo, London, Singapore, Manhattan and Connecticut. </li></ul><ul><li>They started investing in emerging markets commodities, delivering investments banking products, wealth management business, etc </li></ul><ul><li>UBS fixed income business was lagging behind that its competitors, then is when Investments banks were advised to invest in MBS Adjustable Rate Mortgage products. </li></ul><ul><li>Senior Management of UBS was not aware of the aggregate position held in the mortgage assets, they had access to information on a net basis only. </li></ul>
  6. 6. What is Subprime Mortgage? <ul><li>A type of loan granted to </li></ul><ul><li>individuals with poor credit history. </li></ul><ul><li>Deficient credit rating, would </li></ul><ul><li>not qualify them for a conventional </li></ul><ul><li>mortgage. </li></ul><ul><li>Such borrowers present high </li></ul><ul><li>risk for lenders. </li></ul><ul><li>Subprime mortgage charge </li></ul><ul><li>interest rates above the prime lending rate. </li></ul>
  7. 7. How Do Subprime Mortgages Work? <ul><li>An individual gets a mortgage loan from a broker. </li></ul><ul><li>Broker sells this mortgage to a bank. </li></ul><ul><li>Bank sells it to an investment firm on Wall Street. </li></ul><ul><li>Such firms collects them into a pile and create a security instrument </li></ul><ul><li>These security instruments are then sold to interested investors/buyers. </li></ul><ul><li>These were called mortgage backed securities (MBS) </li></ul><ul><li>With mortgage checks coming every month these securities became mortgage backed security (MBS) . </li></ul>
  8. 9. Reasons for Investing in MBS’s <ul><li>MBSs were safe investments with big down payments. </li></ul><ul><li>Proven steady income. </li></ul><ul><li>Opportunity of capital appreciation, as interest rate falls. </li></ul><ul><li>Suitable for most tax-deferred saving accounts. </li></ul><ul><li> </li></ul>
  9. 10. The Heavy Demand for More MBS’s <ul><li>The demand for MBSs was very high in 2003. </li></ul><ul><li>Nearly everyone qualified for a mortgage, and still the global pool of money wanted more. </li></ul>
  10. 11. Change in Mortgage Qualification Guidelines <ul><li>First, the stated-income, verified assets (SIVA ) loans came out. </li></ul><ul><ul><li>Needed no proof for income, just state it. </li></ul></ul><ul><ul><li>Show money in the bank. </li></ul></ul>
  11. 12. <ul><li>Then came, No income, verified assets (NIVA) loans. </li></ul><ul><ul><li>Needed to show some money in the bank. </li></ul></ul><ul><ul><li>No questions about income. </li></ul></ul><ul><li>The qualification guidelines kept going more loose, to produce more mortgages and securities. </li></ul>
  12. 13. <ul><li>Then came, NINA….. </li></ul><ul><li>NINA? </li></ul><ul><li>No Income, No Assets </li></ul><ul><ul><li>Borrow money without proving or stating anything. </li></ul></ul><ul><ul><li>Needed only credit score. </li></ul></ul>
  13. 14. The Speculative Housing Bubble <ul><li>Up to 2006, the housing market in the US was flourishing. </li></ul><ul><ul><li>Easy home loans </li></ul></ul><ul><ul><li>Increased housing demand and prices. </li></ul></ul><ul><ul><li>Attractive investment for investors. </li></ul></ul><ul><ul><li>People took another loan, against the value of their house to pay off the first. </li></ul></ul>
  14. 15. The Housing Bubble Pops <ul><li>Housing prices increased, with no increase in average household income. </li></ul><ul><li>People defaulted in their </li></ul><ul><li>mortgage payments. </li></ul><ul><li>Property values stopped </li></ul><ul><li>increasing. </li></ul><ul><li>More houses on the market. </li></ul><ul><li>Oversupply of houses and lack </li></ul><ul><li>of buyers. </li></ul><ul><li>Mortgage companies went out of business. </li></ul><ul><li>Investors lost a great deal of money. </li></ul>
  15. 16. The Meltdown – Impacts <ul><li>IN U.S. </li></ul><ul><li>More and more foreclosures. </li></ul><ul><li>Thousands of families got </li></ul><ul><li>homeless. </li></ul><ul><li>Between 2007-08, housing </li></ul><ul><li>prices dropped 20% </li></ul><ul><li>Total home equity value dropped from $13 trillion to $8.8 trillion. </li></ul><ul><li>Retirement assets dropped by 22% </li></ul>
  16. 17. Impact on Global Market <ul><li>Morgan Stanley, Citigroup, Bank of America, Merrill Lynch, HSBC, Barclays Capital and UBS AG are some of the global giants that suffered massive losses. </li></ul><ul><li>Lehman Brothers failed in </li></ul><ul><li>September 2008. </li></ul>
  17. 18. <ul><li>European banks suffered losses of $1.6 trillion. </li></ul><ul><li>The decline of stock markets, which led to Global recession. </li></ul><ul><li> </li></ul>
  18. 19. UBS’s Remediation Plan <ul><li>After the mortgage crisis, UBS proposed remedial actions to be taken in the following areas: </li></ul><ul><ul><li>Strategy </li></ul></ul><ul><ul><li>Governance </li></ul></ul><ul><ul><li>Risk Management </li></ul></ul><ul><ul><li>Risk Control </li></ul></ul><ul><ul><li>Finance </li></ul></ul><ul><ul><li>Balance Sheet Management </li></ul></ul><ul><li>A project management framework was established to ensure co-ordination of these remedial efforts and further specifications were developed to address the gaps. </li></ul>
  19. 20. Strategy <ul><li>The bank had improper implementation plans of it’s strategy, especially in investment banking. </li></ul><ul><li>UBS’s proposals to address the issue: </li></ul><ul><ul><li>Assess portfolios of investment banking and requirements in terms of capital, funding and risk. </li></ul></ul><ul><ul><li>Board to redefine the risk </li></ul></ul><ul><ul><li>Review the risk regularly. </li></ul></ul><ul><ul><li>Inclusion of a description of competitive positioning, revenue and resources required for any future business initiatives. </li></ul></ul>
  20. 21. Governance <ul><li>Implementation of new corporate governance framework – demarcated BOD & Executive management roles. </li></ul><ul><li>Improvement of succession planning. </li></ul><ul><li>Specifying risk management systems. </li></ul><ul><li>Refocus on talent development. </li></ul><ul><li>Review, reinforce and adjust roles and responsibilities pertaining to risk management and control. (IT) </li></ul>
  21. 22. Risk Management <ul><li>Establishing comprehensive risk management standards – Identify risk, set limits, objectives aligned to risk, prepare and understand balance sheets/off balance sheet positions. </li></ul><ul><li>Managing inventory. </li></ul><ul><li>Carrying out risk based reviews. </li></ul><ul><li>Translating risk appetite targets into limits </li></ul><ul><li>Enhancing TRPA processes. </li></ul>
  22. 23. Risk Control & Finance <ul><li>Review organizational structure and combine credit and market risks. </li></ul><ul><li>Create portfolio risk teams – for specific risks. </li></ul><ul><li>Comprehensive risk analysis of portfolios. </li></ul><ul><li>Finance department – Analyze P&L to ensure quality of earnings. </li></ul>
  23. 24. Conclusion <ul><li>In the US, the government got involved with the restructuring of the economy through: </li></ul><ul><ul><li>Emergency Economic Stabilization Act (Bail out Plan) – Government purchased distressed mortgages worth $700 billion; this cost 13% of GDP. </li></ul></ul><ul><ul><li>Stimulus package: Introduced to create jobs and promote investments and consumer spending during the recession. </li></ul></ul><ul><li>Overall since the economic downturn in 2008, the economy has been slowly regaining its strength. </li></ul>
  24. 25. Opinions <ul><li>What steps should the government have taken to avoid this crisis? </li></ul><ul><li>In your opinion, what is the ideal organizational structure banks should have to safeguard our global economy? </li></ul><ul><li>Is there any industry not affected by the Mortgage Crisis? </li></ul>