The Financial Tsunami Credit Crisis


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The Financial Tsunami Credit Crisis

  2. 2. Starring <ul><ul><li>Merchant Bankers </li></ul></ul><ul><ul><li>Uncle Sam’s Federal Reserve </li></ul></ul><ul><ul><li>Lehman Bros. </li></ul></ul><ul><ul><li>Merrill Lynch </li></ul></ul><ul><ul><li>AIG, FM & FM </li></ul></ul><ul><ul><li>Morgan Stanley </li></ul></ul>
  3. 3. Story written by <ul><li>SUB PRIME MORTAGES IN </li></ul><ul><li>UNITED STATES OF AMERICA </li></ul>
  4. 4. Directed by <ul><li>WALL STREET </li></ul>
  5. 5. Merchant Bankers <ul><li>“ Masters of the Universe” ( to quote best selling author ‘Tom Wolfe’ ) </li></ul><ul><li>Don’t like our PSBs or private banks </li></ul><ul><li>Assess different financial proposals for investments worldwide </li></ul><ul><li>International portfolio investments </li></ul><ul><li>Global & corporate strategies formulation </li></ul><ul><li>Measure & manage political risks involved </li></ul>
  6. 6. The Devil Behind the Scene US Mortgage Crisis A Sub primer
  7. 7. What is it? <ul><li>Two Types of US Borrowers </li></ul><ul><li>Prime & Subprime </li></ul><ul><li>Loans by subsidiaries in 2002-07 to SP Borrowers </li></ul><ul><li>Due to Real Estate boom </li></ul><ul><li>Rising of home price to more than double since 1997 </li></ul><ul><li>Encouragement by Govt. to lend SPB to help poor & young </li></ul>
  8. 8. <ul><li>With stock mkt. booming & system flush with liquidity, big fund investors like Hedge funds & MFs saw SP loan portfolios as attractive investment </li></ul><ul><li>Bought such portfolios from original lenders </li></ul><ul><li>Lenders had fresh funds to lend </li></ul>
  9. 9. <ul><li>Typically 2% higher interest rate than Prime because of higher default risk, resulting in higher EMIs </li></ul><ul><li>Only added to risk of SPB defaulting rate </li></ul><ul><li>Lenders compromised with prudential norms & devise new instruments </li></ul>
  10. 10. Turning into a Crisis <ul><li>US Housing boom bubble busted in 2007 </li></ul><ul><li>Boom had led to a massive housing supply </li></ul><ul><li>Prices fell down </li></ul><ul><li>Default rate shoot up </li></ul><ul><li>SPB no longer ready to pay through their nose </li></ul><ul><li>Collateral was typically the home being bought, again this vicious cycle started </li></ul>
  11. 11. <ul><li>Coincidence with US Economy slowdown made the matter worse </li></ul><ul><li>Price dropped to 50% of their peak in 2006 </li></ul><ul><li>Lenders left with less the value of their loans to book hefty losses </li></ul>
  12. 12. Turning into a systematic crisis <ul><li>Original lenders had further sold their portfolios to other players </li></ul><ul><li>Some complex derivatives were also developed based on the loan portfolios which sold further, one after another </li></ul><ul><li>As a result, nobody is quite sure about the exact sizes of losses & who had taken how much hit </li></ul>
  13. 13. <ul><li>Fannie Mae & Freddi Mac owned half of roughly $12 trillion outstanding in home mortgage </li></ul><ul><li>Suffered $14bn in last 4 Qs </li></ul><ul><li>Forced retreat of these two giants from market created ripples of fear across the players </li></ul>
  14. 14. Impact of crisis: on USA <ul><li>Global banks & brokerages had to write off an estimated $512 bn </li></ul><ul><li>Heaviest punch on CITI group ($55.1bn) & Merrill Lynch ($52.2bn) </li></ul><ul><li>More than half of total losses are suffered by US based firms ($260bn) </li></ul><ul><li>European firms tanks $227bn </li></ul><ul><li>Relatively modest $24bn hit on Asian firms </li></ul>
  15. 15. <ul><li>Bear Sterns, one of the largest investment bank & securities traders collapsed </li></ul><ul><li>Bought up by JP Morgan Chase with help of Federal Reserve </li></ul><ul><li>Lehman went bankrupt </li></ul><ul><li>ML bought by Bank of America </li></ul><ul><li>Nationalization of FM & FM </li></ul>
  16. 16. On global front <ul><li>US being the biggest borrower in the world since most countries hold their foreign exchange reserve in dollars & invest them in US Securities, any crisis in US has a direct bearing on them </li></ul><ul><li>Countries with large reserves like Japan China and India are at high risk </li></ul><ul><li>Global interconnectivity of financial markets makes the situation worse </li></ul>
  17. 17. <ul><li>NOW WE COME </li></ul><ul><li>TO THE POINT </li></ul>
  18. 18. Lehman Brothers <ul><li>158 years old </li></ul><ul><li>HQ in Manhattan </li></ul><ul><li>CEO Richard Fuld </li></ul><ul><li>4 th largest investment bank </li></ul><ul><li>26,000 employees worldwide </li></ul><ul><li>Market value in Feb. 2007 was $45.5bn </li></ul><ul><li>Posted $4bn losses in Q4 </li></ul><ul><li>File for Bankruptcy under chapter 11 </li></ul><ul><li>Barclays to buy its core capital mkt. business for $1.75bn, a paltry </li></ul><ul><li>Could save 10,000 jobs of Lehmannites </li></ul>
  19. 19. Merrill Lynch <ul><li>94 years old </li></ul><ul><li>60,000 employees </li></ul><ul><li>HQ in Manhattan </li></ul><ul><li>Market value in Feb.2007 was $86bn </li></ul><ul><li>Bought by Bank of America for $50bn in a all stock transaction </li></ul>
  20. 20. Other banks on sale <ul><li>Morgan Stanley, 2 nd largest investment bank across the globe </li></ul><ul><li>Mutual Washington </li></ul><ul><li>Some others are also in the pipeline </li></ul>
  21. 21. Rescue Measures by Central banks <ul><li>SEC Securities & Exchange Commission, a US Regulator banned short selling in 799 financial companies stocks </li></ul><ul><li>$800 bn pumped in worldwide </li></ul>US Federal Reserve $180bn Russian Govt. $130bn Bank of Japan $108bn US Federal guarantors $50bn Bank of England $40bn ECB $40bn RBI $18bn
  22. 22. AIG’s Adoption by Uncle SAM <ul><li>World’s largest Insurer </li></ul><ul><li>Lost $13.2bn in first 6 months of 2008 </li></ul><ul><li>Sought to raise $40bn to avoid crippling credit rating downgrade </li></ul><ul><li>Was also in talks with Warren Buffets </li></ul><ul><li>US take it over for $86bn, ½ of India’s Annual Budget </li></ul>
  23. 23. Other Bailouts by USA <ul><li>So far $900bn bailed out by US in 2008 </li></ul>Federal’s housing administrator $300bn Federal’s term auction facility $200bn FM & FM $200bn JP Morgan Chase $87bn AIG $85bn Bear Stern $29bn Grant to local gov. $4bn
  24. 24. International Stampede <ul><li>Race against time to prevent global financial collapse </li></ul><ul><li>Domino’s effect </li></ul><ul><li>Bank to sit on cash </li></ul><ul><li>Interbanking relations and faith touched a new low </li></ul><ul><li>Several commit suicide across the world </li></ul>
  25. 25. <ul><li>RTS (Russia), Hangseng (Singapore), Shanghai comp, FTSE 100 (UK), Sensex, DAX 30 (Germany), S&P 500, Nikkei (Japan), Dow Jones (USA), NASDAQ comp, CAC40 (France), KOSPI (S.Korea) all crashed like a plane </li></ul><ul><li>Dow Jones tanks 500 pts within 10 min of opening on Monday </li></ul><ul><li>10 major banks in US to create $70bn emergency crisis fund </li></ul>
  26. 26. Ripples in India <ul><li>Rupee hit a 10 year low to Rs.47 A dollar </li></ul><ul><li>FIIs withdraw $800 million on Monday, the biggest withdrawal on a single day after 9/11 </li></ul><ul><li>RBI not to increase CRR in its Oct. Monetary Review </li></ul><ul><li>RBI to cut SLR (statutory liquidity ratio) by 1% to 24% </li></ul><ul><li>RBI to go for 2 LAF (liquidity adjustment facility) in a single day </li></ul>
  27. 27. <ul><li>Call money rates up to 15-17% from 6-8% of one week ago </li></ul><ul><li>ICICI worst hit as its London subsidiary Had purchased Lehman bonds to the tune of Rs. 375 crore </li></ul><ul><li>IRDA asks TATA-AIG to submit reports on solvency </li></ul><ul><li>Real estate sector, Hardest hit </li></ul><ul><li>Could loose 26,000 jobs across the sectors </li></ul>
  28. 28. Blessings in Disguise <ul><li>Every tunnels has a ray of hope at its end </li></ul><ul><li>Crude price dipping </li></ul><ul><li>Service sector growing at double digit </li></ul><ul><li>Comparatively insulated Indian mkt. as 2/3 of Indian economy is domestically driven </li></ul><ul><li>More local investors in equity as a replacement of global one </li></ul><ul><li>Talent crunched A- Indians can now seek to hire A+ talent </li></ul>
  29. 29. My Question <ul><li>Is it good to dwell out taxpayers hard earned money for the losses of those who were playing ROULETTE for long? </li></ul><ul><li>Is it not the “ privatisation of profits and civilisation of losses? ” </li></ul>
  30. 30. Presented By: <ul><li>GUNADITYA SHARMA </li></ul>