Asian Countries were also sending surplus funds into the US economy to help revive it
JP Morgon Chase, Citigroup, Deutsche bank, Goldman Sachs, Lehman brothers, Bank of America, Merill Lynch, RBSAggressively sold MBS, thus off loading such loans from their Balance SheetMBS sold to banks, instituttions, hedge fund, investment banks, govts: japan, europe, russia (mainly)CDO-collateralized debt obligationMBS: mortgage backed security
Non-traditional mortgages (such as 2/28 (section) and interest-only mortgages) that offered low introductory rates and minimal initial costs such as "no down payment”Some argue that the rating agencies should have foreseen the high default rates for subprime borrowers, and they should have given these CDOs much lower ratings than the 'AAA' rating given to the higher quality tranches. If the ratings had been more accurate, fewer investors would have bought into these securities, and the losses may not have been as bad.
Downward spiral: banks foreclose at distress sale (low prices) therefore, property prices drop,
The increased use of the secondary mortgage market by lenders added to the number of subprime loans lenders could originate. Instead of holding the originated mortgages on their books, lenders were able to simply sell off the mortgages in the secondary market and collect the originating fees. This freed up more capital for even more lending, which increased liquidity even more. The snowball began to build momentum.A lot of the demand for these mortgages came from the creation of assets that pooled mortgages together into a security, such as a collateralized debt obligation (CDO). In this process, investment banks would buy the mortgages from lenders and securitize these mortgages into bonds, which were sold to investors through CDOs.
Max : bought by japan,europe, russia
They are out of regulatory control. Supposed to sell to knowledgeable investors, thus less paper work, less disclosures. Not their money.MBS, COD Promoted because they were issued at small premium over Gsec and assured high returns if and when the loans got serviced (refinanced by the borrower)
. Prime Minister Dr. Manmohan Singh assured parliamentarians and the nation that “there is no place for fear. This is the time for unity of purpose and resolute action.” While the Indian economy became more resilient, domestic demand continued to be its key growth driver and the Indian financial market has been more circumspect than the western regulators, the spillage of the sub-prime domino has significant negative impact on the Indian economy in the current context of a rapidly falling Sensex, a depreciating rupee, faltering growth momentum, domestic credit stringency and a slowdown of exports of both goods and services. The recessionary shock has begun to hit Indian exports and slowing down of the Indian economy has affected various sectors. Sectors, such as, textile, real estate, infrastructure, civil aviation, automobile, housing and few export dependent sectors like information technology are likely to be impacted.
With the US and several European countries slipping under the full blown recession, Indian exports have run into difficult times, since October. Manufacturing sectors like leather, textile, gems and jewellery have been hit hard because of the slump in the demand in the US and Europe. Further India enjoys trade surplus with USA and about 15 per cent of its total export in 2006-07 was directed toward USA. Indian exports fell by 9.9 per cent in November 2008, when the impact of declining consumer demand in the US and other major global market, with negative growth for the second month, running and widening monthly trade deficit over $10 billions.Official statistics released on the first day of the New Year, showed that exports had dropped to $1.5 billion in November this fiscal year, (Sivaraman, 2008) from $12.7 billion a year ago, while imports grew by $6.1billion to $21.5 billion.
The global financial crisis has had a deep impact on Indian stock market: within one year (2008), there occurred a more than 50 percent fall in the SENSEX of Bombay stock exchange, the Bombay stock exchange benchmarkindex, which touched a high of 21,206 in January 2008, fell down to less than 10,000 during December 2008, shows the clear picture of the down fall off the stock market in India
Since September 2008, Indian corporates managed to raise only US$18 billion in FY2008–2009 as commercial credit from the overseas market, which is 41% less than the amount raised in the previous year. The fall was rather phenomenal during the second half of FY2008–2009 when ECB approvals declined from US$3 billion in September 2008 to less than US$0.5 billion in February 2009. For the first time in last six years, FDI inflows witnessed a negative growth of 2% in FY2008–2009.
The sluggishness of the inflows of FDI, ECBs, and remittances combined with the massive outflow of FII has resulted in the significant deterioration of India's capital account in FY2008–2009. From its peak in September 2007, the capital account surplus as percent of GDP started to decline and disappeared completely by December 2008.This is the first time after a long period that the capital account component of India's BOP had been negative.
On October 10 the forex reserve of India had fallen from $316 billion dollar to $274 billion dollar. RBI has sold about $42 billion to give strength to the rupee. Some more measures should be needed to tackle the situation. - See more at: http://www.merinews.com/article/the-depreciating-rupee-and-indian-economy/146506.shtml#sthash.bIDEDefK.dpuf
INDIANS NOT COMFORTABLE WITH CREDIT.
Group 2: TYBBA A
Abhilasha Mohan Ram A003
Mayank Beria A025
Monil Shah A027
Rohan Negi A035
Meaning of Subprime :
The word means subordinate to primary
It is the loan given to people with a bad credit
rating who are not eligible for Prime loan ( normal
Characterized by higher interest rates, poor
quality collateral, and less favorable terms in
order to compensate for higher credit risk
Sub-prime lending may be utilized for sub-prime
mortgages, sub-prime car loans, sub-prime
credit cards etc.
Why are Subprime loans issued ?
For banks to earn more money by tapping the
For young people who do not have enough money
for down payment
For people having financial problems
For people who are discriminated against
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
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
The subsequent loss of funds resulted in the Global Recession of 2008
Very low interest rates, property prices were on a
rising trend and the sub prime borrowers were able
to meet their obligations by selling the properties
or getting the properties refinanced
This created what is called ‘The Housing Bubble’
The housing bubble burst during this time,
triggering the crisis
There was a steep fall in housing prices
The interest rates on subprime loans however were
high and were rising
The subprime borrowers were not able to meet
their liabilities leading to meltdown of the US
More subprime borrowers failed to pay their debts
Securities held by mortgages lost value globally
Global investors also drastically reduced purchases
of mortgage-backed debt and other securities
The global recession of 2008-2009 :
Concerns about the soundness of U.S. credit and
financial markets led to tightening credit around
the world and slowing economic growth in the U.S.
The U.S. entered a deep recession, with nearly 9
million jobs lost during 2008 and 2009
This recession was second to only ‘The Great
Depression of the 1920’s’ resulting in huge losses
Owning a home is part of the 'American Dream'. It
allows people to take pride in a property and engage
in a community for the long term.
However, homes are expensive and most people need
to borrow money to get one.
The conditions were right for people to achieve that
dream. In the early 2000s, mortgage interest rates
were low, which allow you to borrow more money
with a lower monthly payment. In addition, home
prices increased dramatically, so buying a home
seemed like a sure bet.
Lenders understood that homes make good collateral
so they were willing to participate.
The mortgage crisis was triggered as this situation
DOT COM COLLAPSE – 2000
SEPTEMBER 11 TERRORIST ATTACK
The housing bubble began to burst in late
Since the end of 2005, default rates on
subprime mortgages have soared from 6.5%
to 17%, while foreclosure rates have jumped
from 2.5% to 9%.
When house prices ceased rising in mid 2006
and then started falling, subprime mortgage
defaults began accelerating.
Sub prime borrowers
On December 1, 2008, the National Bureau of
Economic Research announced that the economy
had entered into a recession in December of
2007. Real GDP increased by only 0.4 percent for
the year 2008, and it decreased at annual rates of
5.4 percent in the 4th quarter of 2008 and 6.4
percent in the 1st quarter of 2009. The
unemployment rate increased from 4.9 percent in
December of 2007 to 9.5 percent in June of
The total real estate equity in The United States
was valued at $13 trillion during the 2006 peak,
had fallen to $8.8 trillion by mid 2008.
The people who contributed to the deadly chain
of events that sent the entire world economy into
Reduction in Fed
Sudden increase in
Rates remained low
Lowered to lending rates to increase loan off
As the prime market was nearing saturation,
began lending to subprime borrowers
Aggressively sold MBS, CDO
Additional funds raised by securitization was
re-deployed in the same manner
MBS ratings influenced using parental
linkages as well as rating shopping
Buying property well beyond their means
Buying for price arbitrage
Non-traditional mortgages leveraged their
borrowing capacity further
2yrs fixed rate, then floating rates: EMIs rose
exuberantly, house value fell
Thus making foreclosure a viable option
Accelerated downward spiral
Increased use of Secondary mortgage market
Lenders sold their mortgages in the
Pooled mortgages into securities like CDOs
Investors were the ones willing to purchase
these CDOs at ridiculously low premiums over
These enticingly low rates are what ultimately
led to such huge demand for subprime loans.
Fuelled volatility through credit arbitrage
Credit Default Swaps
Influenced banks to bring out more MBS &
CDOs as it was a good avenue to invest in
Denotes the real GDP Growth during 2009.
(Countries in brown represent those in recession)
Year Growth (US$ Bn)
15 per cent of total export in 2006-07 was directed toward
Official statistics released on the first day of the New Year,
showed that exports had dropped to $1.5 billion in
November 2008, (Sivaraman, 2008) from $12.7 billion a year
Manufacturing sectors like leather, textile, gems and
jewellery got hit hard.
Month Open High Low Close
January 20325.27 21,206.77 15,332.42 17468.71
February 17820.67 18,895.34 16,457.74 17578.72
March 17227.56 17,227.56 14,677.24 15644.44
April 15771.72 17,480.74 15,297.96 17287.31
May 17560.15 17,735.70 16,196.02 16415.57
June 16591.46 16,632.72 13,405.54 13461.60
July 13480.02 15,130.09 12,514.02 14355.75
August 14064.26 15,579.78 14,002.43 14564.53
September 14412.99 15,107.01 12,153.55 12860.43
October 13006.72 13,203.86 7,697.39 9788.06
November 10209.37 10,945.41 8,316.39 9092.72
December 9162.94 10,188.54 8,467.43 9647.31
Against a net inflow of US$20.3 billion in FY2007–2008,
there was a net outflow of US$15 billion from Indian
markets during FY2008–2009 as foreign portfolio
investors sought safety and mobilized resources to
strengthen the balance sheet of their parent companies.
With Indian stocks melting under the heat of a global
crisis, overseas investors pulled out three dollars in
2008 from every four pumped in the previous year.
A major chunk of FII of over $3 billion had taken place
in October 2008 alone, which saw the Sensex going to
its lowest level in the last three years.
Year No. of
2007 108 33,946.2
2008 39 18,339.9
2009 22 19,306.5
2010 66 36,362.1
IPO Report - Year Vs. Money raised through IPOs
only US$18 billion raised in FY2008–2009 as commercial credit from
the overseas market=41% less than the amount raised in the
ECB approvals declined from US$3 billion in September 2008 to less
than US$0.5 billion in February 2009.
For the first time in last six years, FDI inflows witnessed a negative
growth of 2% in FY2008–2009.
FDI 2004-05 US$6Bn
ECBs 2004-05 US$9Bn
FDI & ECBs
Dec 30th : 1USD =48INR
Jan 1st : 1USD =39INR Dec 1st : 1USD=50INR
India’s Real estate market was very similar to
that of the U.S in 2008.
Housing developments were sprouting up
Plenty of money flowing into India, mainly
from private equity and hedge funds, to fuel
the commercial real estate bubble in
Carlyle, Blackstone, Citibank — they were all
here, throwing money at developers
70% of the banking system in India is
nationalized, so RBI’s role as a strong
regulator is critical.
Indian banks were not levered like American
Capital ratios here are 12% and 13%, instead
of 7% or 8% of the Americans.
Banks Capital Adequacy
Oriental Bank of Commerce
Kotak Mahindra Bank
Bank of India
Indian Overseas Bank
Indian banks don’t do interest-only or
Never gave more money to a borrower
because the value of the house had gone up.
Non performing loans are less than 1 %.
Mortgage loans tend to have down payments
in India that are 1/3rd of the purchase price.
Lets not talk about those prevailing in the
He started sensing that real
estate, in particular, had
entered bubble territory before
One of the first moves he
made was to ban the use of
bank loans for the purchase of
Only when the developer was
about to commence building
could the bank get involved —
and then only to make
Reddy pushed interest rates up to more than
20 percent, which of course dampened the
He made banks put aside extra capital for
every loan they made.
In effect, Mr. Reddy was creating liquidity
even before there was a global liquidity crisis.
India's trade theory is changing a lot as it is
turning out to be more of a manufacturing
export oriented country.
The net trade of services done by India
accounts to about just 22% .
The trade practices of India with US has
BUT on the other hand has relatively
increased with China reflecting out that the
risk of US recession has been deflected.
However on a short term it will have its effect
on the IT companies and also on its revenues
in their future quarter results.
The growth in the employment in the IT
sector in the year 2008 was 44 % up till
August 08 which will drop to about 28% net
growth for this financial year.
For both commercial and residential real-
estate, the proportion of black to white
money may vary from 20 to 40 % depending
on various factors.
However, the borrowing from banks is based
only on the white portion as it should be.
Thus the value of the asset is substantially
higher than what is shown in the book due to
financing of the asset partly by black income.
The presence of black
money or what one
may call the hidden
net worth of India has
advantages in times of
asset based lending
and borrowing since
only a part of the price
of asset is seen, like
the tip of the iceberg.
The other portion of
the asset finance by
the borrower from
black fund makes it
imperative for him to
protect his position by
The amounts in the form of black money are
large and mostly invested in real-estate and
gold, two major areas of passion for the
Indian middle-class. As long as a good
portion of our economy and asset financing is
by black income we need not worry about