Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
Securitization<br />MBS<br />Subprime <br />Mortgages<br />Write-downs and <br />Losses<br />Understanding the Present <br...
Lot of money<br />The Excess Capital<br />Excess capital globally<br />Where to invest in order to make it grow?<br />Qual...
The Process<br />The Big Picture<br />Source: BBC Website<br />
The new Process<br />Picture of Sub-Prime Model<br />Individual to Broker<br />Broker to Bank<br />Bank to Investment Firm...
The Products<br />Sub-Prime Mortgages<br />Typically, those who qualify for the most ideal mortgages with the best interes...
High Interest rates, High Risk
A R Ms
ARMs can be misleading</li></li></ul><li>The Products<br />Mortgage Backed Securities<br /><ul><li>Packaged
Low Risk (a pretty wild assumption)
Guaranteed Return (an even deadly assumption)</li></ul>MBS have developed extremely fast in 8 years<br />Risk has been spr...
Boost is the secret<br />Why did they buy homes?<br />The core ingredient for a financial crisis is excessive lending and/...
The US dream of owning your own home spread to many sectors of US society including low income borrowers
Stock Bubble – good sign to buy a new home
Stock Bubble Burst – an even better sign to buy a new home
2001 recession (after the Terror strike) – Fed cuts Interest Rate
Home Ownership reach new heights
Re-Financing</li></li></ul><li>Burst is the reality<br />How did they lose their homes?<br /><ul><li>Until 2006, it was ea...
Expectations that the price of their home would continue to rise
2005 - peak of the subprime boom, 1 in 5 mortgages was subprime
Housing prices reached its peak.  They were now on a decline
 Interest rates were beginning to “reset” to the higher rates
Upcoming SlideShare
Loading in …5
×

Understanding the Current US Recession

687 views

Published on

  • Be the first to comment

Understanding the Current US Recession

  1. 1. Securitization<br />MBS<br />Subprime <br />Mortgages<br />Write-downs and <br />Losses<br />Understanding the Present <br />US Recession<br />Housing<br />Bubble<br />Housing Bubble<br />Burst<br />Road to recovery<br />The Impact<br />Presented By:<br />Shiva Pillai Harish Narula Rajesh Bangera<br />
  2. 2. Lot of money<br />The Excess Capital<br />Excess capital globally<br />Where to invest in order to make it grow?<br />Qualification guidelines pretty tight<br />Difficult to get mortgages<br />Securitization<br />
  3. 3. The Process<br />The Big Picture<br />Source: BBC Website<br />
  4. 4. The new Process<br />Picture of Sub-Prime Model<br />Individual to Broker<br />Broker to Bank<br />Bank to Investment Firm<br />Investment Firm to the Investor<br />Security<br />
  5. 5. The Products<br />Sub-Prime Mortgages<br />Typically, those who qualify for the most ideal mortgages with the best interest rates are those with good credit scores and minimal debt<br /><ul><li>Granted to individuals with poor credit histories
  6. 6. High Interest rates, High Risk
  7. 7. A R Ms
  8. 8. ARMs can be misleading</li></li></ul><li>The Products<br />Mortgage Backed Securities<br /><ul><li>Packaged
  9. 9. Low Risk (a pretty wild assumption)
  10. 10. Guaranteed Return (an even deadly assumption)</li></ul>MBS have developed extremely fast in 8 years<br />Risk has been spread-out among Banks and Hedge-Funds<br />Weak collateralization could induce a major liquidity crunch<br />MBS Volume in Trillion US$<br />
  11. 11. Boost is the secret<br />Why did they buy homes?<br />The core ingredient for a financial crisis is excessive lending and/or excessive risk taking<br /><ul><li>Low interest rates led to the opening of new mortgage markets (i.e.. new borrowers)
  12. 12. The US dream of owning your own home spread to many sectors of US society including low income borrowers
  13. 13. Stock Bubble – good sign to buy a new home
  14. 14. Stock Bubble Burst – an even better sign to buy a new home
  15. 15. 2001 recession (after the Terror strike) – Fed cuts Interest Rate
  16. 16. Home Ownership reach new heights
  17. 17. Re-Financing</li></li></ul><li>Burst is the reality<br />How did they lose their homes?<br /><ul><li>Until 2006, it was easy to get home loans
  18. 18. Expectations that the price of their home would continue to rise
  19. 19. 2005 - peak of the subprime boom, 1 in 5 mortgages was subprime
  20. 20. Housing prices reached its peak. They were now on a decline
  21. 21. Interest rates were beginning to “reset” to the higher rates
  22. 22. Monthly mortgage payments much higher than before</li></li></ul><li>The rise of fall<br />How did they lose their homes?<br /><ul><li>People then began to sell their homes
  23. 23. Not enough money after selling to cover the amount of the mortgage
  24. 24. This led to DEFAULT
  25. 25. After that Foreclosure and finally Auction
  26. 26. Bank gets much less than the original price of the home
  27. 27. More number of Defaults = More number of Auctions </li></ul> i.e. More number of Houses in the Market, which leads to further decrease in the housing prices<br />
  28. 28. Fate of Investors<br />And what happened to MBS?<br /><ul><li>Billions of dollars were lost in MBS
  29. 29. Belief that MBS was safe was proved to be wrong
  30. 30. Due to more number of DEFAULTS and fall in home prices
  31. 31. Backed by the fact that credit rating agencies had downgraded the ratings of these bonds
  32. 32. This means the $100 billion worth of bonds are now worth much less, because nobody wants to buy them</li></li></ul><li>Investor’s House<br />Picture says it all<br />
  33. 33. Pretty Nasty<br />Defaults in Mortgages<br />Historical USA mortgage default rates were 0.5% to 1.0% of all loans<br />_________________________________________<br />As Per 2008 Q2<br />18.67 %<br />3.93 %<br />PRIME<br />SUB-PRIME<br />
  34. 34. Aftermath<br />General Impact<br /><ul><li>Values of CDOs or MBS collapsed
  35. 35. March 2008 – Bear Stearns dies
  36. 36. September 2008 – Lehman collapse, Merrill Lynch sold to BoA and AIG is nationalized with the US government becoming 80% shareholder
  37. 37. October 2008 – Lack of confidence in global banking system leads to fear of lending money to each other. Credit markets totally freezes</li></li></ul><li>US Economy<br />Direct Impact<br /> Stock Market:<br /><ul><li>08/15/07 Dow Jones had dropped below 13,000 from July’s 14000
  38. 38. First 3 weeks of 08, the Dow Jones Industrial Average fell 9%
  39. 39. 1/18/08 Dow Jones/0.5%, S&P 500/0.6%, and NASDAQ/0.3%
  40. 40. 01/21/08 (black Monday) the world’s biggest falls since Sept. 11, 2001</li></ul> Financial Institutions – Bankruptcy:<br /><ul><li>New Century Financial (USA)– Apr. 2, 2007
  41. 41. American Home Mortgage (USA) – Aug. 6, 2007
  42. 42. Sentinel management Group (USA) – Aug. 17, 2007
  43. 43. Ameriquest (USA) – Aug. 31, 2007
  44. 44. NetBank (USA) – Sept. 30, 2007
  45. 45. Terra Securities (Norway) – Nov. 28, 2007
  46. 46. American Freedom Mortgage Inc. (USA) – Jan. 30, 2007</li></li></ul><li>US Economy<br />Domestic Impact<br /><ul><li>Home Owners
  47. 47. Sale of houses down, 2 millions homes evicted
  48. 48. Minorities
  49. 49. Disproportionate foreclosure, Hispanics & Blacks get higher cost loans
  50. 50. Economy Condition
  51. 51. Low consumer spending, Low GDP rate, Job cuts
  52. 52. Other Credit Markets
  53. 53. Credit Cards, Car Loans</li></li></ul><li>Aftermath<br />Global Impact<br />Investors will be very cautious to act<br />Lack confidence in stock/bound market<br />Consumer spending will slowdown<br />Lack of cash or unwilling to spend<br />World economy may slip into recession<br />U.S. economy condition will affect global economy<br />Financial market<br />May take long time to recover<br />Unemployment rate may be high<br />Slow economy increase unemployment rate<br />Exports will decrease in China, Korea, Taiwan <br />GDP growth heavily depends on export <br />
  54. 54. The Pile Up<br />Write Downs & Losses<br />TOTAL: $501.4 Billion<br />Source: Bloomberg. All figures in $ billion<br />
  55. 55. What Lies Ahead…<br />How to fight this recession?<br /><ul><li>Liquidity: Central banks have expanded their lending and money supplies
  56. 56. Solvency: Restructuring through bankruptcy, or government bailouts
  57. 57. Economic stimulus: Increased spending or cut taxes to offset declines in consumer spending and business investment
  58. 58. Homeowner assistance: Banks are adjusting the terms of mortgage loans to avoid foreclosure
  59. 59. Regulation: rules designed help stabilize the financial system (such as regulating derivatives)</li></ul>Discussions on theses topics are central to deciding what actions should be taken with regard to monetary policy, legislation, and potential programs<br />
  60. 60. The Message<br />The Good News???<br />Alan Greenspan stated: “The current credit crisis will come to an end when the overhang of inventories of newly built homes in largely liquidated, and home price deflation comes to an end . . . After a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business”<br />
  61. 61. Profits at Last<br />Yes Indeed…<br />In the News recently (Q2 2009)<br /><ul><li>Deutsche Bank profits up by 67%
  62. 62. Credit Suisse Q2 profits climb by 29 percent
  63. 63. Investment Banking drives profits at Barclays
  64. 64. SocGen profit falls less than expected
  65. 65. Wells Fargo & Co, JPMorgan Chase & Co  and Goldman Sachs Group Inc  beat forecasts for first-quarter earnings</li></li></ul><li>The Road Ahead<br />The lessons that we are learning from this crisis will go a long way in our understanding of future and help immensely in the betterment of the financial markets<br />The Road to recovery is the most difficult part of any journey.. And this is because in this road will lead you to the Destination<br />Thank You<br />

×