The document summarizes key aspects of the subprime crisis including: - Causes such as the real estate boom and speculative investing. - How it spread from the US housing market to global financial markets. - Major companies that were affected like AIG, Fannie Mae, and Lehman Brothers. - Responses by governments and central banks to mitigate the crisis. - Impacts on the world economy like stock market declines and rising unemployment.

1. SUBPRIME CRISIS

2. Road Map…… Introduction…………………………Raunak Japan’s economic crisis …………. Janhavi Subprime & Prime loan……………...Mihir

3. Causes of subprime crisis ………………..Vishal Affected companies ……………………..Raunak & Suchit Steps to overcome crisis ………………….Viral & Kunal Impact on world economy ………………..Pankaj

4. Impact on Indian economy…………….Apurva Currency Valuation and its effect on IT Sector……………………………….Kunti Effect on commodities, concept of marked to market & coupling & decoupling …………………………….Alok Forex Exchange Reserve….…………Ashish

5. Lessons learnt from Subprime Crisis…................................................Gaurav Conclusion…………………………………Alok

7. Japan’s history holds lessons for the U.S Japan faced a similar economic crisis as the U.S in 1990 Factors responsible for the economic crisis in Japan: Deflating stock-market bubble Deflating property bubble Borrower’s failure in repayment of debts Long period of lackluster economic growth Refusal to own up to the problems Financial sector is far large than it should be

8. Government’s role to overcome crisis in Japan: It spent public funds to replenish the capital of debt-laden banks Expanded definition of collateral to corporate bonds Bought Japanese shares to free up cash at banks After effects: Bank of Japan lost its influence on markets Foreign banks were reluctant to deposit money at bank of Japan Money rate fell below bank of Japan’s target

9. Reasons why Japan was hesitant to deal with problems: Quickly shrinking the financial sector could have a social cost Putting tens of thousands of people out of work Quick exit could seize up the credit market

11. PRIME LOAN A loan offered to borrowers with good credit history & good earning capacity.(Also called "A" loans) Prime loans generally are priced lower and cost the borrower less

12. CRITERIA Credit Score Debt to Income ratio Earning Capacity Down payment

13. SUBPRIME LOAN A Subprime loan is a loan made to customers who typically have low credit scores and histories of payment defaults. Also called B loan, near prime, non prime or second chance loan. Subprime offers the opportunity for borrowers with less than ideal credit standing to gain access to funds.

14. CRITERIA Credit Score Debt to Income ratio Earning Capacity Down payment

15. Why do Lenders Make Subprime Loans? Benefits to the Subprime borrowers Risk to this kind of lending and borrowing arrangement?

16. V/s

17. SUBPRIME LOAN Higher risk of default Higher interest rate Lending to borrower of low or nil credit record Consumer is “sold” the product Lesser Down Payment Earning capacity doesn’t matter PRIME LOAN Lower risk of default Lower interest rate Lending to borrower of high credit record Consumer is “buying” the product Down Payment Earning capacity Play a role

18. CAUSES OF SUBPRIME CRISIS

19. Origin point of the crisis … marking the end of the largest speculative surge of real housing prices in the U.S. in the last 50 years … Notice the prolonged exponential growth!

20. REAL ESTATE BOOM Fixed rate mortgage loans were at the lowest level in last 40 years Speculation Mean reversion Causes Reasons for downturn

21. INVESTOR HOW SUBPRIME CRISIS SPREAD

22. Iraq war 2003 Washington started war in Iraq in 2003 Channeled $500 billion of short-term borrowings, which was eight times more than expected War would be too short and too cheap No realistic time-table for war

23. U.S treasury chose to issue short-term T-bills, say every quarter, instead of long-term 10 year notes and 30 years bonds 14 3 2003 2006 Federal fund rate 1.25 4.50 T-Bills (short –term) 1.04 4.85 T-bills (10 years avg.) 4.00 4.79

24. THE VICIOUS PATH SUBPRIME CRISIS

25. Delinquency Rate … and resulting in a surge of loan delinquencies in the residential mortgage loan market …

26. THE COMPANIES AFFECTED IN THIS TURMOIL

27. AMERICAN INTERNATIONAL GROUP (AIG)

28. HISTORY FOUNDED:1919 in Shanghai, China By Cornelus Vander Starr Head Office: American International Building, New York City, New York Business: Insurance & Financial services Achievement: 18 th Largest Company Of The World

29. WHO BAILED THEM OUT?

30. WHO BAILED THEM OUT? US FEDERAL GOVERNMENT:SEPTEMBER 16 TH 2008 DEAL WORTH:$85bn POST ACQUISATION MARKETS IMPROVED JP AND GS BACKED OUT

31. FEDRAL NATIONAL MORTGAGE ASSOCIATION

32. HISTORY FOUNDED: 1938 Founder: BY Franklin Delano LOCATION: Washington DC, U.S BUSINESS OPERATION: Housing Loan Mortgage

33. FEDERAL HOME LOAN MORTGAGE CORP.

34. HISTORY FOUNDED: In 1970 LOCATION: Melean Virginia, U.S BUSINESS OPERATION: Mortgage, loans

35. WHO TOOK THEM OVER?

36. WHO TOOK OVER THE CONTROL? US FEDERAL GOVERNMENT: SEPTEMBER 8 TH 2008 APPOR. MARKET SHARE:$5tn

37. BEAR STEARNS

38. HISTORY FOUNDERS:JOSEPH AND ROBERT LOCATION BUSINESS AREAS PRESENCE ACROSS THE GLOBE

39. WHO BAILED THEM OUT?

40. WHO BAILED THEM OUT? J.P.MORGAN:MAY 30 TH 2008 DEAL WORTH:$2.2bn

41. COUNTRYWIDE FINANACIAL

42. HISTORY FOUNDERS:DAVID LEB LOCATION:CALABASAS, CA, US BUSINESS AREAS RETURN ON INVESTMENT

43. WHO BAILED THEM OUT?

44. WHO BAILED THEM OUT? BANK OF AMERICA: JULY 1 ST 2008 DEAL WORTH:$4bn

45. MERRIL LYNCH

46. HISTORY FOUNDERS:CHARLES AND EDMUND LOCATION BUSINESS AREAS

47. WHO BAILED THEM OUT?

48. WHO BAILED THEM OUT? BANK OF AMERICA:SEPTEMBER 14 TH 2008 DEAL WORTH:$50bn GOT THE MARKET SHARE AROUND THE GLOBE

49. LEHMAN BROTHERS

50. HISTORY FOUNDERS:HENRY, EMANUEL AND MAYER LOCATION BUSINESS AREAS

51. BANKRUPTCY LEHMAN HOLDINGS FILED ON SEPTEMBER 15 TH 2008 BANKRUPTCY WORTH:$616bn HAPPENEND AFTER 18 YEARS S&P DROPED BY 59 POINTS OR 4.71% DOW JOINES DROPED BY 504.48 POINTS OR 4.42% NASDAQ DROPED BY 81.3 POINTS OR 3.6% LOST HALF ITS MARKET VALUE IN 2 DAYS

52. CONTD….. BARCLAYS ACQUIRED NORTH AMERICAN REGION:SEPTEMBER 17 TH 2008 DEAL WORTH:1.75bn

53. OTHER BANKS CITIBANK WRITES OFF $50bn GS PROFIT REDUCES TO 70% MS DIVEST 20% STAKE FOR $8.4bn NOMURA BUYS LB ASIAN OPEATION

54. TOTAL GROSS LOSS US MAKES TOTAL LOSS OF $1.8tn LOSS IN TERMS OF GDP US JPN GER UK FRN ITA IND 13 41 54 65 70 86 180

55. BIGGER THE SIZE, GREATER THE LOSS Net income in mn $ Apr-jun 08 Q2 2008 2007 2006 2005 2004 Freddie -821 -151 -3094 2327 2113 2937 Fannie -2300 -2186 -2050 4059 6347 4967 AIG -5357 -7805 6200 14048 10477 9839 LB -3927 -2774 4192 4007 3260 2393 ML -4654 -1962 -7777 7499 5116 4436

56. THE STEPS TAKEN TO OVERCOME CRISIS

57. TUESDAY 16 TH OF SEPTEMBER

58. US Federal Reserve pumping $50bn £20bn from the Bank of England 70bn Euros ($100bn; £56bn) from the European Central Bank.

59. THURSDAY 18 SEPTEMBER

60. UK as Lloyds TSB revealed details of its £12bn takeover of Halifax Bank of Scotland US Federal Reserve also announced it was releasing $180bn

61. FRIDAY 19 SEPTEMBER

62. By close of markets on Thursday, billions of dollars had been wiped off stock markets worldwide. US government plan to buy billions of dollars of US banks' bad mortgage-related loans.

63. Bank of Japan (BoJ) Kept interest rates unchanged at 0.5% Injected more than 5 trillion yen ($47 billion) into money markets in the wake of Lehman Brothers Holdings Inc.'s collapse

64. European Central Bank (ECB) European Central Bank added 30 billion euros ($42.5 billion) in a one-day money-market auction on Sept 15

65. US FEDERAL RESERVE Agreed to an $85bn loan to AIG at an interest rate of 3-month LIBOR plus 8.5%. The government will get a 79.9% equity interest in the company. Fed injected $70bn of temporary reserves, the most since the Sept’01 terrorist attacks as the overnight dollar rate soared from 3.33% to 6.44%

66. BANK OF AMERICA Bailed out Countrywide Financial and Merrill Lynch BOA got market share of 20-25% of Home Loan Why Kenneth Lewis went for the deal? Deal occurred at 2/3 rd of its market price a year ago

67. JP MORGAN Bailed out Bear Stearns Renamed as JP Morgan Equity Gave pink slips to 14000 employees Two hedge fund managers of Bear Stearns charged

68. Restrict short selling Short-selling occurs when a trader borrows shares from another to sell them with the hope of buying them back at a lower price, thereby profiting from the difference. It has been blamed for the recent sharp falls in some banking shares.

69. IMPACT ON WORLD ECONOMY

70. Impact of Sub-prime Crisis on various factors of World Economy: Interest sensitive sectors Stock Market Inflation GDP Unemployment Mergers & acquisitions

71. Japan’s GDP March June Sept Dec 2008 1.20 0.70 - - 2007 3.20 1.80 1.70 1.60 2006 3.00 2.30 2.00 2.40

72. China Inflation Rate M Yr Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 08 7.10 8.70 8.30 8.50 7.70 7.10 6.30 4.90 - - - - 07 2.20 2.70 3.30 3.00 3.40 4.40 5.60 6.50 6.20 6.50 6.90 6.50 06 1.90 1.90 0.80 1.20 1.40 1.50 1.00 1.30 1.50 1.40 2.90 1.80

73. US Unemployment Rate Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 08 4.90 4.80 5.10 5.00 5.50 5.50 5.70 6.10 - - - - 07 4.60 4.50 4.40 4.50 4.50 4.60 4.70 4.70 4.70 4.80 4.70 5.00 06 4.70 4.70 4.70 4.70 4.70 4.60 4.70 4.70 4.50 4.40 4.50 4.40

74. Impact on Stock Market Average 30% decline in the share index of the country`s Low confidence in the investors

75. London Stock Exchange(UK) FTSE 100 Index

76. Impact on Banking Sector Some of the major impacts include – Investment Bank transformed to the commercial Bank Liquidity concern

77. INDIA INC./ INDIA SINK??

78. How India was saved from the Crisis? RBI ARCIL Black Money

79. How will it affect India? Liquidity Crunch IPO Project financing FII Outflows Possible measures ECB SLR Interest Rates

81. SECTORS AFFECTED

82. Real Estate & Infrastructure High Interest Rates Drying up of funds Unitech

83. Slowdown in Real Estate Capacity Utilisation down by 8% to 86%. Companies Affected : ACC, Guj Ambuja, Grasim.

84. Banking and insurance MTM Losses Decreased Liquidity ICICI Opportunity for Investment Banking

85. Brokerages Low Volumes

86. Auto Interest Rate Sensitive Increasing Input Costs

87. Travel &Tourism Airlines Hotels

88. Other Sectors Metals Diamond Industry Information Technology

89. TATA- AIG TATA 76% AIG 24%

90. Lehman India Worli & Powai 2200 Employees Interested Parties

91. Where to Invest?? Fixed Maturity Plans, FD Gold Art

92. CURRENCY VALUATION (DOLLAR VS RUPEE)

93. THE FALL OF RUPEE IN FY08

94. STEPS IN TO SUPPORT RUPEE SUPPLIES CASH IN MONEY MARKET TEMPORARILY ALLOWED BANKS TO BORROW FROM IT EVEN IF THEY DON’T HAVE IDLE GOVERNMENT SECURITIES RBI-TO THE RESCUE

95. BANKING,FINANCIAL SERVICES,INSURANCE AND TELECOM SECTORS MAKE UP MOST OF I.T. FIRMS’ REVENUE “ IT SECTOR IS BULLETPROOF” WELL PREPARED TO TIDE OVER WALL STREET CRISIS TOP I.T FIRMS HAVE DEEPENED THEIR SALES CHANNEL S IN EUROPE EFFECT ON IT INDUSTRY

96. DESPITE DEPENDENCE ON BFSI REVENUE GROWTH IN 20-27% RANGE EXPORTS GREW 25.7% IN FY08.

97. IMPACT ON COMMODITIES MARKED TO MARKET COUPLING & DECOUPLING

98. IMPACT ON COMMODITIES Agricultural commodities Crude oil Gold Base metals : copper, zinc, lead & nickel

99. Marked to Market Definition - act of assigning a value to a position held in a financial instrument based on current market price. Concept of hedging - An investment that is taken out specifically to reduce or cancel out the risk in other investment.

100. Coupling & Decoupling Concept. Emerging markets. - Export oriented. - Domestic Consumption Market.

101. FOREX RESERVES

102. FOREX RESERVES INTRODUCTION PURPOSE

103. CONTRIBUTERS FOREIGN CAPITAL FII’S FDI’S ECB(External Commercial Borrowing) BANKING CAPITAL

104. EFFECT OF SUBPRIME CRISIS ON FOREX RESERVE FII SALES RESERVES DIPPING RE UNDER HEAVY PRESSURE

105. EFFECT ON FOREX RESERVE IN $ Bn

106. LESSONS LEARNT FROM SUBPRIME CRISIS

107. LESSONS LEARNT Americans got a lesson in low finance What’s there in wall street firms? We are getting financial leaders of future We have lots of new houses.

108. Experience can help future generation Avoided losses by predicting future Lesson’s learned: Narrow focus on whole picture Need to upgrade regulatory skills.

109. CONCLUSION

110. THANK YOU