The document presents on the subprime crisis of 2007. It discusses how subprime mortgages led to the crisis, with riskier borrowers taking on loans they could not repay. The executive summary notes that the government poured hundreds of billions into the system through bailouts, but this could lead to moral hazard issues with institutions taking greater risks expecting future bailouts. Opinions from professors are provided, with some arguing the bailouts rewarded failure while others felt risk was not accurately evaluated. The conclusion is that the large bailouts have made the US more socialist.

1. PRESENTATION ON SUB PRIME CRISES PRESENTED BY: NAVEEN KUMAR AKANSH GARG GULAM SARVER

2. INTRODUCTION Subprime Crisis : It is a 2007 financial crisis that started in the United States of America from the high number of defaulting borrowers with subprime mortgages. Subprime Mortgages The definition of subprime lending is the loaning of money to people who are at a higher credit risk than normal. This means that the borrower's ability to repay the loan is questionable based on a number of criteria. Here is what would make a borrower be considered a subprime borrower.o FICO Score of 660 or less.o Late payments to any creditor within the last 12-24 months.o Collection accounts.o Any repossessions within the last 5-7 years.o Bankruptcy within the last 7 years.

3. EXCUTIVE SUMMARY The case study simply focuses that what happen after the crises in America and what government do to reduce the negative consequences of crises in a particular industry. They pour hundreds of billion of dollars in to system but these bail out packages could lead to a new problem of ‘moral hazard’ Some faculty member says that moral hazard is a cause of subprime crises. Borrowers who were not able to repay took loan at high interest rate and financial institutions knew that when will be in financial trouble ,government will defiantly come to bail out them because they are very big banks, and they started taking more risk to earn big amount in short term period.

4. OPINION Of AUTHOR Wharton finance professor Richard Herring worries that “We have created huge moral hazard by, in most instances, sparing all creditors from the consequences of their choices,” because bond owners and others who fueled excessively risky lending have not been forced to take the kind of devastating losses suffered by stockholders. Franklin Allen adds that the government are “rewarding failure” and suggests that a better government response would have been to “temporarily nationalize some of the big failing institutions, clearing out the devalued assets, ensuring that debtors and shareholders were wiped out and allowing the firms to emerge healthy.” Wharton finance professor Jeremy Siegel differs from the other faculty quoted, in that he thinks that the current crisis was not really caused by moral hazard but by a failure to accurately evaluate risk

5. PERSONAL OPINION We are very much agree with Wharton finance professor Richard Herring and Franklin Allen that the government is ‘rewarding failure’ the root cause of the 2008 financial crisis was excessive risk-taking. The Financial Crisis of 2008 did not occur because of insufficient or ill-designed regulation. Rather, it resulted from misguided government policies. The pressure to expand risky credit was especially problematic because of the misguided policy, the long-standing practice of bailing out failures from private risk-taking. This practice meant that financial markets expected the government to cushion any losses from a crash in mortgage debt. Thus, the historical tendency to bail out creditors created an enormous moral hazard.. Institutions made buckets of money on these subprime loans, and now they need to suffer the losses. That means ‘profit is private and losses are public’

6. EXAMPLE : a very good example of moral hazard is the case of AIG. Where AIG got billions of dollar as a bail out package and they were using that money to give bonuses to their executives rather than paying to shareholders or creditors.

7. CONCLUSION Conclusion of this case study is that As America is known as a biggest capitalistic country in the world but by giving bail out packages to private banks and insurance companies of America, they are now a biggest socialistic country in the world. These bail out packages are for bail them out from the financial crises and these bail out packages are seeds of new forth coming crises.