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Subprime Crisis(Brief)
The document discusses the causes and effects of the 2008 global financial crisis. It began with the collapse of the US housing market and subprime mortgage crisis. Low interest rates led to increased lending to subprime borrowers who took on mortgages they could not repay. These risky loans were repackaged and sold globally. When housing prices declined, borrowers defaulted, damaging financial institutions and triggering a global recession. India was impacted through declines in exports, foreign investments, and economic growth, though its banks were more stable due to stronger regulations.
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Subprime Crisis(Brief)
- 1. Group 2: TYBBAA Abhilasha Mohan Ram A003 Mayank Beria A025 MihirMandrekar A026 Monil Shah A027 Rohan Negi A035 ZoyaKazi A053
- 2. 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 loans ) 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.
- 3. Why are Subprimeloans issued ? For banks to earn more money by tapping the defaulting customers For young people who do not have enough money for down payment For people having financial problems For people who are discriminated against
- 4. The USsubprime 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 banks The subsequent loss of funds resulted in the Global Recession of 2008
- 5. 2000-2005 : 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’
- 6. 2005-2006 : 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 subprime industry
- 7. 2006-2008 : 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
- 8. The globalrecession 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. and Europe 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
- 11. Owning ahome 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 built momentum.
- 12. DOT COMCOLLAPSE – 2000 SEPTEMBER 11 TERRORIST ATTACK
- 13. Low interestrates Increase in loan incentives Easy credit conditions
- 14.
- 15. 1994 -5 % 1996 - 9 % 1999 – 13% 2006 – 20%
- 16. The housingbubble began to burst in late 2005 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%.
- 17. When houseprices ceased rising in mid 2006 and then started falling, subprime mortgage defaults began accelerating. Effects Sub prime borrowers Financial institutions Banks
- 18. On December1, 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 2009. The total real estate equity in The United States was valued at $13 trillion during the 2006 peak, had fallen to $8.8 trillion by mid 2008.
- 21. The people whocontributed to the deadly chain of events that sent the entire world economy into recession.
- 22. Continued Reduction inFed Rates Sudden increase in Money supply Rates remained low till 2005 High Liquidity
- 23. Lowered tolending rates to increase loan off take As the prime market was nearing saturation, began lending to subprime borrowers Aggressively sold MBS, CDO Additional funds raised by securitization was re-deployed in the same manner
- 24. Non-traditional mortgages MBS ratings influenced using parental linkages as well as rating shopping
- 25. Buying propertywell beyond their means Buying for price arbitrage Non-traditional mortgages leveraged their borrowing capacity further 2yrs fixed rate, then floating rates: EMIs rose exuberantly, house value fell Thus making foreclosure a viable option Accelerated downward spiral
- 26. Increased useof Secondary mortgage market Lenders sold their mortgages in the secondary market Pooled mortgages into securities like CDOs and MBS
- 27. Investors: Investors werethe ones willing to purchase these CDOs at ridiculously low premiums over Treasury bonds. These enticingly low rates are what ultimately led to such huge demand for subprime loans.
- 29. Fuelled volatilitythrough credit arbitrage Credit Default Swaps Influenced banks to bring out more MBS & CDOs as it was a good avenue to invest in
- 30. Source: Wikipedia Denotes thereal GDP Growth during 2009. (Countries in brown represent those in recession)
- 32. Year Growth (US$Bn) 2006-07 22.6 2007-08 29.0 2008-09 13.7 2009-10 -3.6 2010-11 29.5 15 per cent of total export in 2006-07 was directed toward USA. 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 ago. Manufacturing sectors like leather, textile, gems and jewellery got hit hard.
- 34. Year Growth Rate 2005-069.5 2006-07 9.6 2007-08 9.3 2008-09 6.8 2009-10 8.0 2010-11 8.6 Source: http://planningcommission.nic.in/data/datatable/1705/final_1.
- 36. Month Open HighLow 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 Source: http://www.bseindia.com/indices/indexarchivedata.aspx
- 37. Against anet 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.
- 38. Year No. of IPOs Amt Raised(in Rs. Cr) Issue Succeede d Issue Failed 2007 108 33,946.2 2 104 04 2008 39 18,339.9 2 36 03 2009 22 19,306.5 8 21 01 2010 66 36,362.1 8 64 02 IPO Report - Year Vs. Money raised through IPOs
- 39. only US$18billion raised in FY2008–2009 as commercial credit from the overseas market=41% less than the amount raised in the previous year. 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. Year Inflow FDI 2004-05 US$6Bn 2007-08 US$34.3Bn ECBs 2004-05 US$9Bn 2007-08 US$30.3Bn FDI & ECBs
- 42. Dec 30th :1USD =48INR Jan 1st : 1USD =39INR Dec 1st : 1USD=50INR
- 44. India’s Realestate market was very similar to that of the U.S in 2008. Housing developments were sprouting up everywhere. Plenty of money flowing into India, mainly from private equity and hedge funds, to fuel the commercial real estate bubble in particular. Carlyle, Blackstone, Citibank — they were all here, throwing money at developers
- 45. 70% ofthe banking system in India is nationalized, so RBI’s role as a strong regulator is critical. Indian banks were not levered like American banks. Capital ratios here are 12% and 13%, instead of 7% or 8% of the Americans.
- 46. Banks Capital Adequacy Ratioduring 2007-08 Federal Bank Oriental Bank of Commerce Barclays Bank Corporation bank Kotak Mahindra Bank Allahabad Bank Bank of India ICICI bank Citi Bank Axis Bank Indian Overseas Bank HFDC bank 22.5% 12.1% 21.1% 12.1% 18.7% 12.0% 12.0% 14.0% 12.0% 13.7% 12.0% 13.6%
- 47. Indian banksdon’t do interest-only or subprime loans. 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 United states!
- 49. He startedsensing that real estate, in particular, had entered bubble territory before the crisis. One of the first moves he made was to ban the use of bank loans for the purchase of raw land. Only when the developer was about to commence building could the bank get involved — and then only to make construction loans.
- 50. Reddy pushedinterest rates up to more than 20 percent, which of course dampened the housing frenzy. 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.
- 52. India's tradetheory 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 decreased . BUT on the other hand has relatively increased with China reflecting out that the risk of US recession has been deflected.
- 54. However ona 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.
- 55. For bothcommercial 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.
- 56. The presenceof black money or what one may call the hidden net worth of India has tremendous 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 meeting the
- 57. The amountsin 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 sub-prime
Editor's Notes
- #23 Asian Countries were also sending surplus funds into the US economy to help revive it
- #24 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
- #25 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.
- #26 Downward spiral: banks foreclose at distress sale (low prices) therefore, property prices drop,
- #27 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.
- #29 Max : bought by japan,europe, russia
- #30 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)
- #32 . 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.
- #33 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.
- #37 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
- #40 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.
- #42 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.
- #43 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
- #48 INDIANS NOT COMFORTABLE WITH CREDIT.