The subprime crisis began in 2008 and was caused by rising mortgage defaults and foreclosures among subprime borrowers who took out unsustainable adjustable rate loans. This led to the collapse of lending institutions and hedge funds, severely damaging the global credit market. Key factors included a housing market boom and bust, risky lending practices, inaccurate credit ratings, and loose government regulations. The crisis had widespread impacts across the US, India, and world, including bank failures, job losses, and economic recession. Governments responded with bailouts and programs to help at-risk homeowners.

1. SUBPRIME CRISIS
PRESENTED BY-
VEDIKA AGARWAL
SALONI AGARWAL
SAKSHI GIRIA
PIYUSH KHETAN
YASH KEJRIWAL
ROHIT KUMAR SHAW
SOMNATH MAITY

2. WHAT IS SUBPRIME CRISIS?
• A situation starting in 2008 affecting the mortgage industry due to
borrowers being approved for loans they could not afford. As a
result, a significant rise in foreclosures led to the collapse of many
lending institutions and hedge funds. The financial crisis in the
mortgage industry also affected the global credit market resulting
in higher interest rates and reduced availability of credit.

3. CAUSES OF SUBPRIME CRISIS
• Boom and Burst in housing market
• High risk mortgage loans and lending/borrowing practices
• Inaccurate Credit Ratings
• Government Rules And Regulations

4. BOOM AND BURST IN HOUSING MARKET
• Low interest rates and large inflows of foreign funds created easy credit conditions for a
number of years prior to the crisis, fueling a housing market boom & encouraging debt-
financed consumption.
• The USA home ownership rate increased from 64% in 1994 to an all- time high of 69.2% in
2004.
• Between 1997 and 2006, the price of the typical American house increased by 124%.
• By September 2008, average U.S. housing prices had declined by over 20% from their mid-
2006 peak.
• As of March 2008, an estimated 8.8 million borrowers – 10.8% of all homeowners – had
negative equity in their homes.
• By September 2010, 23% of all U.S. homes were worth less than the mortgage loan.

5. HIGH RISK MORTGAGE LOANS AND
BORROWING/LENDING PRACTICES
• In the years before the crisis, Lenders offered more and more loans to
higher-risk borrowers and undocumented immigrants.
• Subprime mortgages amounted to $35 billion (5% of total
originations) in 1994, 9% in 1996, $160 billion (13%) in 1999, & $600
billion (20%) in 2006.
• In 2005, the median down payment for first-time home buyers was
2%, with 43% of those buyers making no down payment .

6. INACCURATE CREDIT RATINGS
• Credit rating agencies are now under scrutiny for having given investment-grade
ratings to MBSs based on risky subprime mortgage loans.
• These high ratings enabled these MBSs to be sold to investors, thereby financing
the housing boom.
• Between Q3 2007 and Q2 2008, rating agencies lowered the credit ratings on $1.9
trillion in mortgage backed securities.
• Financial institutions felt they had to lower the value of their MBS and acquire
additional capital so as to maintain capital ratios.
• If this involved the sale of new shares of stock, the value of the existing shares was
reduced.
• Thus ratings downgrades lowered the stock prices of many financial firms.

7. GOVERNMENT RULES AND REGULATIONS
• Government over-regulation, failed regulation and
deregulation have all been claimed as causes of the crisis.
• Increasing home ownership has been the goal of several
presidents including Roosevelt, Reagan, Clinton and George
W. Bush.

8. Impact Of Crisis
Impact On
USA
Impact on
India
Impact on
World

9. IMPACT ON USA
• Initial impact was felt in March 2008, when investment bank, Bear Stearns
was acquired by J.P. Morgan Chase, a commercial bank, for US$1.2 billion.
• September 2008, witnessed major shakeouts in the US financial sector. The
drama began with Lehman Brothers declaring bankruptcy on 15
September 2008, facing a refusal by the federal government to bail it out.
• Washington Mutual is closed by the US government in the largest failure
of a US bank. Its banking assets are sold to J.P. Morgan Chase for US$1.9
billion.

10. CONT.…
• US Federal Reserve provided an emergency loan of US$85 billion to
insurance major, American International Group (AIG), which will be repaid
by selling off assets of AIG.
• Investment bank, Merill Lynch was acquired by Bank of America in
September 2008 for $50 billion.
• US Federal Reserve granted approval to investment banks, Goldman Sachs
and Morgan Stanley to convert themselves into commercial banks .
• US Treasury Department confirmed that both Fannie Mae and Freddie
Mac , would be placed into conservatorship with the government taking
over their management.

11. CONT..
• WachoviaCorp agrees to sell most of its assets to Citigroup Inc in a deal brokered by
regulators. However,Wells Fargo, a commercial bank, drafted an agreement to
acquire assets ofWachovia for US$15.1 blln .
• The deal forcedWachovia to backtrack from the Citigroup deal worth US$2.2 billion
which was backed by the US Government.
• US Government releases a US$700 billion bailout package for its financial industry.
• Dow Jones posts its largest point decline ever while the S&P 500 had its worst day
since 1987 with an 8.8% drop.

12. IMPACT ON INDIA
• The foreign banks started unloading their holding in INDIAN EQUITIES
resulting in fall in the stock price and weakening the domestic currency .
• Hitting the IT enabled services since a majority firms derive 75% of
revenue from US.
• Manufacturing sectors has to ramp up scale economies and improve
productivity & operational efficiency .
• The near recession situation in the US has lead to the loss of demand for
Indian exports and hence there is loss of export earnings in India.

13. CONT.
• A recession in US has seen some job loss in India.
• The subprime crisis has led to a loss of confidence in the American
stock market.
• Investment banks and other financial institutions are on a job
slashing spree to cut costs.
• There will be several implications for the banking sector Indian
banks have to follow stricter norms while disbursing loans.

14. IMPACT ACROSS THE WORLD
• Northern Rock Bank had difficulty finding finance to keep the business
going and was nationalized in February 2008 .
• British bank Lloyds TSB Group Plc agrees to buy rival HBOS Plc , (UK’s
largest mortgage lender) scooping up Britain's biggest home loan lender in
an all-share deal which values HBOS at over £ 12 billion (US$22.3 billion).
• In September 2008, British bank Bradford & Bingley was nationalized by
the UK government, which will take control of the bank's £50bn mortgages
and loans, while its savings operations and branches are to be sold to
Spain's Santander.

15. CONT..
• The Dutch operations of Fortis , Europe's largest victim of the credit crisis,
have been nationalized in a €16.8 billion (£13 billion) deal aimed to calm
investors in the troubled banking and insurance group .
• Germany struggled to rescue lender Hypo Real Estate ( Mortgage Giant),
underlining the challenge facing European leaders, who vowed to restore
stability in a banking system hit by the worst crisis since the 1930s.
• In October 2008, the Australian government announced that AU$4 billion was
to be raised to fund non-bank lenders that are unable to obtain funding to
finance new loans. After industry feedback this was increased to AU$8 billion .
• Japanese financial powerhouse, Nomura Holdings Inc . bought over Lehman's
franchise in Europe and Asia Pacific, including Japan and Australia .

16. CONT..
• Credit got tighter
• Effect on jobs
• Stock market tanked

17. SOLUTIONS GIVEN BY GOVERNMENT
• To help lower-income people renegotiate their loans & stay in their homes.
• They hope more money for lower-income families will be free & shift the balance of
power between borrowers & lenders.
• FHA insure slightly more expensive homes.
• Deutsche Bank estimates that about $400 billion in subprime loans are scheduled for
rate increase of 30% or more.
• To provide the needy financial institutions with the liquidity that they need.
• ECB is lending at the normal rate.