The document discusses the financial meltdown of 2008 and its causes. It provides context on the rise of securitized mortgage lending from the 1930s-2007. A key development was the increasing use of mortgage-backed securities from the 1980s onward. It then outlines the timeline of major events from 2008, including the collapse of investment banks like Lehman Brothers and bailouts of companies like AIG. The complex financial instruments like CDOs and their role in inflating the housing bubble that eventually burst are also examined.

1. Financial Meltdown
and its impact on
Financial Markets
Created by:
Ajay Kr Dhamija (N-1) Hanish Rajpal (N-67)
Himanshu Goenka (N-22) Adil Zaidi (S-8)
Snehal Soni (N-47) Geetanjali Aggarwal (S-20)
Tripat Preet Singh (N-53) Radhika Gulati (S-40)

2. Agenda
Terminology
Historical Linkage & Timeline of Current Crisis
Model of Mortgage Loan
Complexity of Financial Products & Model
Tea Break
Faults in the Model & Aftermath
Crisis Toll
How does it affect India
Terminology 2
Learning and change of the model
Conclusion

3. Terminology
Interest Rate Swap
Credit Default Swap
Securitization
Asset-backed security
Mortgage Backed Security
Collatarized Debt Obligation
Subprime Lending
Terminology 3
Foreclosure
Credit rating agency (CRA)

4. Interest Rate Swap
The swap bank Swap
makes ¼ %
Bank
10 3/8 % 10 ½%
LIBOR – ¼%
LIBOR – 1/8%
Bank Company LIBOR
10%
Note that the total savings + ½%
A ½ + ½ + ¼ = 1.25 % = QSD B
A saves ½ % B saves ½ %
COMPANY B BANK A DIFFERENTIAL
Terminology 411.75%
Fixed rate 10% 1.75%
Floating rate LIBOR + .5% LIBOR .5%
QSD = 1.25%

5. Credit default Swap
Company A Company B
- BB – B+
CRA
Insurance Insurance (Moody’s)
$1B A - AA $2B B - AA ->
10% B+
12%
200 BP
100 BP
Insurance 200 BP
on B for Insurance = $200M
$1B on B for
Insurance $10B
Terminology 5 on B for
$2B
Pension Hedge
Pension
Fund 2 Fund 1
Fund 1

6. Securitization
Securitization
-Structured Process
-The assets are combined into a pool, and then that pool is split into
shares.
-The shares are sold to investors who share the risk and reward of
the performance of those assets collectively
- Present Value of Future Cash Flows
Terminology 6
- Categorization

7. Motives for securitization
Advantages to issuer
•Reduces funding costs
•Reduces asset-liability mismatch
•Lower capital requirements
•Locking in profits
•Enables Transfer of risks by one who does not want to take it
•Earnings
Terminology 7
•Admissibility
•Liquidity

8. Asset-backed security
An asset-backed security is a type of debt security that is
based on pools of assets, or collateralized by the cash
flows from a specified pool of underlying assets.
Backing assets-loans, lease, credit card debt, company
receivables, royalty
Non Mortgage Assets
TerminologyHigh
Prepayment Risk
8

9. Mortgage Backed Security
A Mortgage-Backed Security (MBS) is an asset-
backed security whose cash flows are backed by the
principal and interest payments of a set of mortgage
loans.
Payments are typically made monthly over the
lifetime of the underlying loans
Prepayment Risk Low
Government Guarantees
Terminology 9

10. Collateralized Debt Obligation
Securitized Interest in a pool of assets- ABS
Constructed from Portfolio of fixed income assets.
Types
• CLO
• CBO
Non Mortgage loans or Bonds
Multiple Tranches of Securities
Senior (AAA)
Terminology 10
Mezzanine(AA to BB)
Equity(Unrated)
Losses in reverse order of seniority of tranches
Servicing Agent

11. Collateralized Debt Obligation
$1B * 10% = $100M
$1B $1B
Bank Investment MBS
Bank
1000 * $100K
= $100M
Mortgagors And
$1B
$1B
$1000 K * 1M shares
SPV
Equity 300 M (300K shares @ 16.5% = $55M)
Mezzanine 300 M (300K shares @ 7% = $21M)
Terminology 11 CDO
Senior 400 M (400K shares @ 6% = $24M)
Investors

12. What is Subprime Lending?
Near-prime, non-prime, or second chance lending
Providing credit to borrowers who do not meet prime underwriting
guidelines.
A sub-prime lender is one who lends to borrowers who do not
qualify for loans from mainstream lenders or prime financing terms-
Low Credit Scores
Subprime loans are not predatory loans
Terminology 12

13. Why Subprime Lending ?
Realization of a demand for loans to high-risk
borrowers with imperfect credit.
Fall in prime interest rates with real interest becoming
negative- allowing modest subprime rates to flourish.
Relaxation of usury laws - Confidence to foreclose
assets in case of default.
Terminology 13
Credit Repair Option.

14. How do we know a Sub-prime Borrower
Payment delinquencies
Reduced Repayment capacity as measured by credit scores
Poor debt-to-income ratios
Limited income or having poor credit scores
Relatively high heightened perceived risk of default
History of loan delinquency,
Recorded bankruptcy,
Terminology 14
Limited debt experience.
Charge-offs, Set offs, judgments.

15. Credit profile keeping a borrower out of a prime loan may
include the following
Two or more loan payments paid past 30 days due in the last
12 months, or
one or more loan payments paid past 90 days due the last 36
months;
Judgments, foreclosure, repossession, or non-payment of a
loan in the past;
Bankruptcy in the last 5 years;
Terminology 15
Hi default probability as evidenced by the credit score.
Accuracy of the credit line data obtained by the underwriter.

16. Foreclosure
Foreclosure is the legal and professional proceeding in which a
mortgagee, or other lienholder, usually a lender, obtains a court
ordered termination of a mortgagor's equitable right of
redemption.
Types of foreclosure
1. Judicial Foreclosure – Court Proceedings
2. Power of Sale- Where Sale Clause provided or a trust deed
used
Terminology 16

17. Credit Rating Agency (CRA)
Is a company that assigns credit ratings for issuers of
certain types of debt obligations as well as the debt
instruments
The Basel II guidelines
Objectivity
Independence
Transparency
Terminology 17

18. Agencies that assign credit ratings for corporations
include:
A. M. Best (U.S.)
Baycorp Advantage (Australia)
Dominion Bond Rating Service (Canada)
Fitch Ratings (U.S.)
Japan Credit Rating Agency (Japan)
Malaysian Rating Corporation (Malaysia)
Moody's (U.S.)
Standard & Poor's (U.S.)
Pacific Credit Rating (Peru)
Terminology 18
Rating Agency Malaysia (Malaysia)
Egan-Jones Ratings Company (U.S.)
Capital Intelligence Ltd (Cyprus)
CRISIL (India)

19. Historical Linkages --
Manias, Panics and Crashes
Terminology 19

20. Rise of Securitized Mortgage Lending
Mortgage Lending
1930s-80s: Funds derived primarily from deposits of the lending
institution
1980-2007: Funds derived increasingly from credit markets through
securitization process
Period Home Loan Securitized
Before 1970’s <1%
Terminology 20
1980’s ~10%
Late 2000’s – Sub Prime Crisis 56%+

21. Mechanism of A Meltdown
There is a change in legislation/policy/practice - a loophole is discovered
“Financial Asset” is innovated/ created around the loophole
Mass “staged dealing” takes place, valuations are artificially blown up
Sudden fall in fundamental asset
Bull run turning into sudden “Meltdown” and panic impacting economy for
long period
Lets take last 20 years and see if there is a trend:
Financial Meltdown Financial Assets which were overvalued
Terminology 21
Late 1980’s – Saving & Loan Crisis Junk Bond
Later 1990’s – Tech Bubble Internet Stock
Late 2000’s – Sub Prime Crisis Sub-Prime Mortgages

22. Late 80’s – Saving and Loan Crisis
In 1980 – US Congress allowed Thrift – (Saving and Loan) Associations to
lend consumer loans/commercial loans, issue credit cards, - These were
high risk and below investment grade loan
Further in 1981 –S&L Associations were allowed to sell their risky loans and
use cash generated to seek better returns – to invest in even riskier loans .
Major Wall Street Firms started buying and these bonds at 60-90%,
bundling and trading in them as Government Backed Bonds
“Staged dealing” – back and forth trading amongst close group to establish
Terminology outsiders (banks)
“value” and sell it to
22
As the initial assets (loans) started defaulting – bonds became worthless
Eventually Bond failed and created a trillion $ crisis for US taxpayers

23. Late 90’s – Tech Bubble
Internet Stocks (A stock gets its value from underlying sales, growth and
overall prospects of future)
Company needs to prove themselves by being in existence for several
years before they could be traded on stock exchanges – this standard was
thrown away - That was the Loophole
To pump up the value – companies engaged in “ staged dealings” – (back
and forth sales/billing of ads on mutual sites to create false Revenues)
These sales numbers were used to fraudulently value the companies and a
Terminology 23 totally worthless companies.
lot of money was raised on
Eventually these companies failed and created another trillion $ crisis

24. Late 2000’s – Sub-Prime Crisis
In current case – instrument - Sub Prime Mortgages.
Previously Sub-Prime Mortgages had very little trading value. Only
specialist use to deal in them.
Mortgage Industry changed Lending standards and Wall Street innovated -
“If we take LOTS of these mortgages and assemble them into large pools
and then slice and dice the pools in various ways, we can sell the slices to
banks and other investors as AAA paper”
To pump up the value – Banks sold them (at a fee) to each other and due to
Terminology declared them valuable.
“ staged dealings” –
24
Eventually Housing Industry came under pressure and everyone on the top
starting falling

25. Historical Linkages
Terminology 25
Financial Meltdown

26. Crisis and Financial Meltdown
Crisis is a result of change in legislative, its fraudulent use to
create false value, a bull run and then…
A Sudden Market Crash
Full scale financial system break down – bankruptcies
Economic Meltdown - fall in Industrial output, rise in unemployment,,
household net-worth drops,
Terminology 26

27. Time Line - Past Few Years
Low interest rate regime and availability credit/ securitization
resulting into increased liquidity since 2003
Lending to Sub Prime customers on increased
Home Prices rise till 2005 and busting of housing bubble in 2005
Rise in Interest rate in 2006 – refinancing became difficult
Defaults and foreclosure on rise through 2007-08
Average debt of American
Terminology 27
American way of Debt

28. Time Line . . . . .
Initial Impact: Mortgage Lenders
Country wide
Bears Stears
Indy Mac
Fannie Mac & Mae
Secondary Impact : Investment Banks followed by Commercial Banks
Lehman Brothers
Merrill Lynch
Terminology 28
and it spreads to rest of world

29. Timeline of current crisis
January 11,2008 : Bank of America
buys mortgage lender Countrywide
Financial for $4 billion in an all-stock
deal.
March 16,2008 : JP Morgan Chase
buys brokerage firm Bear Stearns for
$2/share in a deal backed by the Fed
and Treasury Department. The price is
later revised to $10/share.
July 11,2008 : IndyMac is seized by
Terminologyperiod. This $1.3
the FDIC after depositors withdraw
billion over an 11-day
29
brought to 12 the number of banks
seized by FDIC in 2008.
Source: www.investmentbankeronlife.com

30. Timeline of current crisis
July 13,2008 : Government-sponsored
mortgage finance companies Fannie Mae and
Freddie Mac are nationalized by the federal
government in an effort to support the U.S.
housing market.
Sep 7,2008 : The federal government
takes control of financial giants Fannie Mae
and Freddie Mac, which were nationalized in
July. The two hold or guarantee about half the
nation's $10 billion in mortgage loans.
Sep 15,2008 :
Investment bank Lehman Brothers files
Terminology 30
for Chapter 11 bankruptcy protection.
Rival Merrill Lynch agrees to be taken
over by Bank of America.
The Dow Jones fell 504 points, the
index’s worst since the 2001 terrorist
attacks. Top 10 Bankruptcies
Source: www.investmentbankeronlife.com

31. Timeline of current crisis
Sep 16,2008 : Insurer American International Group (AIG)
is rescued by the federal government through an $85 billion
loan package in return for an 80% stake in the company. The
move comes amid a cash crunch, triggered by $18 billion of
losses over three quarters, a sinking stock price and debt
downgrades.
Sep 19,2008 : U.S. Treasury Secretary Henry Paulson calls
for the government to spend hundreds of billions of dollars to
take toxic mortgage assets off the books of financial companies
to restore financial stability . News of the bailout plan helps
world stock markets soar.
Sep 20,2008 :
Terminology 31 outlines details of a
Treasury Secretary Henry Paulson
$700 billion bailout plan for firms troubled by bad mortgage
debt.
A U.S. bankruptcy judge approves a revised version of
Barclays purchase of the core U.S. business of Lehman.
Source: www.investmentbankeronlife.com

32. Timeline of current crisis
Sep 21,2008 : Goldman Sachs Group Inc. and
Morgan Stanley become bank holding companies
regulated by the Fed, essentially ending Wall Street's
investment banking model.
Sep 23,2008 : Warren Buffett’s Berkshire Hathaway
invests $5 billion in Goldman Sachs, citing the rescue
plan as a contributing factor.
Sep 25,2008 :
Washington Mutual is seized by the FDIC, making
it the largest U.S. bank failure, with $307 billion in
Terminology 32
assets.
JPMorgan Chase buys WaMu’s banking assets for
$1.9 billion.
Source: www.investmentbankeronlife.com

33. Timeline of current crisis
Sep 29,2008 :
U.S. House of Representatives rejects the $700 billion
rescue plan in a stunning 228-205 vote. The Dow Jones
falls by a record 777 points.
Wachovia agrees to sell most of its assets to Citigroup in a
deal brokered by regulators.
Oct 1,2008 : U.S. Senate passes a modified U.S. financial
rescue plan aimed at restoring global financial stability, sending
the measure to the U.S. House of Representatives for a vote
on Friday.
Oct 3,2008 :
Terminology historic $700 billion rescue bill
President Bush signs the 33
approved just hours earlier by the U.S. House of
Representatives in a 263-171 vote.
Wells Fargo agrees to buy Wachovia for $15.4 billion or $7
a share, better than Citigroup’s earlier offer of about $1 a
share.
Source: www.investmentbankeronlife.com

34. Model of Mortgage Loan
Mortgage Broker
Sub-prime Mortgage
Secondary Mortgage Market
CRA Certification
Investors – OTC Market
Home Mortgage Evolution
Repackaging into MBS, CDO
Private Sub-prime Mortgage Process
Terminology 34
Source: The Economist: Making Sense of Modern Economy

35. Mortgage Broker
Mainly found in developed economies like US, Western Europe
Professionals who are paid a fee to bring together lenders and
borrowers
Sells mortgage loans on behalf of businesses (ex. Banks)
Terminology 35
Source: Wikipedia

36. Sub-prime mortgage – What’s that?
Home loans made to borrowers with poor credit ratings — a group
generally defined by FICO scores below 620 on a scale that ranges
from 300 to 850
FICO - a number that is based on a statistical analysis of a person's
credit report, and is used to represent the creditworthiness of that
person.
(FICO is the acronym for Fair Isaac Corporation, a publicly-traded corporation (under the symbol
"FIC") that created the best-known and most widely used credit score model in the US.)
Creditworthiness—the likelihood that the person will pay his or her
Terminology 36
debts. Calculated by credit reporting agencies.
Ex. Equifax, Experian, and TransUnion in US
Source: Wikipedia

37. Secondary Mortgage markets
The secondary mortgage market allows banks to sell mortgages,
giving them new funds to offer more mortgages to new borrowers.
If banks had to keep these mortgages the full 15 or 30 years, they
would soon use up all their funds, and potential homebuyers would
have a more difficult time to find mortgage lenders.
Many of the mortgages on the secondary market are bought by
Fannie Mae.
Terminology 37 mortgage-backed securities, and sold to
Other are packaged into
investors.
Source:http://www.urbandigs.com/2007/08/how_mortgage_backed_securities.html

38. Credit Rating Agency (CRA)
Company that assigns credit ratings for issuers of certain types
of debt obligations as well as the debt instruments themselves
A credit rating for an issuer takes into consideration the
issuer's credit worthiness (i.e., its ability to pay back a loan), and
affects the interest rate applied to the particular security being
issued
Ex: Moody's (U.S.), Standard & Poor's (U.S.)
Credit ratings are used by investors, issuers, investment
Terminology 38 and governments.
banks, broker-dealers,
For investors, credit rating agencies increase the range of investment
alternatives and provide independent, easy-to-use measurements of
relative credit risk.
Source: Wikipedia

39. OTC market
A decentralized market of securities not listed on an exchange where
market participants trade over the telephone, facsimile or electronic
network instead of a physical trading floor. There is no central exchange
or meeting place for this market.
In the OTC market, trading occurs via a network of middlemen, called
dealers, who carry inventories of securities to facilitate the buy and sell
orders of investors
Trading is private and prices and
Terminology 39
volumes are not disclosed
Price discovery non transparent
Source : http://www.investopedia.com/terms/o/over-the-countermarket.asp

40. Evolution of home mortgage
Home loan funding
1930s
Principal + interest payable over long term
Lender-Banks Borrower-Individuals
• Owning a house was not affordable to many
• Great Depression brought industry to a halt. Large scale defaulters and lenders
could not recover by reselling
• To simulate the industry again Government as part of New Deal policy created
the Federal National Mortgage Association (Fannie Mae) in 1938. This created a
secondary market for mortgages
Bought loan Home loan funding
Terminology 40 Cash Principal + interest payable
over long term
Transfer of credit risk, market risk
Had Access to long term borrowing Lender-Banks Borrower-Individuals
Bought only those which conformed to
certain underwriting standard ( called Prime
Mortgages)
Source :http://www.imf.org/external/pubs/ft/fandd/2007/12/dodd.htm ,Subprime Mortgage Market Turmoil, Christopher L. Peterson, Asst Prof of Law, Univ of Florida

41. Evolution continued…
Fannie Mae proved very successful . But by 1960s , borrowing done by it
constituted a significant share of the debt owed by US government.
1968- Government National Mortgage Association (Ginnie Mae) was
created to handle government guaranteed mortgages.
Fannie Mae became federally chartered, privately held
1970- Ginnie Mae developed MBS -- shifted the market risk to investors --
eliminated debt incurred to fund government housing program
1970-Federal National Mortgage Corporation (Freddie Mac) created
To securitize conventional mortgages
Terminology to Fannie Mae
Provide competition
41
Over time Fannie Mae and Freddie Mac together provided enormous
amount of funding for US mortgage
Since Fannie Mae and Freddie Mac guaranteed loans, much of credit risk
stayed with them. Size and diversification allowed them to handle it.
Source :http://www.imf.org/external/pubs/ft/fandd/2007/12/dodd.htm ,

42. New Model of mortgage lending
Bought loan Home loan funding
Cash
Transfer of credit & market risk
Lender-Banks
Principal + interest payable
over long term
Securitization
SPV
Advantages
Cash
fees
MBS
• More liquidity in market
• Risk spread out
• Long term funding for mortgage lending
Transfer of market risk
Terminology 42 • MBS- allows originators to earn fee income
from underwriting activities without exposure to
credit, market or liquidity risks as they see the
loans they make

43. Private Players joined
1977- Private label securitization started first done by BOA and
Salomon Brothers
1980s- pricing, liquidity and tax hurdles were resolved in same
Unlike 2-3 party , private label securitization has 10 or more different
parties playing independent role
Big private players in this field were
Wells Frago • Indymac
Lehman Brothers • Washington Mutual
Terminology 43
Bear Stearns • Countrywide
JP Morgan
Goldman Sachs
Bank Of America

44. Repackaging into MBS / CDO
MBS
MBS CDO
Terminology 44
• Created in 1987 by now defunct investment firm Drexel Burnham Lambert
• Not traded on exchange but OTC market

45. Details : Private Sub-prime mortgage process
1. Brokers identify borrowers
2. Originator and broker identify a loan for
borrower after looking at his credit rating
3. Formal application for loan by borrower
4. Originator transfers the loan to the
subsidiary of an investment banking firm (
Seller)
5. Seller(Investment bank) collects a pool
of loans and call it as SPE/SIV/SPV. Off
balance sheet instrument
6. SPV can be a corporation, partnership or
limited liability company. Most often a
Trust. It has nothing else except mortgage
loans
7. Underwriter purchases all the securities
(derivative income streams)
8. In designing SPV and its tranches
underwriter works with credit rating agencies
Terminology 45 9. Underwriter then sells the securities to
the investors
10. High rated tranches might be guaranteed
by a 3rd party insurance company
11. Seller also arranges to sell the rights to
service the loan pool to a company or
sometimes Originator takes these rights
12. MERS – document custodian. Company to
keep track of mountains of paper work on loans
Source : Subprime Mortgage Market Turmoil , testimony by Christopher L. Peterson
in the pool. At National level.

46. Complexity of Financial Products &
Models
Mark to Market / Model
Blame the models
The fragility of models
Four Major Implications
VaR
Market risk model
CRA’s: SIV & Sub-prime
Terminology 46 Unrealistic demands
Use models but…

47. Mark to Market / Model
Last year, Banta bought an apartment in Gurgaon. He spent Rs 1 Cr. His Real Estate agent
says it’s worth Rs 60 Lac today.
Banks are not lending, so no one is offering to buy Banta’s apartment. A drunk guy ,
Santa, met at the bar said he would pay Banta Rs. 5 Lac
Rs 60 Lac is the Mark to Model.
Rs 5 Lac is the Mark to Market.
How much is Banta’s apartment worth?
If he used it as collateral for a loan, how much would you lend him?
A mark to model is less reliable
Assumptions
Terminology 47 is not present.
May assign a liquidity which
complex financial instruments
no ready market => mark to model
Source :http://innovationcreators.com/wp/?p=464

48. Blame the models
Quality of Statistical Risk Models was much lower
Ignored Black Swans ( the highly improbable and unpredictable events that
have massive impact. ) - Fractals Theory & Chaos Theory
no one managed to prove that the use of a model that does not work is neutral,
volatility as an indicator of stability has fooled the banking system.
Identification of fourth quadrant (danger zone) is important
Ignored liquidity
Ignored increase in correlation during downturn
Ignored leverage ratios
Ignored the fact that events are correlated and risks are auto correlated.
Terminology 48made value & risk assessment difficult
Trading in OTCEI further
No standard contracts
No information on holdings and pairings
Sources: Blame the Models by Jon Daniielson , London School of Economics
Ian Stewart, Does God Play Dice? The Mathematics of Chaos

49. The fragility of Models
Finance is not physics; it is more complex.
Endogenous risk:
Statistical properties change under observation since market participants react to
information
We can only model aggregate behavior.
Financial modeling changes the statistical laws in real-time,
we can ignore endogenous risk in calm. In a crisis, we cannot. And that is when
the models fail.
Quality of assumptions
Modelers tend to ignore what is difficult, not what is important.
Terminology 49 been ignored in model design
liquidity had generally
Data quality
Financial data have the annoying habit of being of short duration.
The statistical properties of financial data change over time
Source: Blame the Models by Jon Daniielson , London School of Economics

50. Four Main Implications
1. SF Pool Losses Don’t Recover
2. SF Pool Losses are Skewed
3. SF Pool Losses are Moving Target
4. SF Pool Loss Distribution Narrows Over Time
Terminology 50
Source: Where Did the Risk Go? How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt Obligation Market
Disruptions, Joseph R. Mason, Associate Professor of Finance, Drexel University & Joshua Rosner, Managing Director, Graham Fisher & Co.

51. VaR (Value at Risk)
What is my worst case scenario (compare volatility)
Three components: a time period, a confidence level (relatively high)
and a loss amount (or loss percentage).
What is the most I can - with a 95% or 99% level of confidence - expect to lose
in dollars over the next month?
3 Methods
Historical Method – actual historical distribution
Variance-covariance Method – assumes normal distribution
VaR = Value * Z * σdaily * (horizon Period)1/2
Terminology 51 σ* 10 = .75% for 10 day period
1% VaR of $400m with
= $400m * .0075 * 2.326 = $22.07m
daily
Basel (rule based) : 8% of $400m = $32m
Monte Carlo Simulation – any method of randomly generated trials
Source :http://www.investopedia.com/articles/04/092904.asp

52. Market Risk Model
Daily 99% VaR estimates for a $1000 portfolio of IBM for May 1, 2008
Sample size 1 year 4 years 10 years
Estimation method
Historical simulation $22.8 $17.7 $29.9
Moving window $24.7 $18.8 $32.6
Exponentially moving average $21.3 $21.3 $21.3
Normal GARCH $25.5 $23.4 $24.0
Fat tail GARCH $27.6 $20.6 $22.9
No easy way to pick the best method.
Terminology we increase the number of assets.
The model risk increases as 52
Aggregation Method & its associated assumptions ?
Assets traded on different exchanges, time zones and opening hours,dates of holidays
, asset categories
Source: Blame the Models by Jon Daniielson , London School of Economics

53. CRA’s : SIV & Sub-prime
Modeling process is much more complicated and harder to verify,which increases
the risk of mistakes.
Aggregation problem
the short data sets mean that we can not obtain the default probabilities => need to model default
probabilities.
The rating agencies like Moody’s
use historical credit data and ignore the actual loan applications
Underestimated the importance of the business cycle and the presence of a speculative bubble in
housing markets.
default correlations and low rates of defaults of mortgages initially
mortgage defaults become highly correlated in downturns
Terminology 53 SIV’s often were not long enough to include a recession
Data samples used to rate
Didn’t include key data fields like debt-to-income,appraisal type,originating lender & rate,resets
Moody’s Fiasco
Source: Blame the Models by Jon Daniielson , London School of Economics

54. Unrealistic demands
A high quality modeling process is harmonization between probability levels,
sample sizes, and testing.
Can’t use same models in all situations (95%,99%)
Models which can’t be backtested ,
99.9% model (risk of loss in every 1000 years), fat tail VaR model
Exceptions are copulas etc. which are still at experimental level
Dependence on Basel II Accord (based on regulation by models) could be
problematic since model risk could go out of sync
Terminology 54
Source: Blame the Models by Jon Daniielson , London School of Economics

55. Use models but …
The financial institutions that are surviving this crisis best are those with
the best management, not those who relied on models to do the
management’s job.
The solution to a problem like the sub-prime crisis is not Basel II but to
understand the products ,interaction with institutions and risks involved
Taleb’s Thumb rules
Learn to love redundancy
Terminology 55 numbers
Beware presentations of risk
Absence of Volatility is not absence of risk ……
Source: Blame the Models by Jon Daniielson , London School of Economics

56. Faults in the model and aftermath…
Financial Turbulence
Sources of Market Failure
Regulatory Shortcomings
Reasons for forming of sub-
prime mess
Big Assumptions and
Terminology 56 misaligned incentives

57. Financial Turbulence
Crisis precipitated by failure of America’s financial
sector to
Manage Risk
Allocate Capital
Financial sector made Bad Loans & engaged in multi
billion dollar gamble through derivatives & Credit
Terminology 57
default Swaps.
Source: The Economist: Making Sense of Modern Economy

58. Sources of Market Failure
Poor Credit appraisal standards – Loans for NINJAS
New dimension to bank liquidity
Faulty Risk Management Tools & Models
Role of Credit Rating Agencies
– Understatement of Risk
Weak Public disclosures of Risk & Exposures
Terminology 58
Source: The Economist: Making Sense of Modern Economy

59. Regulatory Shortcomings
Lax regulations which did not keep pace with the
innovations happening in financial engineering
Limited regulation on investment Banking
Failure of regulators – overestimation of strength &
resilience of financial system
Terminology 59
Source: The Economist: Making Sense of Modern Economy

60. Leading to . . .
Inadequate capital
growth of unregulated exposures
excessive risk-taking
weak liquidity risk management.
For eg : Hedge funds leverage ratio of the order of 500%
Shortcomings associated with the valuation and financial
reporting of structured products
Terminology 60 derivatives trade on OTCEI
CDOs and credit
Source: The Economist: Making Sense of Modern Economy

61. Reasons for forming of Sub-prime mess
Giant pool of money available for investment through
savings of Oil exporters , economic development in BRIC
countries.
US kept interest rates too low for too long in post dotcom
bust period
Building up of the housing bubble
Terminology 61

62. Reasons for forming of Sub-prime mess
Private share in mortgage market growth in large part
through origination and securitization of high risk sub-prime
and Alt-A mortgages.
To sum up in 3 words as noted by Harvard dean:
Leverage(high), Transparency (low) and Liquidity
(abundant)
Terminology 62

63. Big assumptions & Misaligned incentives
Banks kept on lowering lending standards, since they
assumed they could sell the risk on.
A widespread assumption that the process of “slicing
and dicing” debt had made the financial system
more stable.
Terminology 63
Investors barely understood these complex products and
believed the credit rating agencies.
Source :http://www.ft.com/cms/s/0/a09f751e-6187-11dd-af94-000077b07658,dwp_uuid=698e638e-e39a-11dc-8799-0000779fd2ac.html

64. Big assumptions Cont..
“Churning” of capital “allows even an institution without a
great amount of fixed capital to make a huge amount of
loans, lending in a year much more money than it has
Securitization conduit divides various lending tasks into
Multiple corporate entities—a broker, an originator, a
servicer, a document custodian, etc.
Terminology 64
Prevents the accumulation of a large enough pool of at risk
assets.
Source :http://www.ft.com/cms/s/0/a09f751e-6187-11dd-af94-000077b07658,dwp_uuid=698e638e-e39a-11dc-8799-0000779fd2ac.html

65. Good days don’t last forever.
Financial innovations like ARM (adjustable rate mortgage) mechanism led to
complacency. By mid 2006, time to pay bigger amounts comes :--
Household income did not increase in same proportion as house prices
Subprime mortgage owners start defaulting
Rating agencies revise ratings of MBS/CDO as expected number of
defaults turn out higher. Many ratings are lowered
Terminology 65lost faith in ratings, many stop buying MBS/CDO
Bewildered investors
altogether.

66. Crisis at the door (mid 2006 onwards):
Banks find themselves in non-comfortable position , stop making loans
Housing prices plummet owing to increase in foreclosure, delinquency
and stoppage of loans – prices fall exponentially in vicious cycle
Perfectly good borrowers – Prime/A category – see the value of their
houses also fall. This feeling of loss of wealth makes them spend less,
putting the economy in to a further downturn due to lack of demand.
=> SUBPRIME CRISIS
Terminology 66

67. Oh ! what a mess….
More frenzy -> more defaults -> again revised ratings -> further
stoppage of funding & loans -> further fall in house prices as demand
and supply mismatch....problem feeding itself in circular fashion. =>
SUBPRIME CRISIS
Most of the player in the market, mortgage brokers, investment banks
were running in debts caught unaware and are in insolvency and start
tumbling down
Central government start pumping in money as last resort but one
Terminology returning soon and which is very vital in financial
thing is surely not
67
industry -FAITH.

68. CDS
CDS were used to profit from speculation.
The volume of CDS outstanding increased 100-fold from 1998 to
2008.CDS market stated to be $62 trillion.
Market is completely lacking in transparency and unregulated.
Reasons for expansion of CDS market
- Limited capital requirement for CDS
- No need for funds to take risk through CDS
Terminology 68 were active participants in CDS
Thus Hedge funds

69. CDS
Defaults increased the likelihood of “protection sellers” having to pay
counter parties.Thus Insurance Companies ratings downgraded.
“Counter party risk.” loomed large -party providing the insurance
protection does not have the money to pay the insured buyer when
default occurred.
CDS transactions also one of the reasons for the crisis spreading to
Terminology 69 main victim
the insurance sector, the being AIG.

70. In Short
When homeowners default, the
amount of cash flowing into
MBS declines and becomes
uncertain.
Investors and businesses
holding MBS have been
significantly affected.
The effect is magnified by the
high debt levels maintained by
Terminology 70 ie
individuals and corporations,
financial leverage.
Source :http://www.imf.org/external/pubs/ft/fandd/2007/12/dodd.htm ,

71. Crisis Toll
“The Most serious financial crisis
since the Great Depression of the
1930”
“Real estate prices collapsed, credit
Terminology 71 building stopped ...
dried up, house

72. The Genesis .. . US Mortgage Market
Home Prices were expected to rise forever . . . . .
Home ownership rate reaches an all time high of 65 %
Home mortgage debts as % of PDI rises to 75 %
Overall Household leverage rises over 100%
Weak link in chain : Subprime borrower
Terminologystarts in subprime market
Default 72
Sales fall
Existing home sales nationwide fell 29%

73. “Any real-estate investment
is a good investment … ”
… NOT any more!
Terminology 73
But Home Prices starts to fall..
Forty-six States Had Falling Prices in the
Fourth Quarter 2007

74. The Mess . . . .
Surge in Mortgage Loan Fraud leading to record Dollar losses
Rising Inventory on books
Forec
lo sure r
nc y is es
ue
linq All Leading too …
de
ec o rd
R Leading financial Institution &
Investment Bank going bankrupt
Terminology 74
Bear Stearns goes belly up … American International
Group (AIG) 85B. bailout
C
eize d by the FDI
I ndyMac is s

75. Spillover to the Rest of the World
2
Financial Food and
FIRE Shock
1
Energy Price
Shock
Federal Reserve Primary Reaction Function
Deterioration Decline in Increase in
Federal
in U.S. U.S. U.S. Headline
Reserve 5
Financial Economic Inflation
Cuts
Appreciation Conditions Activity
Its Policy
Rate of
Euro
ECB Deterioration Decline in Increase in
Raises in Euro-Area Euro-Area Euro-Area
Its Policy Financial Economic Headline
Terminology 75
Rate 4 Conditions Activity Inflation
3
ECB Primary Reaction Function
ICE

76. Financial Crises:- A Comparison …
Banking Losses in Constant US$ Terms (and as a
Percentage of GDP)
In 2007 U.S. Dollar Terms (US$ bn.)
1600
10% of GDP
1400
1200
1000
15% of GDP
800
600
35% of GDP
400 2.5% of GDP
200
Terminology 76
0
U.S. S&L Crisis
(1986-95)
Japan Banking Crisis
(1990-99)
Asia Banking Crisis
(1998-99)
US Subprime Crisis
(2007-08)
Banking Losses Other Financial Losses
Losses of over 1.4 trillion USD
Source: IMF Global Financial Stability Report, October 2008, Chapter 1, p. 16.

77. Impact on US Credit Market
Market for Liquidity Freezes
Supply of credit decreased dramatically
Lenders refusing to lend to other banks
Lenders buy only government bonds – the “flight to quality”
Firms, individuals holding money as cash, not loans – the
“liquidity trap”
Lenders are afraid of all loan types – subprime bonds, then student
Terminology 77
loans, then home equity loans, then commercial paper (business,
consumer loans), etc.

78. Impact on US Credit Market Cont..
Widening Spreads over 10 years treasury bonds:
Municipal Bonds rises to a historic high of over 100 basis pts.
Mortgage-Backed & High-yield Bonds rises to a historic high of
over 1000 basis pts.
Corporate Yield Spreads rises to over 500 basis pts.
Terminology 78
Money Market Spreads Blow up to over 360 basis points ( US
LIBOR / OIS) against a normal of 20 basis pts.

79. Impact on Markets …
U.S. Equity Market Falls Back to 2003 Levels
Unprecedented rise in Equity market volatility
Financial Stocks Take Big Hits in Subprime Crisis
Financial Conditions Index falls to historic low
Terminology 79 worldwide
Major losses for banks
Commodity Prices : CRB Index Falls to 2003 Levels

80. Impact on Foreign Exchange Market
Till end-July 2008, USD depreciated against major
currencies on account of :
Weaker equity markets
Slowing manufacturing productivity growth
Higher unemployment with downward non- farm payroll
employment, &
Low housing sales
Terminology 80
Lowering consumer confidence

81. Deleveraging Starts…..
Appreciation (+) / Depreciation (-) of USD vis-
From early-August 2008, USD’s à-vis other currencies
strength reflected
Liquidation of positions in the
overseas equity and bond
markets by US investors
Repatriation of the money back
to US due to slowing growth in
the Euro area
Terminology 81

82. Financial restructuring starts …
Wachovia, the 6th largest bank, taken over by Wells Fargo Bank
Top Investment Bank : Lehman Brothers, Bears Stearns & Merrill
Lynch cease to exist
Goldman Sachs & Morgan Stanley were converted into Bank
Holding Companies
15 Banks declared bankruptcy:- Washington Mutual filed for biggest
ever bankruptcy.
Terminology were made by Financial Institutions
Majors write down 82

83. Recapitalization of financial system
Economic Stabilization Act was passed on Oct 3,2008
Troubled Assets Relief program, to purchase troubled assets of
USD 700 Billion was passed.
Limit on Deposit insurance was increased from USD 100000 to USD
250,000 per account
Eligible collaterals and the eligible counterparties were expanded
Foreign Exchange Swaps were created with major central banks for
Terminology 83 ( Made unlimited on October 13 , 2008 )
infusing Dollar liquidity

84. Impact on World Markets: Equities
Financial stress sweeps through global markets….
• MSCI Emerging Market Index is down by over 66 % from their peak
• MSCI US and Euro Index are down by over 50 % from their peak
Terminology 84
Source: Bloomberg

85. Impact on World Markets : Government Bonds
Government bond yields
declines in major advanced
economies
•Worsening Growth Expectation
• Falling Inflation Outlook
Terminology 85

86. Impact on World Markets : Short Term Int. Rate
Short Term Interest showed
a mixed trend in major
advanced economies
reflecting
• Local Liquidity conditions
• Policy Rates
Terminology 86
3- Months money market rates

87. Macroeconomic risks continue to rise..
Continuous fall in Global Economic Activity
Considerable deteriotion from
April 2008 situation
•Credit deterioration broadens
• Market & Liquidity Risk
•Fall in Risk Appetite
•Tighter Monetary & Financial
Terminology 87
conditions

88. Risk of Systemic Default on the rise ..
Terminology 88

89. Impact of Financial Crisis on Europe . . .
Payment incident index (*) Scale of sector risk in Western Europe
12 months moving rate
300 WORLD Germany
France Italy
250
200
150
100
50
0
june 93
dec-93
june 94
dec-94
june 95
dec-95
june 96
dec-96
june 97
dec-97
june 98
dec-98
june 99
dec-99
june 00
dec-00
june 01
dec-01
june 02
dec-02
june 03
dec-03
june 04
dec-04
june 05
dec-05
june 06
dec-06
june-07
déc-07
Terminology 89
* Payment incident index 100: World 1995-2000 basis

90. Impact on Europe Cont..
United Kingdom, Spain, Ireland on negative watch
Payment incident index (*)
12 months moving rate
Economic growth Payment incident index
Economic growth
Payment incident index
7% 300
7% 300
6% 250 6% 250
5% 4,7%
200 5% 4,5% 4,4%
3,9% 200
4% 3,9% 3,9% 3,8%
3,2% 3,2% 3,0% 3,3% 4% 3,5%
3,1% 150 3,2%
2,7% 2,8% 3,0% 150
3% 2,8% 2,7%
2,3% 2,1% 3%
2,3%
1,9% 1,9% 100 100
2% 2%
1% Terminology 90 50 1% 50
0% 0 0% 0
2 0 0 7 (f)
2 0 0 8 (f)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2 0 0 7 (f)
2 0 0 8 (f)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Spain
United Kingdom
*Payment incident index 100: World 1995-2000 basis

91. US Economic Indicator : Snapshot !
GDP falls to less than 1% (YOY) in real terms
Expectation 2009 : -1.30 % (YOY)
Inflation : Less than ZERO % in 2008 = Worst in 17 years
Unemployment: Rises to over 7.0 %
Interest Rate: Falls to 0.250 %
Terminology 91 fall in economic activity
Unprecedented

92. Current Status of World Economy
World economy entering a major downturn
OECD countries in recession
Enormous financial sector dislocation
Unknown fiscal costs of bailouts
Severe real economy dislocations
Stagflation potential
Terminology countries growth rates ex China & India
Developing 92
reduced by half

93. Current Status of World Economy Cont..
Weakening global trade - world trade likely to decrease
in 2009 for the first time since the 1982 recession,
remittances dropping
Emerging markets witnessing international reserves
declining, volatile equity and foreign exchange markets
Volatile commodity prices pose risks for importers &
exporters
Global Inflation Risk Moderated but Volatile
Terminology 93
OECD Leading Economic Indicator Points to
a Significant Slowdown

94. Impact of Financial Crisis on Domestic Financial Markets
Economic Indicator: Snapshot
Impact on financial markets
Impact analysis on key sectors
Terminology 94

95. Economic Indicator : Snapshot !
GDP for 2008-09 8.0-8.5% (YOY)
Expectation 2009-10 : Less than 7 %
Index of Industrial production fell to less than 1 % in Aug.
Fiscal Deficit expected to touch over 5 % of GDP
Inflation : Over 8.5% in 2008-09
Terminology 95 G-Sec yield is at less than 5 %
Interest Rate: 10 years
Equities Market down by over 60 % from their peak

96. Inflation – Number 1 concern now
Inflation numbers : Rate in May/June 08 vs. (2007)
•Japan - 7.1% 27 year record high
•China - 7.7% (4.8%)
•India - 7.8% (4.4%)
•Malaysia - 7.7%, (2.0%)
Terminology 96
•Vietnam - 25.2% (8.3%)
•Singapore - 7.5% worst in 26 years

97. 2009 = slowdown + uneasy financing for companies
An expected slowdown of the World Economy, especially felt in
industrialized countries
Terminology 97
A more difficult access to financing for Companies because of tougher
credit conditions

98. Impact on Equity Markets
Global equities market more tightly linked
Fall in Asian equities markets even more severe than in the
U.S.
Equity markets decline (Q3-2008):
Japan - 34% China - 50%
India - 45% Singapore - 30%
Malaysia - 27%
Reasons
Withdrawal of foreign equity funds from Asia to cover losses
in U.S
Negative news about the health of financial institutions
China and India markets over-heated
Terminology 98
Extension of credit losses
High inflation
Fears over decline in corporate earnings

99. Impact on Financial Markets
In India, Short term Int. rate
rose initially and then fell
• Local Liquidity
conditions (Initial Rise)
•Policy Measures (Fell)
Terminology 99

100. Impact on Foreign Exchange Market
Till end-July 2008, USD depreciated
Appreciation (+) / Depreciation (-) of
against major currencies on account of : USD vis-à-vis other currencies
lowering consumer confidence
weaker equity markets
slowing manufacturing productivity
growth
higher unemployment with downward
non-farm payroll employment, and
low housing sales
From early-August 2008, USD’s
strength reflected
liquidation of positions in the overseas
Terminology 100
equity and bond markets by US
investors
repatriation of the money back to US
due to slowing growth in the Euro area

101. Impact of Financial Crisis on Japan
Japanese companies suffered from disappointing growth prospects
Payment incident index (*) Scale of sectoral risk
12 months moving rate
300
WORLD
250
Japan
200
150
100
50
0
june 93
dec-93
june 94
dec-94
june 95
dec-95
june 96
dec-96
june 97
dec-97
june 98
dec-98
june 99
dec-99
june 00
dec-00
june 01
dec-01
june 02
dec-02
june 03
dec-03
june 04
dec-04
june 05
dec-05
june 06
dec-06
june-07
déc-07
Terminology 101
*Payment incident index 100: World 1995-2000 basis

102. Impact of Financial Crisis on Developing Countries
Massive capital outflows, drastic drop off from previous record highs
(from $1 trillion to nearly $500b, from 7.6 to 3 percent of GDP)
Many hard hit developing countries already had:
– Fiscally precarious positions
– High levels of initial poverty and malnutrition
– Limited capacity to implement targeted policy response
Impact
– Affects wages and employment as inflation passes through
(inflation up 5% in most, >10% in more than half)
– Sharp drop in investment, which has been driver of growth
Terminology 102
– Falling remittances
– Long term cost of coping mechanisms, loss of fiscal cushions

103. Impact of Financial Crisis on Developing Countries
Financial flows are likely to drop precipitously ……
Net private capital flows to developing countries
$ billions $998 billion in 2007
1000
Possible
2008-09
800
600
East Asia Crisis
400
200
Terminology 103
0
20 P
P
20 e
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
20 6
0
07
08
09
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
Source: World Bank staff estimates

104. Impact of Financial Crisis on India
Liquidity conditions in Q2-2008 were eased on account of significant reduction in the
cash balances of Central Govt.
In Q3, liquidity conditions mostly remained in a deficit mode
Indian financial markets in Q3 witnessed heightened volatility reflecting uncertain
global situation
Interest rates in money market moved in accordance with evolving liquidity
conditions
Daily avg. call rate continued to remain above the repo rate reflecting the
impact of hikes in CRR and repo rate
Indian rupee depreciated against major currencies
In credit markets, lending rates of scheduled banks hardened
Yields in govt. securities Liquidity Adjustment Facility and the Call Rate
market decreased
Indian equity markets
Terminology 104
declined in tandem with
trends in major international
equity markets as well as
edging up of domestic
inflation

105. Impact of Financial Crisis on India
Foreign Exchange Market Credit Market
During FY2008-09, Indian rupee Scheduled commercial banks
generally depreciated (from Rs 39.89 increased their deposit rates for
to Rs 48.84 per USD ~ depreciated various maturities by 25-150 basis pts
by 18%) (8.25-9.5% in Jun’08 to 8.75-10.25% in
Due to FII outflows, bearish stock Sep’08)
market conditions, high inflation and Benchmark lending rates of PSBs
higher crude oil prices reflecting increased by 75-125 basis pts from
higher demand for USD 12.5-14% in Jun’08 to 13.75-14.75%
by Sep’08
Movement of Rupee vis-à-vis Major Currencies Deposit & Lending Rates-PSB
5.5%
Terminology 105
18%
3.6%

106. Impact of Financial Crisis on India
Govt. Securities Market Equity Market - Primary Market
Heightened inflationary expectations Witnessed slackness in resource mobilization
emanating from sharp increase in global during Q2-Q3
commodity and crude oil prices led to Cumulatively, resources raised through public
hardening of yield in Q1-Q2 issues declined sharply to Rs 12,361 crores
Since Q3, yields have eased due to CRR during Q2 from Rs 31,850 crores during
reduction to 250 basis pts and softening of corresponding Q2 of 2007
crude oil prices No. of issues declined from 60 to 32 (19 IPOs
from Pvt. sector cos. constituting 16% of total
resource mobilization)
Avg. size of Public issue declined to Rs 386 cr
Yields on Govt. Securities from Rs 531
Mobilization of Resources – Primary Market
Terminology 106

107. Impact of Financial Crisis on India
Stock Market
Four distinct Phase
- Phase I (Apr 1 & May 21’08) – Mkts staged recovery due to better results of Q4-2007
declared by IT majors, net purchases by FIIs in Indian equity mkt and some easing of
international crude oil prices
- Phase II (May 22 & July 16’08) – Mkt sentiment turned cautious on account of increase in
in’tl crude oil prices , hike in retail fuel oil prices, rise in domestic inflation rate, rising trade
deficit and depreciation of rupee, domestic political uncertainties, downward trend in in’tl
equity mkts, etc
- Phase III (Jul 17 & 7 Sep’08) – Mkt recovered on account of restoration of domestic
political stability and decline in crude oil prices
- Phase IV (7 Sep’08 onwards) – Mkt Indian Stock Market
turned volatile due to decline in
international stock mkts triggered by
bankruptcy/sell-out/restructuring of some I II III IV
Terminology 107
of world’s largest financial inst., heavy
net sales by FIIs, sharp fall in value of
rupee & slowdown in industrial growth
Sectoral indices also witnesses
downward trend
P/E ratios of 30 scrips in BSE Sensex
declined from 20.1 (end-Mar’08) to 16.2
(at end-Sep’08)

108. Impact on India – The Good, Bad and Ugly
Indian companies with big tickets deals in the international market are
seeing their profit margins shrinking
Trade finance is drying up and is dragging down exports
Terminology 108

109. Impact of Financial Crisis on India
Indian Financial Services
Indian Financial Services Most Impacted
The US sub-prime market crisis, which so far caused losses worth $181 billion to
the world’s top 45 banks by the end of FY08, has started hitting Indian banks also
India’s largest private sector bank ICICI Bank was the first bank to announce a
loss of about Rs. 1,056 crores owing to the sub prime crisis of US in the FY08
results
The public sector banks have had a limited position in the structured products and
therefore impact is expected to be minimal. However negative sentiments will hit
harder
Punjab national Bank, Bank of India, State Bank of India, Bank of Baroda were
major banks having an exposure to the instruments issued by Lehman and Merrill
Terminology 109
Lynch
However the banking sector in general will have to face tight liquidity conditions
apart from further mark-to-market losses. The net non performing assets of entire
banking sector is less than 2% and it is well capitalized. The capital adequacy
ratio is around 13% as against the statutory requirement of 8 to 9%.

110. Impact of Financial Crisis on India
Indian Financial Services Chakra-view…..Exposed??
Indian Financial Services Chakra-view…..Exposed??
Terminology 110

111. Impact of Financial Crisis on India
Real Estate
Real Estate Most Impacted
With the sudden collapse of world leading financial houses, the Indian real
estate players who were already facing the problem of lack of funds due to
economic slowdown & correction in prices are finding difficult in raising further
funds
Among the US Financial Houses --- Lehman Brothers was very bullish on Indian
Reality Sector and had an investment in excess of US$ 700 mn (maximum
amongst peers)
Lehman’s real estate investments at project levels (including the big ones like
DLF, Unitech & Future Capital) have been disbursed & it will not affect the
ongoing projects
Terminology remitainvestments made by US financial houses inflight of
RBI’s directive not to 111
without permission is also step in positive direction and would restrict
India
capital
However, stocks of companies in which sunked financial institutions have a
direct exposure (as FII investments especially Lehman) would see selling
pressure

112. Impact of Financial Crisis on India
Automobiles
Automobiles Mildly Impacted
Auto companies have been seeing sluggish sales for the past few months due to
higher interest rates and higher fuel prices
Two wheelers have shown decent sales growth in the last 2 months, more due to
the low base effect
It would get tougher for passenger and commercial vehicles and it might start
impacting two wheeler vehicle sales negatively
Exports of auto companies might take some hit, however, the impact on exports
might not have significant impact on the top-line of auto companies, as the
percentage sales contribution from exports is less for Indian auto companies; but
this might cause the auto companies to cut their export targets for the next two or
Terminology 112
three years
Sales Growth
Description Jul'08 Aug'08
Passenger Vehicles ‐1.40% ‐4.35%
Commercial Vehicles 2.00% ‐6.33%
Three‐wheelers 1.50% ‐3.19%
Two‐wheelers 19.50% 14.24%

113. Impact of Financial Crisis on India
Hospitality ,, Travel and Tourism
Hospitality Travel and Tourism Mildly Impacted
Slowdown in travel demand: Travel budgets of companies have fallen by
approx. 40% and a further fall of 10-15% is expected in the next 2 quarters
Hotels face difficulty in maintaining occupancies - falling from the current
75% to 68-70%
Growth in average rooms rates is expected to slowdown from 16-21% to 5-
9%
With increasing competition and room tariff wars, hotels facing pressure on
their profit margins
Terminology 113
Lack of investments in properties will limit the hotels from expansion plans
AIG bailout is likely to impact Indian Aviation as its subsidiary is among the
world’s largest aircraft leasers to Indian companies

114. Learning & change of the model
What has the crisis been about?
India’s long term growth story
remains intact
Strong long term growth prospects
Lessons from sub-prime crisis
Controlling the crisis
Terminology 114

115. What has the crisis been about
This crisis is about three things:
Too much liquidity.
Fundamental structural problems in the credit industry, including the almost-total
lack of regulation.
Lack of transparency of complex financial instruments for which there is no public
market, making them tough to value and nearly impossible to trade.
There is fair distance to travel
Banks have recognized only a fraction of the overall potential losses –
approximately $50 billion to $75 billion so far on sub-prime debt alone.Total
Terminology 115 (IMF estimate)
bailout cost is around $1 trillion
Source: Three Ways to Know When the Credit Crisis Hits Bottom, Keith Fitz-Gerald,Investment Director,Money Morning/The Money Map Report

116. India’s long term growth story remain
intact
India’s GDP growth is expected to continue as 85% comes from
domestic market
India a country of savers – low credit dependence
Strong base of trained manpower
Terminology 116

117. Strong long term growth prospects
Growing insurable population in 20-60 years bracket
Increasing disposable income
Terminology 117

118. Lessons from sub-prime crisis
Importance of observing prudent underwriting standards, verification of
documents, and an ongoing monitoring of the borrowers affairs
Liquidity Risk - Close link between market liquidity and an individual bank’s
funding liquidity
Importance of reliable valuations and transparency of risk exposures.
Inappropriately optimistic valuation and modeling methodologies
Technology does not obviate the need to assess a borrower carefully.
Insufficient recognition of residual risks in the structured products
Lack of transparency due to insufficient disclosure.
Terminology 118
Compensation systems rewarded very short-term employee performance.
Source: Financial Times , http://www.ft.com/cms/s/0/a09f751e-6187-11dd-af94-000077b07658,dwp_uuid=698e638e-e39a-11dc-8799-0000779fd2ac.html

119. Lessons from sub-prime crisis
Conflict of interest in the role of rating agencies
Rating agencies are paid for their rating exercise by the issuers of
securities and not by the investors in those securities.
Appropriate mechanisms should be evolved to ensure that the
information received by the rating agencies is reliable;
Closer attention to the liquidity risks faced by the rated entity / product
should be mandated for the rating agencies in their rating process;
Terminology 119
Road map for the rating agency reforms, should be evolved to address
the weaknesses revealed as also to promote competition in the rating
industry
Source: Financial Times , http://www.ft.com/cms/s/0/a09f751e-6187-11dd-af94-000077b07658,dwp_uuid=698e638e-e39a-11dc-8799-0000779fd2ac.html

120. Controlling the crisis- better warning
signals in future
Strengthened Prudential oversight of capital, liquidity risk management
Phased implementation of the Basel II norms
Minimum capital requirement prescribed at higher levels of 9% .
Banks exposure to sensitive sectors and their liquidity position monitored on a
regular basis
Broad guidelines for asset – liability management have been put in place and
banks develop risk management policies under broad guidelines
Terminology 120
Overnight unsecured market for funds has been restricted only to banks and
primary dealers
Source: Financial Times , http://www.ft.com/cms/s/0/a09f751e-6187-11dd-af94-000077b07658,dwp_uuid=698e638e-e39a-11dc-8799-0000779fd2ac.html

121. Controlling the crisis- better warning
signals in future
Enhancing transparency and valuation
Strengthened the valuation norms and market discipline in respect of
complex financial products including issuance of guidelines on valuation
of various instruments
Comprehensive guidelines on derivatives incorporating risk
management and corporate governance aspects, suitability and
appropriateness policy.
Terminology 121
Set of disclosure requirements developed to enable assessment on
capital adequacy, risk exposure, risk assessment processes and key
business parameters
Source: Financial Times , http://www.ft.com/cms/s/0/a09f751e-6187-11dd-af94-000077b07658,dwp_uuid=698e638e-e39a-11dc-8799-0000779fd2ac.html

122. Controlling the crisis- better warning
signals in future
Changes in the role and uses of credit ratings
Norms developed to ensure consistency in credit rating agencies by banks
disallowing banks to cherry pick the assessments provided by different credit
rating agencies
Strengthening the authorities responsiveness to risks:
A working group has been constituted to lay down a road map for adoption of a
suitable frame work for cross border supervision and supervisory cooperation
Robust arrangements for dealing with stress in the financial system
Terminology 122have been put in place for liquidity management
Institutional arrangements
facilities, and open market operations, and market stabilisation schemes
RBI has been empowered under existing legal framework to deal with the
resolution for the weak and failing banks
Source: Financial Times , http://www.ft.com/cms/s/0/a09f751e-618-11dd-af94-000077b07658,dwp_uuid=698e638e-e39a-11dc-8799-0000779fd2ac.html

123. Conclusion
Risk of sub-prime Housing loan transferred : commercial bank ->
investment bank -> investors through securitization
Mortgagor defaults created havoc in real estate and in turn financial markets
and leveraged financial institutions
Models were too fragile to value complex financial instruments since they
ignored vital variables like Black Swans , liquidity,leverage & correlated
risks etc.
Crisis is GLOBAL (geographically , sector-wise , market-wise etc.)
In India: Banks,financial Services,IT,real estate & infrastructure are worst
Terminology 123FMCG , Media & Entertainment least affected
affected whereas pharma ,
Strengthening capital & liquidity risk management, Enhancing transparency
and valuation , CRA’s overhaul & legal framework is important to avert
these kind of crises

124. References
1. Financial Crisis 2008 - Parshwadeep Lahane
2. Annual Policy Review, RBI monthly bulletin November
2009
3. Where Did the Risk Go? How Misapplied Bond Ratings
Cause Mortgage Backed Securities and Collateralized
Debt Obligation Market Disruptions, Mason & Rosner,
Drexel University
4. Three Ways to Know When the Credit Crisis Hits Bottom,
Keith Fitz-Gerald,Investment Director,Money Morning/The
Money Map Report
Terminology 124
5. The Black Swan, Nassim Nicholas Taleb
6. Fooled by Randomness, Nassim Nicholas Taleb
7. Global Financial Stability Report, Oct 2008
8. World Economic Outlook

125. Thanks
Questions
Terminology 125

126. Hyperlink Slides
Terminology 126

127. A Longer-Term Perspective on Home Prices
1890=100
220 220
Current
Boom
200 200
180 180
Great
Depression
160 160
World World 1970’s 1980’s
War I War II Boom Boom
140 140
120 120
100 100
Terminology 127
80 80
60 60
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source: Robert J. Shiller, 2006.

128. Homeownership Rate Reaches Historic High in 2004
Percent 69.2% in September 2004
70
69
68
67
66
67.8% in March 2008
65
64
Terminology 128
63
62
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2008
Source: U.S. Census Bureau.

129. Home Mortgage Share of Household Liabilities : New
High in 2007
Percent
75
70
65
60
Terminology 129
55
1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
Source: Federal Reserve.

130. Ratio of Median Home Price to Median Household Income Surges
Median Home Price/Median Household Income
5.0
4.5
4.0
3.5
Terminology 130
3.0
2.5
'68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06

131. Median Existing Single-family Home Price:
Too Good to Last
Percent change, year ago
20
15
10
5
0
-5
Terminology 131
-10
-15
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Sources: National Association of Realtors, Moody’s Economy.com.

132. History Repeats Itself: Home Prices Don’t Just Go Up
Change in Home Prices in 100 plus years
Percentage change, year ago
40%
World Great World 1970’s 1980’s Current
War I Depression War II Boom Boom Boom
30%
20%
10%
0%
Terminology 132
-10%
-20%
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source: Robert J. Shiller, 2006.

133. Existing Home Sales Are Down Everywhere Over the Past Two
Years
Percent change in existing home sales
Fourth-quarter 2005 through fourth-quarter 2007
Terminology 133
Existing home sales nationwide down 29%
Source: Freddie Mac.

134. Forty-six States Had Falling Prices in the Fourth Quarter 2007
United States: - 9.3% (fourth-quarter annualized growth)
Terminology 134
Source: Freddie Mac.

135. OECD Leading Economic Indicator Points to a
Significant Slowdown
2007-08
Financial Crisis
2001-02 Worldwide
Recession
Terminology 135

136. Impact of Financial Crisis on United States
Payment incident index (*) Scale of sector risk
12 months moving rate
300
WORLD
250
United States
200
150
100
50
0
Terminology 136
june 93
june 94
june 95
june 96
june 97
june 98
june 99
june 00
june 01
june 02
june 03
june 04
june 05
june 06
dec-93
dec-94
dec-95
dec-96
dec-97
dec-98
dec-99
dec-00
dec-01
dec-02
dec-03
dec-04
dec-05
dec-06
june-07
déc-07
*Payment incident index 100: World 1995-2000 basis

137. Inflation Expectations Are Trending Downward
TIPS/10-Year Implied Breakeven Inflation Rate
Terminology 137

138. Unemployment Expectation
7%-8%
2009
Forecasts
6.1 %
Oct. 2008
4.4 %
Oct. 2006
Terminology 138

139. Commodity Prices
CRB Commodity Price Index
Terminology 139

140. Baltic Dry Index
Terminology 140

141. Mortgage Loan Fraud Surges
Thousands
60
50
40
30
20
10
Terminology 141
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Financial Crimes Enforcement Network.

142. S & P 500 Index
Terminology 142

143. Equity Market Volatility
S&P 500 Volatility
Terminology 143

144. Bloomberg’s Financial Conditions Index
Terminology 144

145. Market for Liquidity Freezes
Thirty-Day AA Rated Commercial Paper Rates
Percent
6.5
Asset-backed
6.0 Commercial
5.5 Paper
5.0
4.5 Nonfinancial
Commercial
4.0
Paper
3.5
Financial
3.0 Commercial
Paper
2.5
Terminology 145
2.0
1.5
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
07 07 07 07 07 07 07 07 08 08 08 08 08
Source: Federal Reserve.

146. Widening Spreads: Municipal Bonds
Basis point spread over 10-year treasury bond
120
ML municipal master
index yield spread
80
40
0
Terminology 146
-40
-80
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08
Source: Bloomberg.

147. Widening Spreads :Mortgage-Backed & High-yield
Bonds
Basis point spread above 10-year treasury bond
1200
ML BBB Mortgage-Backed Securities Index
1000
800
ML High-Yield Bond Index
600
400
Terminology 147
200
0
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08
Source: Bloomberg.

148. Money Market Spreads : U.S. Libor/OIS Spread
U.S. Libor/OIS Spread
Terminology 148

149. Credit Spreads : Baa Corporate/ Treasury Spread
Terminology 149

150. The Dollar in 2007-08
Feb.-April 2008
From 1.45 to 1.60
May-July
2008.
Sept.-Nov. 2007 Pause
From 1.35 to 1.45
July.-Oct. 2008
Dec.Jan. From 1.60 to 1.36
Pause
Terminology 150
January-August 2007
From 1.30 to 1.35

151. Financial Stocks
Percentage change in price, December 2006–March 2008
-94% Bear Stearns
-87% Countrywide
-77% Washington M utual
-63% Freddie M ac
-56% M errill Lynch
-56% Fannie M ae
-53% Wachovia
-52% UBS
-52% Lehman Brothers
-40% AIG
-32% M organ Stanley
Terminology 151 -29% Bank of America
-18% Wells Fargo
-17% Goldman Sachs
-11% JP M organ & Chase
-1 -0.8 -0.6 -0.4 -0.2 0
Source: Bloomberg.

152. Major losses for banks worldwide
Losses/write-downs through May 27, 2008, US$ billions
Citigroup 42.9
UBS 38.2
Merrill Lynch 37.0
HSBC 19.5
IKB Deutsche 16.1
Royal Bank of Scotland 15.4
Bank of America 14.8
Morgan Stanley 12.6
JPMorgan Chase 9.8
Credit Suisse 9.7
Terminology 152
Washington Mutual 9.1
Credit Agricole 8.4
Deutsche Bank 7.7
Wachovia 7.0
Source: Bloomberg.

153. Dollar Losses in Reported Cases of Mortgage Fraud
US$ Millions
1,200
1,014
946
1,000
813
800
600
429
400
293
225
Terminology 153
200
0
2002 2003 2004 2005 2006 2007
Source: Federal Bureau of Investigation.

154. Market share shifted from 2003 to mid 2006
Mortgage market % share
100
• Government share fell by 43%
80
24 where as private share rose
60
57
sharply by 138% over a period of 3
years
%
40 76
20 43
0
2003 mid-2006
Year
Government sponsered Private( Wall Street firms)
• Subprime lending increased by
massive 205% over 3 years
Terminology 154 • Alternative–A similarly expanded
by 384%
• Increase in Prime was mere
16.7%
Between sub-prime and prime

155. Global pool of money
• After 1997/98 financial crisis – Developing countries focus on export-
driven growth and the associated accumulation of foreign exchange
reserves
• The strength of exports relative to domestic demand has seen saving
Terminology 155
outstrip investment in most of these economies
• Accordingly, we have the ironic situation whereby a range of developing
countries are (in net terms) the providers of capital to some of the world’s
most developed economies.
• This rapidly rising “savings glut” has been a principal source of increased
global liquidity.
Source:http://www.rbnz.govt.nz/speeches/2968727.html

156. Rise of Global Liquidity (1998 onwards)
• The flow of increased global liquidity through markets has provided the impetus for many changes
• To generate a return on this liquidity has spurred massive growth in securitization of debt and the
development of a vast array of derivatives. The propagation of these instruments can itself be seen as a
source of liquidity growth. From a monetary policy perspective, this implies a very big increase in the
liquidity that is not directly controlled by central banks.
•
•Bank for International Settlements, highlighted a number of important new features:
Terminology 156
• the unbundling and re-pricing of risk through major advances in financial engineering, resulting in
improved ability to lever lending via new markets such as for credit transfer products;
• the emergence of new financial players such as hedge funds and private equity firms that have not
been traditional intermediaries;
• more reliance of financial firms on markets to handle growing complexity;
• a reliance on market liquidity even in stress situations; and
• a surge in volume and value of transactions.
Source:http://www.rbnz.govt.nz/speeches/2968727.html

157. FED interest rate
• To catch up with dot com bust
FED kept interest rate low for too
long
•This indirectly resulted in
investors looking for other safe
heavens
• They got attracted to housing
market
Terminology 157

158. High Banks leverage ratio’s to fund MBS/CDO
Terminology 158

159. Building up of the housing bubble
Terminology 159

160. Housing prices and Income
• Housing
prices were
increasing
•Income slope
was almost flat
Terminology 160
Source: http://varbuzz.com/meltdown/

161. Starting 2006 housing bubble busted
Terminology 161

162. LIBOR rate
Terminology 162

163. Credit rating of complex financial instruments
Terminology 163
Source: IMF and WSJ

164. Speedy Foreclosures
Terminology 164

165. Top 10 Bankruptcies
Terminology 165

166. The American way of debt
Terminology 166
Source: http://www.nytimes.com/interactive/2008/07/20/business/20debt-trap.html?ei=5070

167. Average debt of American in 2004
Terminology 167
Source: http://www.nytimes.com/interactive/2008/07/20/business/20debt-trap.html?ei=5070

168. VaR
Terminology 168
With 95% confidence, we expect that our worst daily loss will not exceed 4%.
If we invest $100, we are 95% confident that our worst daily loss will not exceed $4 ($100 x -4%).
Source :http://www.investopedia.com/articles/04/092904.asp

169. Effect of correlation
n n n
σp = ∑ wi2σ i2 + ∑
i =1 i =1
∑w w σ σ
j =1
i j i r
j ij
A series of securities Which have different priorities in
Mortgages are originated… And pooled (tranches) are created Investors buy the repayment, and thus different
together into a backed by the pool of individual securities levels of risk and yields
trust mortgages…
Mortgage Higher
Propert $ for purchase or priority of Lower yield
y refi Buy security repayment
Mortgage P&I purchased
AAA
Security P&I
paid
Propert
y
AA
Propert
Mortgag
y
e pool
A
Propert
y BBB
BB
Terminology 169 y
Propert
B
Unrated
Lower priority
of repayment
Higher yield
AAA
AA Synthetics (e.g. ABX)
A
CDO
Pool BBB
Other RE BB
and non-RE
obligations B
Unrated
Source: Where Did the Risk Go by Mason & Rosner

170. Black Swans
Classical metaphor: A Turkey is fed for a
The fate of close to 1000 financial institutions (includes
1000 days—every days confirms to its
busts such as FNMA, Bear Stearns, Northern Rock,
statistical department that the human
Lehman Brothers, etc.). The banking system
race cares about its welfare "with
(betting AGAINST rare events) just lost > 1 Trillion
increased statistical significance". On
dollars (so far) on a single error, more than was
the 1001st day, the turkey has a
Terminology 170
surprise.
ever earned in the history of banking.
Turky Economics : we are in a new era of safety", and back-it up
with thorough and "rigorous" analysis and so package of sub-prime
loans (leveraged) gets sold on grounds that "30 years of history show
that the trade is safe
Source: The Black Swan, Nassim Nicholas Taleb

171. Fourth Quadrant
Terminology 171
passage from theory to the real world presents two distinct difficulties
• Inverse problem compounded by the small sample properties of rare events
• Many asymptotic properties do’nt work well pre-asymptotically
Source: The Black Swan, Nassim Nicholas Taleb

172. Volatility as an indicator of stability
Random Walk—Characterized by volatility. Random Jump process—It is not
You only find these in textbooks and in characterized by its volatility. Its exits
essays on probability by people who the 80-120 range much less often, but
have never really taken decisions under its extremes are far more severe.
uncertainty.
Terminology 172 hard-wired to demand an explanation for everything,
Fooled by Randomness: humans are
even when there is none, leading us to be fooled into thinking that something is not
random when it really is.
Sources: The Black Swan, Nassim Nicholas Taleb
Fooled by Randomness , Nassim Nicholas Taleb

173. Fooled by Randomness
An evil investment advisor sends letters to a thousand or so
prospective clients, telling half that a particular stock will go
up and the other half that it will go down. The second month,
repeat the same mailing to the half of the list where the
prediction happened to be correct. Keep repeating each month
and at the end of ten months he'll have a (short) list of people
who think he was correct for ten months in a row. Apply the
same math to the world's pool of actual investment advisors
and mutual fund managers and you'll find that the number of
people with 10 year successful track records is about what
you'd expect from pure chance!
Terminology 173
Source: Fooled by Randomness , Nassim Nicholas Taleb

174. Moody’s Fiasco
Moody’s discovered in February 2007 that the models used to
rate CDO’s had a mistake that provided ratings up to four
notches higher than they should have been.
Key problems in modeling of CDO’s
Incorrect assessments of correlations between the individual assets
An AAA CDO tranche does not have the same risk characteristics as an
AAA corporate. The average probabilities of defaults may have been
similar, but the tails of the distribution are much fatter for CDOs.
Credit spreads on high-grade corporate obligations tend to narrow in a crisis
Terminologyto 174 We see the opposite with CDOs.
because of flight quality.
Why would an AAA rated SIV earn 200 basis points above an AAA rated
corporate bond?
Source: Blame the Models by Jon Daniielson , London School of Economics

175. SF Pool Losses don’t recover
Cumulative Loss Level
Corporate Investments
% Loss on Asset Pool
Expected
Actual
Mortgage Pool
Terminology 175
Time: zero to maturity
Source: Where Did the Risk Go? How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt
Obligation Market Disruptions, Joseph R. Mason, Associate Professor of Finance, Drexel University & Joshua Rosner,
Managing Director, Graham Fisher & Co.

176. SF Pool losses are Distributionally
skewed
Terminology 176
Source: Where Did the Risk Go? How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt
Obligation Market Disruptions, Joseph R. Mason, Associate Professor of Finance, Drexel University & Joshua Rosner,
Managing Director, Graham Fisher & Co.

177. Moving,Increasing,Skewed SF Pool Loss
distribution narrows over time
Cumulative Corporate Investment Performance
Cumulative Mortgage Pool Performance
Cumulative Loss Level
Cumulative Loss Level
µ µ µ µ µ µ µ µ µ µ µ
µ µ µ µ
µ µ
µ
µ
µ
% Loss on Asset Pool
% Loss on Asset Pool
µ
Terminology 177
Time: zero to maturity Time: zero to maturity
Source: Where Did the Risk Go? How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt
Obligation Market Disruptions, Joseph R. Mason, Associate Professor of Finance, Drexel University & Joshua Rosner,
Managing Director, Graham Fisher & Co.

178. Investments devalued across the Globe
Terminology 178
Source: BBC News, http://news.bbc.co.uk/2/hi/talking_point/7644574.stm

179. Impact of Financial crisis-felt across the globe
Terminology 179
Source: Reuters, http://www.reuters.com/news/globalcoverage/creditcrisis

180. Mortgage Loan Fraud Surges
Thousands
60
50
40
30
20
10
Terminology 180
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Financial Crimes Enforcement Network.

181. The Dollar in 2007-08
Feb.-April 2008
From 1.45 to 1.60
May-July
2008.
Sept.-Nov. 2007 Pause
From 1.35 to 1.45
July.-Oct. 2008
Dec.Jan. From 1.60 to 1.36
Pause
Terminology 181
January-August 2007
From 1.30 to 1.35

182. U.S. and Euro-Area Credit Default Swaps During
the 2007-08 Financial Crisis
September 17, 2007 =100
Europe CDS
U.S. CDS
Terminology 182

183. U.S. and Euro-Area Swap Spreads During the
2007-08 Financial Crisis
September 17, 2007 =100
Europe Swap
Spreads
U.S. Swap
Terminology 183 Spreads