Grand Finale2003

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Grand Finale2003

  1. 1. SUBPRIME CRISIS
  2. 2. Road Map…… <ul><li>Introduction…………………………Raunak </li></ul><ul><li>Japan’s economic crisis …………. Janhavi </li></ul><ul><li>Subprime & Prime loan……………...Mihir </li></ul>
  3. 3. <ul><li>Causes of subprime crisis ………………..Vishal </li></ul><ul><li>Affected companies ……………………..Raunak & Suchit </li></ul><ul><li>Steps to overcome crisis ………………….Viral & </li></ul><ul><li>Kunal </li></ul><ul><li>Impact on world economy ………………..Pankaj </li></ul>
  4. 4. <ul><li>Impact on Indian economy…………….Apurva </li></ul><ul><li>Currency Valuation and its effect </li></ul><ul><li>on IT Sector……………………………….Kunti </li></ul><ul><li>Effect on commodities, concept </li></ul><ul><li>of marked to market & coupling </li></ul><ul><li>& decoupling …………………………….Alok </li></ul><ul><li>Forex Exchange Reserve….…………Ashish </li></ul>
  5. 5. <ul><li>Lessons learnt from Subprime Crisis…................................................Gaurav </li></ul><ul><li>Conclusion…………………………………Alok </li></ul>
  6. 7. Japan’s history holds lessons for the U.S <ul><li>Japan faced a similar economic crisis as the U.S in 1990 </li></ul><ul><li>Factors responsible for the economic crisis in Japan: </li></ul><ul><li>Deflating stock-market bubble </li></ul><ul><li>Deflating property bubble </li></ul><ul><li>Borrower’s failure in repayment of debts </li></ul><ul><li>Long period of lackluster economic growth </li></ul><ul><li>Refusal to own up to the problems </li></ul><ul><li>Financial sector is far large than it should be </li></ul>
  7. 8. <ul><li>Government’s role to overcome crisis in Japan: </li></ul><ul><li>It spent public funds to replenish the capital of debt-laden banks </li></ul><ul><li>Expanded definition of collateral to corporate bonds </li></ul><ul><li>Bought Japanese shares to free up cash at banks </li></ul><ul><li>After effects: </li></ul><ul><li>Bank of Japan lost its influence on markets </li></ul><ul><li>Foreign banks were reluctant to deposit money at bank of Japan </li></ul><ul><li>Money rate fell below bank of Japan’s target </li></ul>
  8. 9. <ul><li>Reasons why Japan was hesitant to deal with problems: </li></ul><ul><li>Quickly shrinking the financial sector could have a social cost </li></ul><ul><li>Putting tens of thousands of people out of work </li></ul><ul><li>Quick exit could seize up the credit market </li></ul>
  9. 11. PRIME LOAN <ul><li>A loan offered to borrowers with good credit history & good earning capacity.(Also called &quot;A&quot; loans) </li></ul><ul><li>Prime loans generally are priced lower and cost the borrower less </li></ul>
  10. 12. CRITERIA <ul><li>Credit Score </li></ul><ul><li>Debt to Income ratio </li></ul><ul><li>Earning Capacity </li></ul><ul><li>Down payment </li></ul>
  11. 13. SUBPRIME LOAN <ul><li>A Subprime loan is a loan made to customers who typically have low credit scores and histories of payment defaults. Also called B loan, near prime, non prime or second chance loan. </li></ul><ul><li>Subprime offers the opportunity for borrowers with less than ideal credit standing to gain access to funds. </li></ul>
  12. 14. CRITERIA <ul><li>Credit Score </li></ul><ul><li>Debt to Income ratio </li></ul><ul><li>Earning Capacity </li></ul><ul><li>Down payment </li></ul>
  13. 15. <ul><li>Why do Lenders Make Subprime Loans? </li></ul><ul><li>Benefits to the Subprime borrowers </li></ul><ul><li>Risk to this kind of lending and borrowing arrangement? </li></ul>
  14. 16. V/s
  15. 17. <ul><li>SUBPRIME LOAN </li></ul><ul><li>Higher risk of default </li></ul><ul><li>Higher interest rate </li></ul><ul><li>Lending to borrower of low or nil credit record </li></ul><ul><li>Consumer is “sold” the product </li></ul><ul><li>Lesser Down Payment </li></ul><ul><li>Earning capacity doesn’t </li></ul><ul><li>matter </li></ul><ul><li>PRIME LOAN </li></ul><ul><li>Lower risk of default </li></ul><ul><li>Lower interest rate </li></ul><ul><li>Lending to borrower of high credit record </li></ul><ul><li>Consumer is “buying” the product </li></ul><ul><li>Down Payment </li></ul><ul><li>Earning capacity Play a </li></ul><ul><li>role </li></ul>
  16. 18. CAUSES OF SUBPRIME CRISIS
  17. 19. Origin point of the crisis <ul><li>… marking the end of the largest speculative surge of real housing prices in the U.S. in the last 50 years … </li></ul>Notice the prolonged exponential growth!
  18. 20. REAL ESTATE BOOM <ul><li>Fixed rate mortgage loans were at the lowest level in last 40 years </li></ul><ul><li>Speculation </li></ul><ul><li>Mean reversion </li></ul><ul><li>Causes </li></ul><ul><li>Reasons for downturn </li></ul>
  19. 21. INVESTOR HOW SUBPRIME CRISIS SPREAD
  20. 22. Iraq war 2003 <ul><li>Washington started war in Iraq in 2003 </li></ul><ul><li>Channeled $500 billion of short-term borrowings, which was eight times more than expected </li></ul><ul><li>War would be too short and too cheap </li></ul><ul><li>No realistic time-table for war </li></ul>
  21. 23. <ul><li>U.S treasury chose to issue short-term T-bills, say every quarter, instead of long-term 10 year notes and 30 years bonds </li></ul>14 3 2003 2006 Federal fund rate 1.25 4.50 T-Bills (short –term) 1.04 4.85 T-bills (10 years avg.) 4.00 4.79
  22. 24. THE VICIOUS PATH SUBPRIME CRISIS
  23. 25. Delinquency Rate <ul><li>… and resulting in a surge of loan delinquencies in the residential mortgage loan market … </li></ul>
  24. 26. THE COMPANIES AFFECTED IN THIS TURMOIL
  25. 27. AMERICAN INTERNATIONAL GROUP (AIG)
  26. 28. HISTORY <ul><li>FOUNDED:1919 in Shanghai, China By Cornelus Vander Starr </li></ul><ul><li>Head Office: American International Building, New York City, New York </li></ul><ul><li>Business: Insurance & Financial services </li></ul><ul><li>Achievement: 18 th Largest Company Of The World </li></ul>
  27. 29. WHO BAILED THEM OUT?
  28. 30. WHO BAILED THEM OUT? <ul><li>US FEDERAL GOVERNMENT:SEPTEMBER 16 TH 2008 </li></ul><ul><li>DEAL WORTH:$85bn </li></ul><ul><li>POST ACQUISATION MARKETS IMPROVED </li></ul><ul><li>JP AND GS BACKED OUT </li></ul>
  29. 31. FEDRAL NATIONAL MORTGAGE ASSOCIATION
  30. 32. HISTORY <ul><li>FOUNDED: 1938 </li></ul><ul><li>Founder: BY Franklin Delano </li></ul><ul><li>LOCATION: Washington DC, U.S </li></ul><ul><li>BUSINESS OPERATION: Housing Loan Mortgage </li></ul>
  31. 33. FEDERAL HOME LOAN MORTGAGE CORP.
  32. 34. HISTORY <ul><li>FOUNDED: In 1970 </li></ul><ul><li>LOCATION: Melean Virginia, U.S </li></ul><ul><li>BUSINESS OPERATION: Mortgage, loans </li></ul>
  33. 35. WHO TOOK THEM OVER?
  34. 36. WHO TOOK OVER THE CONTROL? <ul><li>US FEDERAL GOVERNMENT: SEPTEMBER 8 TH 2008 </li></ul><ul><li>APPOR. MARKET SHARE:$5tn </li></ul>
  35. 37. BEAR STEARNS
  36. 38. HISTORY <ul><li>FOUNDERS:JOSEPH AND ROBERT </li></ul><ul><li>LOCATION </li></ul><ul><li>BUSINESS AREAS </li></ul><ul><li>PRESENCE ACROSS THE GLOBE </li></ul>
  37. 39. WHO BAILED THEM OUT?
  38. 40. WHO BAILED THEM OUT? <ul><li>J.P.MORGAN:MAY 30 TH 2008 </li></ul><ul><li>DEAL WORTH:$2.2bn </li></ul>
  39. 41. COUNTRYWIDE FINANACIAL
  40. 42. HISTORY <ul><li>FOUNDERS:DAVID LEB </li></ul><ul><li>LOCATION:CALABASAS, CA, US </li></ul><ul><li>BUSINESS AREAS </li></ul><ul><li>RETURN ON INVESTMENT </li></ul>
  41. 43. WHO BAILED THEM OUT?
  42. 44. WHO BAILED THEM OUT? <ul><li>BANK OF AMERICA: JULY 1 ST 2008 </li></ul><ul><li>DEAL WORTH:$4bn </li></ul>
  43. 45. MERRIL LYNCH
  44. 46. HISTORY <ul><li>FOUNDERS:CHARLES AND EDMUND </li></ul><ul><li>LOCATION </li></ul><ul><li>BUSINESS AREAS </li></ul>
  45. 47. WHO BAILED THEM OUT?
  46. 48. WHO BAILED THEM OUT? <ul><li>BANK OF AMERICA:SEPTEMBER 14 TH 2008 </li></ul><ul><li>DEAL WORTH:$50bn </li></ul><ul><li>GOT THE MARKET SHARE AROUND THE GLOBE </li></ul>
  47. 49. LEHMAN BROTHERS
  48. 50. HISTORY <ul><li>FOUNDERS:HENRY, EMANUEL AND MAYER </li></ul><ul><li>LOCATION </li></ul><ul><li>BUSINESS AREAS </li></ul>
  49. 51. BANKRUPTCY <ul><li>LEHMAN HOLDINGS FILED ON SEPTEMBER 15 TH 2008 </li></ul><ul><li>BANKRUPTCY WORTH:$616bn </li></ul><ul><li>HAPPENEND AFTER 18 YEARS </li></ul><ul><li>S&P DROPED BY 59 POINTS OR 4.71% </li></ul><ul><li>DOW JOINES DROPED BY 504.48 POINTS OR 4.42% </li></ul><ul><li>NASDAQ DROPED BY 81.3 POINTS OR 3.6% </li></ul><ul><li>LOST HALF ITS MARKET VALUE IN 2 DAYS </li></ul>
  50. 52. CONTD….. <ul><li>BARCLAYS ACQUIRED NORTH AMERICAN REGION:SEPTEMBER 17 TH 2008 </li></ul><ul><li>DEAL WORTH:1.75bn </li></ul>
  51. 53. OTHER BANKS <ul><li>CITIBANK WRITES OFF $50bn </li></ul><ul><li>GS PROFIT REDUCES TO 70% </li></ul><ul><li>MS DIVEST 20% STAKE FOR $8.4bn </li></ul><ul><li>NOMURA BUYS LB ASIAN OPEATION </li></ul>
  52. 54. TOTAL GROSS LOSS <ul><li>US MAKES TOTAL LOSS OF $1.8tn </li></ul><ul><li>LOSS IN TERMS OF GDP </li></ul>US JPN GER UK FRN ITA IND 13 41 54 65 70 86 180
  53. 55. BIGGER THE SIZE, GREATER THE LOSS Net income in mn $ Apr-jun 08 Q2 2008 2007 2006 2005 2004 Freddie -821 -151 -3094 2327 2113 2937 Fannie -2300 -2186 -2050 4059 6347 4967 AIG -5357 -7805 6200 14048 10477 9839 LB -3927 -2774 4192 4007 3260 2393 ML -4654 -1962 -7777 7499 5116 4436
  54. 56. THE STEPS TAKEN TO OVERCOME CRISIS
  55. 57. TUESDAY 16 TH OF SEPTEMBER
  56. 58. <ul><li>US Federal Reserve pumping $50bn </li></ul><ul><li>£20bn from the Bank of England </li></ul><ul><li>70bn Euros ($100bn; £56bn) from the European Central Bank. </li></ul>
  57. 59. THURSDAY 18 SEPTEMBER
  58. 60. <ul><li>UK as Lloyds TSB revealed details of its £12bn takeover of Halifax Bank of Scotland </li></ul><ul><li>US Federal Reserve also announced it was releasing $180bn </li></ul>
  59. 61. FRIDAY 19 SEPTEMBER
  60. 62. <ul><li>By close of markets on Thursday, billions of dollars had been wiped off stock markets worldwide. </li></ul><ul><li>US government plan to buy billions of dollars of US banks' bad mortgage-related loans. </li></ul>
  61. 63. Bank of Japan (BoJ) <ul><li>Kept interest rates unchanged at 0.5% </li></ul><ul><li>Injected more than 5 trillion yen ($47 billion) into money markets in the wake of Lehman Brothers Holdings Inc.'s collapse </li></ul>
  62. 64. European Central Bank (ECB) <ul><li>European Central Bank added 30 billion euros ($42.5 billion) in a one-day money-market auction on Sept 15 </li></ul>
  63. 65. US FEDERAL RESERVE <ul><li>Agreed to an $85bn loan to AIG at an interest rate of 3-month LIBOR plus 8.5%. The government will get a 79.9% equity interest in the company. </li></ul><ul><li>Fed injected $70bn of temporary reserves, the most since the Sept’01 terrorist attacks as the overnight dollar rate soared from 3.33% to 6.44% </li></ul>
  64. 66. BANK OF AMERICA <ul><li>Bailed out Countrywide Financial and Merrill Lynch </li></ul><ul><li>BOA got market share of 20-25% of Home Loan </li></ul><ul><li>Why Kenneth Lewis went for the deal? </li></ul><ul><li>Deal occurred at 2/3 rd of its market price a year ago </li></ul>
  65. 67. JP MORGAN <ul><li>Bailed out Bear Stearns </li></ul><ul><li>Renamed as JP Morgan Equity </li></ul><ul><li>Gave pink slips to 14000 employees </li></ul><ul><li>Two hedge fund managers of Bear Stearns charged </li></ul>
  66. 68. Restrict short selling <ul><li>Short-selling occurs when a trader borrows shares from another to sell them with the hope of buying them back at a lower price, thereby profiting from the difference. It has been blamed for the recent sharp falls in some banking shares. </li></ul>
  67. 69. IMPACT ON WORLD ECONOMY
  68. 70. Impact of Sub-prime Crisis on various factors of World Economy: <ul><li>Interest sensitive sectors </li></ul><ul><li>Stock Market </li></ul><ul><li>Inflation </li></ul><ul><li>GDP </li></ul><ul><li>Unemployment </li></ul><ul><li>Mergers & acquisitions </li></ul>
  69. 71. Japan’s GDP March June Sept Dec 2008 1.20 0.70 - - 2007 3.20 1.80 1.70 1.60 2006 3.00 2.30 2.00 2.40
  70. 72. China Inflation Rate M Yr Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 08 7.10 8.70 8.30 8.50 7.70 7.10 6.30 4.90 - - - - 07 2.20 2.70 3.30 3.00 3.40 4.40 5.60 6.50 6.20 6.50 6.90 6.50 06 1.90 1.90 0.80 1.20 1.40 1.50 1.00 1.30 1.50 1.40 2.90 1.80
  71. 73. US Unemployment Rate Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 08 4.90 4.80 5.10 5.00 5.50 5.50 5.70 6.10 - - - - 07 4.60 4.50 4.40 4.50 4.50 4.60 4.70 4.70 4.70 4.80 4.70 5.00 06 4.70 4.70 4.70 4.70 4.70 4.60 4.70 4.70 4.50 4.40 4.50 4.40
  72. 74. Impact on Stock Market <ul><li>Average 30% decline in the share index of the country`s </li></ul><ul><li>Low confidence in the investors </li></ul>
  73. 75. London Stock Exchange(UK) FTSE 100 Index
  74. 76. Impact on Banking Sector <ul><li>Some of the major impacts include – </li></ul><ul><li>Investment Bank transformed to the commercial Bank </li></ul><ul><li>Liquidity concern </li></ul>
  75. 77. INDIA INC./ INDIA SINK??
  76. 78. How India was saved from the Crisis? <ul><li>RBI </li></ul><ul><li>ARCIL </li></ul><ul><li>Black Money </li></ul>
  77. 79. How will it affect India? <ul><li>Liquidity Crunch </li></ul><ul><ul><li>IPO </li></ul></ul><ul><ul><li>Project financing </li></ul></ul><ul><ul><li>FII Outflows </li></ul></ul><ul><li>Possible measures </li></ul><ul><ul><li>ECB </li></ul></ul><ul><ul><li>SLR </li></ul></ul><ul><ul><li>Interest Rates </li></ul></ul>
  78. 81. SECTORS AFFECTED
  79. 82. Real Estate & Infrastructure <ul><li>High Interest Rates </li></ul><ul><li>Drying up of funds </li></ul><ul><li>Unitech </li></ul>
  80. 83. <ul><li>Slowdown in Real Estate </li></ul><ul><li>Capacity Utilisation down by 8% to 86%. </li></ul><ul><li>Companies Affected : ACC, Guj Ambuja, Grasim. </li></ul>
  81. 84. Banking and insurance <ul><li>MTM Losses </li></ul><ul><li>Decreased Liquidity </li></ul><ul><li>ICICI </li></ul><ul><li>Opportunity for Investment Banking </li></ul>
  82. 85. Brokerages <ul><li>Low Volumes </li></ul>
  83. 86. Auto <ul><li>Interest Rate Sensitive </li></ul><ul><li>Increasing Input Costs </li></ul>
  84. 87. Travel &Tourism <ul><li>Airlines </li></ul><ul><li>Hotels </li></ul>
  85. 88. Other Sectors <ul><li>Metals </li></ul><ul><li>Diamond Industry </li></ul><ul><li>Information Technology </li></ul>
  86. 89. TATA- AIG TATA 76% AIG 24%
  87. 90. Lehman India <ul><li>Worli & Powai </li></ul><ul><li>2200 Employees </li></ul><ul><li>Interested Parties </li></ul>
  88. 91. Where to Invest?? <ul><li>Fixed Maturity Plans, FD </li></ul><ul><li>Gold </li></ul><ul><li>Art </li></ul>
  89. 92. CURRENCY VALUATION (DOLLAR VS RUPEE)
  90. 93. THE FALL OF RUPEE IN FY08
  91. 94. <ul><li>STEPS IN TO SUPPORT RUPEE </li></ul><ul><li>SUPPLIES CASH IN MONEY MARKET </li></ul><ul><li>TEMPORARILY ALLOWED BANKS TO BORROW FROM IT EVEN IF THEY DON’T HAVE IDLE GOVERNMENT SECURITIES </li></ul>RBI-TO THE RESCUE
  92. 95. <ul><li>BANKING,FINANCIAL SERVICES,INSURANCE AND TELECOM SECTORS MAKE UP MOST OF I.T. FIRMS’ REVENUE </li></ul><ul><li>“ IT SECTOR IS BULLETPROOF” </li></ul><ul><li>WELL PREPARED TO TIDE OVER WALL STREET CRISIS </li></ul><ul><li>TOP I.T FIRMS HAVE DEEPENED THEIR SALES CHANNEL S IN EUROPE </li></ul>EFFECT ON IT INDUSTRY
  93. 96. <ul><li>DESPITE DEPENDENCE ON BFSI REVENUE GROWTH IN 20-27% RANGE </li></ul><ul><li>EXPORTS GREW 25.7% IN FY08. </li></ul>
  94. 97. IMPACT ON COMMODITIES MARKED TO MARKET COUPLING & DECOUPLING
  95. 98. IMPACT ON COMMODITIES <ul><li>Agricultural commodities </li></ul><ul><li>Crude oil </li></ul><ul><li>Gold </li></ul><ul><li>Base metals : copper, zinc, lead & nickel </li></ul>
  96. 99. Marked to Market <ul><li>Definition </li></ul><ul><li>- act of assigning a value to a position held in a financial instrument based on current market price. </li></ul><ul><li>Concept of hedging </li></ul><ul><li>- An investment that is taken out specifically to reduce or cancel out the risk in other investment. </li></ul>
  97. 100. Coupling & Decoupling <ul><li>Concept. </li></ul><ul><li>Emerging markets. </li></ul><ul><li>- Export oriented. </li></ul><ul><li>- Domestic Consumption Market. </li></ul>
  98. 101. FOREX RESERVES
  99. 102. FOREX RESERVES <ul><li>INTRODUCTION </li></ul><ul><li>PURPOSE </li></ul>
  100. 103. CONTRIBUTERS <ul><li>FOREIGN CAPITAL </li></ul><ul><ul><li>FII’S </li></ul></ul><ul><ul><li>FDI’S </li></ul></ul><ul><li>ECB(External Commercial Borrowing) </li></ul><ul><li>BANKING CAPITAL </li></ul>
  101. 104. EFFECT OF SUBPRIME CRISIS ON FOREX RESERVE <ul><li>FII SALES </li></ul><ul><li>RESERVES DIPPING </li></ul><ul><li>RE UNDER HEAVY PRESSURE </li></ul>
  102. 105. EFFECT ON FOREX RESERVE IN $ Bn
  103. 106. LESSONS LEARNT FROM SUBPRIME CRISIS
  104. 107. LESSONS LEARNT <ul><li>Americans got a lesson in low finance </li></ul><ul><li>What’s there in wall street firms? </li></ul><ul><li>We are getting financial leaders of future </li></ul><ul><li>We have lots of new houses. </li></ul>
  105. 108. <ul><li>Experience can help future generation </li></ul><ul><li>Avoided losses by predicting future </li></ul><ul><li>Lesson’s learned: </li></ul><ul><li>Narrow focus on whole picture </li></ul><ul><li>Need to upgrade regulatory skills. </li></ul>
  106. 109. CONCLUSION
  107. 110. THANK YOU

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