SUBPRIME CRISIS

Presented by : – Amit
“When the music stops in terms of liquidity things
will be complicated. But as long as the music is
playing , you’ve got to get up and dance. We’re
still dancing”
Chuck Prince Citigroup, July 9th 2007

“This was obviously a very disappointing quarter

for us”
Chuck Prince Citigroup, October 1st 2007

4 November 2007 - Chuck Prince resigns

ABCP Market
DROUGHT
US asset-backed commercial paper outstanding - $ Trillions

1.30 33
SON – “Dad give me 50 pence”
DAD - “Sorry I m staying out of
the sub prime lending market”
Subprime Loan
A type of loan that is
offered at a rate above prime
to individuals who do not
qualify for prime rate loans

Quite often, subprime borrowers are often turned

away from traditional lenders because of their low credit
ratings or other factors that suggest that they have a
reasonable chance of defaulting on the debt repayment.
 SUB PRIME CRISIS

A subprime mortgage is granted

to borrowers whose credit history is
not sufficient to get a conventional
mortgage. Often these borrowers have
impaired or even no credit history.
These can also include interest-only
loans.
Root of money
crisis
IT was happened with the
war of Iraq in 2003
The total war expenses
was estimated to be $60
billion but they had made
huge expenditure and it
reached up to $500 billion
Due to huge expenditure
there was money crisis so
to control this the
Impact of making credit
easy
Increase in
mortgage Why?
Boom and bust in
Housing market
ü Low interest rates
due to gov’t policies.
ü Rise in the housing
price.
High risk mortgage
 Triggering Causes

US undergone a cycle of Interest rate

reduction interest rates 17 times in a
row to slow inflation interest rate
borrowing Cost Defaults on
Subprime mortgages
 Leading
Causes
xcessive lending of high-risks loans

Subprime Mortgages
It is the practice of
making loans to borrowers who
do not qualify for market
interest rates owing to
various risk factors, e.g. income
level, size of the down payment,
credit history and employment
status
Leading
Causes
Securitizati
on
Securitization
A process of
standardizing contractual terms
which allows a loan to be
packaged with other contracts
and sold as a diversified bundle
to passive investors
Securitization

Put it simply:-
Cash flows from the bundle
are carved
up or “trenched” into different
securities differing in liquidity,
maturity, contingency, and risk, each
of which appeals to a particular
clientele
 Leading Causes(3):
Inaccurate Credit ratings
Credit Rating Agency (CRA)
A company that assigns
credit ratings
for issuers of certain types of debt
obligations as well as the debt
instruments themselves E.g. Moody’s,
Standard & Poors Problem: Conflicts
of interest
Timeline of subprime losses

June 2007
Bear Stearns spent $3.2bn
(£1.5bn) bailing out two of its
funds exposed to the sub-prime
market

August 2007
American Home Mortgage,
one of the largest US
 Timeline of Losses

March 2008
Bear Stearns was
acquired by JP Morgan Chase for
$1.2b

September 2008
Fannie Mae and
Freddie Mac placed into
conservatorship Lehman
 Bailouts in US

The Emergency Economic

Stabilization
Act of 2008
A law authorizing the United
States Treasury Secretary to spend up to
US$700 billion to purchase distressed
assets, especially mortgage-backed
securities either in auction
 What makes it worse

An adjustable rate mortgage

(ARM) is a mortgage loan where the
interest rate on the note is periodically
adjusted based on a variety of indices
Mortgage-backed securities
(MBS)
Which derive their value from
mortgage payments and housing
prices.
Had enabled financial institutions and
investors around the world to invest in
the U.S. housing market.
Major banks and financial institutions
had borrowed and invested heavily in
MBS and reported losses of
approximately US$435 billion as of 17
 There are four primary
types of risks..
Credit risk - the risk that the
homeowner or borrower will be unable
or unwilling to pay back the loan;
Asset price risk - the risk that assets
will depreciate in value, resulting in
financial losses.
Liquidity risk - the risk that a business
entity will be unable to obtain
financing.
Counterparty risk - the risk that a party
TRAGEDY
FOR
ENTIRE
WORLD
.

Financial Institution

Click to edit Master text styles Financial markets across the

world lost a whopping $50
Second level trillion, including $9.6 trillion in
● Third level
the developing Asian market,
● Fourth level says a report by the Asian
● Fifth level Development Bank (ADB). 

$9.6 trillion wiped off from Asian

countries, excluding Japan
 A revenue deficit
does not mean
actual loss of
revenue. Let's take
an hypothetical
example, if a
country expects a
revenue receipt of
Rs 100 and
expenditure worth
Rs 75, it can result in
net revenue of Rs
25. But the actual
revenue of Rs 90 is
realised and an
 How is the rest of the
world affected
Click to edit Master text styles
Second level
● Third level

● Fourth level

● Fifth level

Apart from the fact that banks based in other parts of the
world also suffered losses from the subprime market, there are
two major ways in which the effect is felt across the globe.
First, the US is the biggest borrower in the world since most
countries hold their foreign exchange reserves in dollars and
invest them in US securities.
 What has
Click to edit Master text styles
been the
impact
Second level
● Third level
of the crisis?
● Fourth level
● Fifth level The crisis has also seen
Lehman Brothers - the
fourth largest investment
bank in the US - file for
bankruptcy. Merrill Lynch
has been bought out by
Bank of America.
 Loss
Country Company   Business Type  
(Billion USD)  
Swiss  UBS AG bank $37.7 bln
US  Citigroup bank $39.1 bln
investment
US  Merrill Lynch $29.1 bln
bank
 Morgan investment
US $11.5 bln
Stanley bank
France  Crédit Agricole bank $4.8 bln
UK  HSBC bank $20.4 bln
 Bank of
US bank $7.95 bln
America
Canada  CIBC bank $3.2 bln
Germany  Deutsche Bank bank $7.7 bln

 Mizuho
Japan bank $5.5 bln
Financial Group
 Loss
Country Company   Business Type  
(Billion USD)  
investment
UK  Barclays Capital $3.1 bln
bank
investment
US  Bear Stearns $2.6 bln
bank
 Royal Bank of
UK bank $15.2 bln
Scotland
 Washington savings and
US $2.4 bln
Mutual loan
Swiss  Swiss Re re-insurance $2.04 bln
investment
US  Lehman Brothers $3.93 bln
bank
Germany  LBBW Bank $1.1 bln
US  JP Morgan Chase Bank $5.5 bln
investment
US  Goldman Sachs $1.5 bln
bank
US  Freddie Mac mortgage GSE $4.3 bln
INDIA  ICICI Bank bank $0.264 bln
 How did this turn into a
Click tocrisis?
edit Master text styles
Second level
● Third level

● Fourth level

● Fifth level

The housing boom in the US started petering out in 2007. One major
reason was that the boom had led to a massive increase in the supply of
housing. Thus house prices started falling. This increased the default rate
among subprime borrowers, many of whom were no longer able or willing
to pay through their nose to buy a house that was declining in value.
THANK YOU