SUB-PRIME CRISIS

SUB PRIME MORTGAGE

Typically, those who qualify for the most ideal mortgages

with the best interest rates are those with good credit scores and minimal debt. A subprime mortgage is a type of loan granted to individuals with poor credit histories (typically below 600), who would not be able to qualify for conventional mortgages. Subprime mortgages charge interest rates that are above the typical interest rate because of the risk that is involved on the part of the lender.

HOW SUB PRIME CRISIS SPREAD?

FINANCIAL INSTITUTION RMBS CDO LOWEST RISK / HIGHEST RATING ( SENIOR ) MEDIUM RISK ( MEZZANINE ) HIGHEST RISK / ( EQUITY )
INVESTORS SUB-PRIME BORROWER BUYING HOME BANKS HEDGE FUNDS LOAN INSURANC E COS. PENSION FUNDS

SECURITISATION

PROCEEDS

SALE of LOAN

SUB-PRIME LENDER

Comparison between Traditional & Sub prime model.

 Lenders : The Biggest Culprits

Investment Banks Homeowners

Government and regulators

Investor Behavior Hedge Funds

Lenders : The Biggest Culprits

Investment Banks

GLOBAL MARKETS

16TH JULY(BEFORE)

17TH AUGUST(AFTER)

CHANGE

% FALL

DOW JONES NASDAQ BSE SENSEX HANG SENG KOSPI COMPOSITE NIKKIE 225 WEIGHTED INDEX SHANGHAI INDEX FTSE 100 DAX() CAC 40 () IBOVESPA()

13950.98 2697.34 15311.22 22953.94 1949.51 18217.27 9417.32 3896.19 6697.7 8105.69 6125.6 57374

13079.08 2505.03 14141.52 20387.13 1191.55 15273.68 8090.29 4656.57 6064.2 7387.29 5363.63 48558.76

-871.9 -192.31 -1169.7 -2566.81 -757.96 -2943.59 -1327.03 760.38 -633.5 -718.4 -761.97 -8815.24

6.249 7.129 7.639 11.182 38.879 16.158 14.091 19.515 9.458 8.862 12.439 15.364

 Liquidity crunch in the Economy Correction of Prices Rupee Appreciation & Slump in Economic activity

 Staff cuts Losses to Banks Short-term impact on the stock markets

 Sound banking practices Controlled derivatives market One of the wrong lessons that could be learnt from the sub-prime episode is about securitization.

 Limited investment by Indian companies abroad.

Quality inward investment. Reputation risk is as real as credit risk.

Financial institutions cant afford to be shortsighted Failure to anticipate impact