SUBPRIME CRISIS
Ayan Ray – 03
Presented to :- Mr S.K Vaze
Mansi Bajpai – 04
Binu Joseph – 06
Divya Boddu – 07
Nailesh Jacob – 12
Jagdish Meena – 14
Rahul Kumar - 52
 What is sub-prime?
§ When banks lend money to people, they broadly
classify them into prime and sub-prime debtors -
the former are people who are considered
creditworthy and the latter, less so .

§ Banks normally do not lend to subprime debtors

but as regulations were lax they started lending at
high rates of interest .
But, Do Sub-Prime Borrowers pay
a risk premium ?

Yes ! They Do.

But in some cases loans were even sanctioned to the

NINJA ( NO income + NO job+ NO assets) borrowers
as well .
So how does one define
the Sub-Prime crisis ?
• It actually refers to a credit problem among sub-
prime borrowers in the US residential market and
they account for around 8 % of the total mortgage
loans.
• Like borrowers anywhere in the world, the interest
paid on residential mortgages in the US is linked to
the central bank's benchmark (in this case- the US
Federal Reserve's Fed Funds Rates)
When Fed Rates increase, lenders
default . But shouldn’t only Banks
be affected ????
Banks slice the mortgaged & sell them as

RMBS – Residential Mortgage Backed Securities

CDO – Collateralized Debt Obligations

& Many other fancy financial products !!!!

Now sit back and see………
………………..What some smart guys at Wall
Street could do to the Main Street !!!!!!
 Year 2000
Americans were rolling in dough.

FINANCIAL CRISIS & INDIA 02/28/10

Then They started practically
flushing their money down the toilet.

FINANCIAL CRISIS & INDIA 02/28/10

Govt. spending,
Corporate
spending, Like a
Flood of Money
 NO PROBLEM

Banks begin lending to people with BAD CREDIT

(ARM) – Adjustable Rate Mortgage
• WHAT IS
•
SUBPRIME LENDING
RATE?
 Sub-prime Lending…
Sub-prime lending is to borrow
money to people with poor
credit histories.

Sub-prime lending rater are
higher as compared to PLR
•
Banks promised that housing
prices will continue to rise.
Banks start selling
MORTGAGE BACKED SECURITIES*

*Investments of packaged home loans

These are fine if the housing market goes up...bad if it doesn't.
9/11 shocks US and
world economies
Fed drops
interest rate to

1
Investors buy
lots of
mortgaged
backed
securities
...with very high fees
Real estate soars 10 – 20%
from 2002 - 2006
Building up of the housing bubble
Home owners
spend like
celebs using
Home Equity
Loans
 BUT…….












•


 LIQUIDITY OVER
•

•
Starting 2006 housing bubble
busted
So this happened...

Credit Bubble Housing Bubble Credit Bubble

Fed increases
interest rate to

5.25
 Adjustable Rate
Mortgages increase with
interest rates

Home
Owners
can't pay
their
mortgages
Home owners are forced out of their homes
When SUB-PRIME holders were unable to
repay their loan, major banks who have
shown losses in their balance sheet, file for
Bankruptancy or get nationalized.

FINANCIAL CRISIS & INDIA 02/28/10

In their BALANCE SHEET,
•


In left side (liability), NOTHING IS
RIGHT,
In right side (assets), NOTHING IS LEFT.

FINANCIAL CRISIS & INDIA 02/28/10

So..What were
the
consequences..?
•During 2007, nearly 1.3 million U.S.
housing properties were subject to
foreclosure activity, up 79% from 2006.

•Major banks and other financial

institutions around the world have
reported losses of approximately
US$435 billion as of 17 July 2008.

•During the week of September 14, 2008

the crisis accelerated, developing into a
global financial crisis.resulting in the
bankrupcy of some of the world’s biggest
financial institutes..
The following week the Dow-Jones index
of the largest companies traded on the
U.S Stock

market declined 22%, the worst week in

the index's 118-year history
Since 1 January, 2008, owners of stocks in U.S.
corporations have suffered about $8 trillion in
losses, as their holdings declined in value from
$20 trillion to $12 trillion. Losses in other
countries have averaged about 40%.

02/28/10
I MPACT ON W ORLD E CONOMY
GLOBAL MARKETS 16TH JULY(BEFORE) 17TH AUGUST(AFTER) CHANGE % FALL

DOW JONES 13950.98 13079.08 -871.9 6.249

NASDAQ 2697.34 2505.03 -192.31 7.129

BSE SENSEX 15311.22 14141.52 -1169.7 7.639

HANG SENG 22953.94 20387.13 -2566.81 11.182

KOSPI COMPOSITE 1949.51 1191.55 -757.96 38.879

NIKKIE 225 18217.27 15273.68 -2943.59 16.158

WEIGHTED INDEX 9417.32 8090.29 -1327.03 14.091

SHANGHAI INDEX 3896.19 4656.57 760.38 19.515

FTSE 100 6697.7 6064.2 -633.5 9.458

DAX() 8105.69 7387.29 -718.4 8.862

CAC 40 () 6125.6 5363.63 -761.97 12.439

IBOVESPA() 57374 48558.76 -8815.24 15.364

BEAR STERNS was acquired BY J P MORGAN in
March 2008 FOR 1.2$ BILLION AT PRICE OF
JUST 10$ PER SHARE.
Source : Bloomberg
Unemployment
Rate
US
Government
digs deep to
bailout the
large financial
institutions
to the tune of...
$700B +
Neither presidential candidate really has a clue what to
do...

Lets hope this thing works!

 Canada:
reduced interest rates and
increasing liquidity “Borrow indefinitely: Only in America”
Mexico: 
falling Peso
and 2009 budget deficit estimated
dwindling U.S.: ??? to be close to $2 TRILLION,
economy still working out which is equal to 2.5% of GDP
financial bail-
Brazil:  outs; more bank
Heavy credits, but failures to come
stabilizing and
recouping

Argentina: 
Heavy job losses,
higher import tariffs
and weaker Peso

Credit Crisis: The Americas

Which
implies,
national debt
can increase
beyond 70%
of GDP, the
highest since
the end of
World War II
Source: Bloomberg.com
•


02/28/10
When the United States sneezes, the rest of the
world may well catch a cold
• Europe - European banks have lost more money
than American banks due to investments in the U.S.
mortgage market.
•

Government stepping in to bail out banks from

‘going under’ in Denmark and U.K.
Threat of recession in Irish Republic and Spain
France, Germany, Italy and Portugal follow suit…
Iceland is all but officially bankrupt
•

Some are most affected.

Japan: Mizuho, second largest bank lost more than
$6 bn
Singapore: Temasek and GIC have become the
biggest shareholders of Merill Lynch and UBS
India: facing economic slowdown
China: sitting on surplus goods
•

Some are indirectly affected

Australia, Malaysia, New Zealand, Singapore, South
•

Korea and the Middle East have protected foreign

currency deposits.
•

Hence a promising economy…

•

Some are unaffected..

 Poland: 
Part of Eurozone,but
has a stable banking Russia: 
sector Fast growing
economy with large
Ireland:  foreign reserves
First Eurozone country to
slide into recession
China: ???
France:  Strained with economic
Sluggish economy heading surplus and counterfeit
for recession goods
Hungary: 
-ve credit raing, heavy Singapore: 
debts, huge current account Prosperous,
deficit government guarantee
India:  for deposits till 2010
Economic slowdown
with high inflation
and poverty

BUT, the crisis is truly GLOBAL!

Credit Crunch
A credit crunch is a sudden
reduction in the general availability
of loans (or credit), or a sudden
increase in the cost of obtaining
loans from Banks.
Effect on INDIA

02/28/10
 Mr. Smith in USA,
didn't paid his Loan

Mr. Sharma in India Lost

His Investments
Even after providing so many
home loans to their citizens the
American banks still having the
excess liquidity problem so
they decided to invest in
different stock markets of the
world, along with Indian stock
market
This Sudden Flow of
Money in Indian
Markets Resulted in
Rise of Market
On the other side, in India After
looking at Rise in Indian Stock Market
& to make money double, Sharma g
invested his money in the Stock
Market
In this way Mr. Smith didn’t paid
his loan & due to this, Sharma g
lost his investment
Due to credit crunch, American
bank started pulling back there
money from India…
•$16 Billion outflow from India in
2008
•Inflation at 12%
•$291 Billion – Indian FX reserves as
of 03 Oct.
•Indian Oil Corp costs to rise 70% to
$45 Billion
•Industrial growth plummets to
1.3% in August
•Sensex down ~50% in 2008
•
CRASHING STOCK INDICES
IMPACT ON INDIAN BANKS
•ICICI Bank has the highest
exposure of $1.5 billion.

•SBI has an estimated

exposure of $1 billion.
•
•BoI of $300 million, and
BoB of $150 million.
•
•About 5-10 per cent of this
figure could be the losses
that these banks could
incur.
Financial Crisis is in America….
 Impact of the US Financial Crisis on
India
Little impact on India.
•

•Reasons -
Unlike in US where capitalism rules in India market
is closely regulated by the government.

Less exposure of Indian financial sector with the
global financial market


Impact on India’s trade

Increasing Trade deficit.


Foreign exchange reserves depletion by around
$57 billion to $253 billion for the week ended
October 31.

The current deficit is at around $10 billion
 Impact on India’s export
 About 15 per cent of its total export in 2006-07 was
directed toward USA.

 Slump in the consumer demand in the US and Europe.

 Indian exports fell by 9.9 per cent to $1.5 from $12.7
billion in November 2008.

 Imports grew by $6.1billion to $21.5 billion.

 Manufacturing sectors like leather, textile, gems and
jewellery have been hit hard
Impact on India’s handloom sector,
jewellery export and tourism
Reduction in demand in the OECD countries .

Around 50,000 artisans employed in jewellery
industry have lost their jobs .

Volume of handloom exports dropped by 4.6 per
cent in 2007-08.

Indian tourism sector badly affected as the
number of tourist flowing from Europe and
USA has decreased sharply
 EXPORT VOLUMES : HANDLOOM
Year Value Percentage Change

2000-01 Rs.2127.4crores +7.4%

2001-02 Rs.2064.9crores 2.9%

2002-03 Rs.2633.3crores +27.5%

2003-04 Rs.2481.3crores 5.8%

2004-05 Rs.2213.1crores 10.8%

2005-06 Rs.2619.7crores +18.3%

2006-07 Rs.3477.5crores +32.7%

2007-08 Rs.3353.7crores -4.6%

Source :- Ministry of Commerce

Exchange rate depreciation
With the outflow of FIIs, India’s rupee
depreciated approximately by 20 per cent
against US dollar and stood at Rs. 49 per dollar

IT-BPO sector

Indian IT employees use to be mainly outsourced

to US by various companies which drastically
reduced.

The growth in employment in the IT sector 44 %
dropped to about 28%.

Software exports dropped .
 Steps taken by Indian Govt.
Reduced into CRR to 5.5%
Through cut into CRR, There is flow of 120+
thousand crore into Indian market
Plan to lift the Ban from PN (i.e. participatory notes)
Reduced the Prime Landing Rate by all Public sector
Banks
Reduced into ATF’s price (i.e. aircraft turbine fuel)
Planning for putting Ban on short selling.
So think before you invest because…

02/28/10
After all, money doesn’t grow
on trees
THANK YOU

Any questions???