Our Group

 Syeda Nowrin Shibly

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 Tasnia Jahan
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 Jamil M Ameen
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 Maria Muntahin
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 Cinthia Sabrina
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 Subprime Mortgage Crisis
 The subprime mortgage crisis caused the U.S. economy the

worst recession since the Great Depression. When the

subprime crisis unfolded, it first affected the real estate

market and then the economy overall.

 Subprime Mortgage
 Subprime mortgage is lending to low credit rated

borrowers who borrow money at a high mortgage rate

against collateral which might be a property they want to

buy with the borrowed fund.

Effect on Financial Market
 Credit Crunch.

 Vicious cycle between housing and financial market .

 Bad-debt
 Banks, investment banks and insurance companies

incurred enormous losses and wrote down their bad

debt expenses by a huge amount.

 Effect on Global Economy
 Increase in worldwide commodity price.

 As closely connected with the United States financial

markets, the euro zones and Japan experienced a rough

time as well.
 Effect on Global Economy
 Because of unemployment , U.S citizens curbed their
consumption as a result U.S started to restrict import
which caused economic downturn to countries which
depend mostly on U.S import.
 Global Hedge funds that borrowed money to invest in
subprime mortgages are forced to sell their mortgages
at extremely low prices to pay off lenders and investors
who want out. To raise cash quickly, many hedge funds
dumped stock, causing stock market prices to plunge
worldwide.
 Federal Reserve and
Government Response
 Federal Reserve provided short-term funding by allowing banks

to exchange their holdings of Treasury securities for cash.

 Discount rate was lowered from 5.75% to 2.25% by the central

bank to provide access to funds for those entities with illiquid

mortgage-backed securities so that these entities avoid selling
mortgage backed securities at a steep loss.
 Federal Reserve and Government
Response
 To avoid complete market failure and to allow banks to
borrow money cheaply, the Federal Reserve, European
Central Bank, and their counterparts flooded the market
with billions of dollars, Euros, and yen in August 2007.

 The injected government funds are designed to encourage

banks to continue making loans rather than conserving
cash which can make credit crunch worse.
 Term Auction Facility (TAF)
 Innovative tool

 Auctions require banks to bid simultaneously.

 Interest rate at which the funds are allocated is determined by

the demand for the funds.

 Enable banks to approach the Federal Reserve collectively rather

than individually.

 Interest rate is determined by auction rather than premium.

 Commercial Paper Funding
Facility (CPFF)
 Commercial Paper is a short-term debt security used by

corporations to raise funds which is considered as liquid.

 Federal Reserve further expanded the collateral and

started to loan against commercial paper.

 Tax Rebates
 February 13, 2008 President Bush

passed a law to provide tax rebates

to low- and middle-income U.S.

taxpayers, tax incentives to

stimulate business investments .

 Foreclosure Avoidance
 There was a growing concern
that an estimated 8.8 million
U.S. homeowners with negative
equity (homes worth less than
the mortgage principal) will
walk away from the property,
further worsening the crisis.
 The Federal Reserve System also
is supporting troubled
borrowers and raising awareness
in communities about ways to
prevent foreclosures.
 Rescue Package

 Banks and other financial institutions

such as insurance companies and

mortgage corporations with shortage of

capital were allowed to ask to be rescued.

The government had used tax payer's

money to buy shares of these institutions

to make them partly nationalized.

Bail Out Program