A presentation by

Ashish Diwania, Lecturer (Finance)Dipankar Biswas, PGPB01

Vanguard Business School

At the US Federal Reserve…

What should I do to increase the

consumption level in the country??

I think this can be achieved through easy

availability of credit and reducing the

interest rate on loans.

Easy credit availability to people will induce them to

spend more on buying assets…

Ultimately this will result in raising the consumption level in

the country…

At one of the Mortgage houses…

Middlemen Mortgage Brokers

Mortgage Broker

I want to buy a house, but I do not have any money to make down payment nor I can pay regular installments for loan. Can you help me ??

Sure, I can help you get a loan a loan for your new house…

Middlemen Mortgage Brokers

Mortgage Broker

Sub prime Borrower

Since the value of the new house you will buy, will always go up in the future, you need not make any down payment. Moreover, initially you will need to pay very low rate of interest on the loan taken which will be increased in the future.

Middlemen Mortgage Brokers

Mortgage Broker

Sub prime Borrower

You guys are awesome. Are you really willing to get me a loan for buying a new house..?

Why shouldn’t I get you a loan ? The actually loan will be given by a bank and I will get my commission on it. I don’t care whether you pay back or not.

Months later at

“BANK FOR ALL”…

We should get rid of these crappy loans quickly. They are just stinking our office. What do you suggest?

We can take help from the REALLY SMART guys at Wall Street, New York.

Do you think they can really get us out of trouble ?

Yes Sir!! They can. They are from the top league business schools of the world. They are really smart. We will sell these loans to them and they will perform some financial magic on these loans.

BANK FOR ALL

MANAGER

ONOFF

At the office of “REALLY SMART”

GUYS…

Pheww..!! We shall get rid of these bad loans as soon as possible. They are just stinking our office badly

They are just useless.

“ Really Smart” Investment bankers

Smart Guy Subordinate

I have got an idea…We will create a new security and use these crappy mortgages as collateral. We will call it a CDO. We can sell those CDO’s to investors and promise them t pay back as mortgages are paid off. I am “Really Smart”.

But, crap is a crap. I don’t get it.

Let me explain it to you.

“ Really Smart” Investment bankers

Smart Guy Subordinate

Individually these are a bunch of crappy loans. But, if we pool them together, then only a few of them are expected to go bad-NOT ALL. And since housing prices will continue to go up in the future, we have little to worry about.

Boss, you are “Really Smart.” TUSSI GREAT HO..!!

I know it.

“ Really Smart” Investment bankers

Smart Guy Subordinate

We will also go ahead to buy insurance for these securities. By this, the rating agencies will give a “very good” rating for these securities.

So, you have managed to create AAA and BBB securities out of a pile of stinky, risky mortgage loans.Boss, you are a genius…

“ Really Smart” Investment bankers

Smart Guy Subordinate

No. To get rid of this, we will create a shell company in the Hululu islands. We will transfer all such mortgage loans in the balance sheet of that shell company.The fancy name for it will be “Special Purpose Vehicle.”

This is all great. But, won’t we have to show all these crappy mortgages used as a collateral in our balance sheet??

“ Really Smart” Investment bankers

Smart Guy Subordinate

To insurance companies, banks, small towns in Norway, school boards in Kansas – to anyone who is looking for a high quality and safe investment.

Okay, and who are we going to sell these securities to ?

“ Really Smart” Investment bankers

Smart Guy Subordinate

Then started the defaults by the sub prime borrowers...

Sir, I request you to order the security issuing companies to show greater transparency regarding their financial reporting

Consumer Grievance Agency

Hey man… we are not receiving our monthly payments.

Banks and Financial Institution cross the world faced similar problems