sub prime ii

8/7/2019 sub prime II

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SUBPRIME

CRISIS

By .

Siddhartha Reddy

Pradeep Y.D.

Representing GROUP 4 IBS



What is SUBPRIME?

� SUBPRIME MORTGAGE It is the mortgage for people withshaky credit, or specifically, people who is unlikely to be able to

pay the mortgage.

� Usually its given to those who are seeking money to finance

their houses.

When ?

� The dotcom bubble of 00-01 and 9/11 attacks drove the US

FEDERAL RESERVE to follow an ultra-easy monetary policy to

curb RECESSION.

ncrease in mortgage Y?

Boom and bust in Housing market

Low interest rates due to govt policies.

Rise in the housing price.



Y ? contd

High risk mortgage loan and lending/borrowing practice lending more and more loans to high risk borrowers and

immigrants.

� Government policies.

�

Policies of the central bank.Ultimately.Downturn & crash

� Interest rates started rising due to inflationary concern.

� The overbuilding of homes during the boom periodeventually led to a surplus inventory of homes causing homeprices to decline .

Causes .

� Offering NINJA loans.

� Payment options.



Initiatives by govt

� The US govt to stimulate the economic growth enacted a

LAW on ECONOMIC STIMULUS PACKAGE of $168 billion

mainly in the form of tax rebates.

� was acquired by JP MORGAN CHASE with the

support of US FEDERAL RESERVE.

� was taken over by for $50 billion.

� The US FEDERAL RESERVE provided a loan of $85 billion to

the troubled insurance giant resulting in the US govt

acquiring a 79.9% stake in the company.� The US govt announced a $700 billion bail-out package to

stimulate the economy.

� Investment banks like and

converted themselves as regular banks.



Mortgage-backed securities (MBS)

� Which derive their value from mortgagepayments and housing prices.

� Had enabled financial institutions andinvestors around the world to invest in theU.S. housing market.

� Major banks and financial institutions had

borrowed and invested heavily in MBS andreported losses of approximately US$435billion as of 17 July 2008.



There are four primary types of risks..

� Credit risk - the risk that the homeowner orborrower will be unable or unwilling to pay backthe loan;

� Asset price risk - the risk that assets willdepreciate in value, resulting in financial losses.

� Liquidity risk - the risk that a business entity willbe unable to obtain financing.

� Counterparty risk - the risk that a party to acontract will be unable or unwilling to upholdtheir obligations.



Impacts on INDIA� FOREX,equity and commodity markets.

� INDIAN RUPEE.

� INDIAN BOURSES ( came down f rom 21,200 in Jan 2008 to 7,700

level in Nov 2008)

ReasonThe foreign banks and hedge funds started unloading their holdingin INDIAN EQU I T I ES resulting in fall in the stock price and weakening the domestic currency.

�Hitting the IT enabled services since a majority of the Indian IT firmsderive 75% of their revenues from US.

� Manuf acturing sectors has to ramp up scale economies and improveproductivity and operational efficiency.

� Tourism sector could be badly affected. Now it is the time to

promote the aggressive health tourism.



PICTORIAL- CRISIS



WORST CRISIS SINCE 1930S

WITH NO END YET IN SIGHT

sub prime ii

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