MERCHANT BANKERS MERCHANT BANKERS MELTDOWNMELTDOWN

A GLOBAL FINANCIAL A GLOBAL FINANCIAL TSUNAMITSUNAMI

ORIGINATED FROM ORIGINATED FROM MANHATTANMANHATTAN

StarringStarring

Merchant BankersMerchant Bankers

Uncle Sam’s Federal ReserveUncle Sam’s Federal Reserve

Lehman Bros.Lehman Bros.

Merrill LynchMerrill Lynch

AIG, FM & FMAIG, FM & FM

Morgan StanleyMorgan Stanley

Story written byStory written by

SUB PRIME MORTAGES IN SUB PRIME MORTAGES IN

UNITED STATES OF AMERICAUNITED STATES OF AMERICA

Directed byDirected by

WALL STREETWALL STREET

Merchant BankersMerchant Bankers

““Masters of the Universe” ( to quote best Masters of the Universe” ( to quote best selling author ‘Tom Wolfe’ )selling author ‘Tom Wolfe’ )

Don’t like our PSBs or private banksDon’t like our PSBs or private banks

Assess different financial proposals for Assess different financial proposals for investments worldwideinvestments worldwide

International portfolio investmentsInternational portfolio investments

Global & corporate strategies formulationGlobal & corporate strategies formulation

Measure & manage political risks Measure & manage political risks involvedinvolved

The Devil Behind the The Devil Behind the SceneScene

US Mortgage US Mortgage Crisis A Crisis A

Sub primerSub primer

What is it?What is it? Two Types of US BorrowersTwo Types of US Borrowers

Prime & SubprimePrime & Subprime Loans by subsidiaries in 2002-07 to SP Loans by subsidiaries in 2002-07 to SP

BorrowersBorrowers Due to Real Estate boomDue to Real Estate boom Rising of home price to more than double Rising of home price to more than double

since 1997since 1997 Encouragement by Govt. to lend SPB to Encouragement by Govt. to lend SPB to

help poor & younghelp poor & young

With stock mkt. booming & system With stock mkt. booming & system flush with liquidity, big fund investors flush with liquidity, big fund investors like Hedge funds & MFs saw SP loan like Hedge funds & MFs saw SP loan portfolios as attractive investmentportfolios as attractive investment

Bought such portfolios from original Bought such portfolios from original lenderslenders

Lenders had fresh funds to lendLenders had fresh funds to lend

Typically 2% higher interest rate Typically 2% higher interest rate than Prime because of higher default than Prime because of higher default risk, resulting in higher EMIsrisk, resulting in higher EMIs

Only added to risk of SPB defaulting Only added to risk of SPB defaulting raterate

Lenders compromised with Lenders compromised with prudential norms & devise new prudential norms & devise new instrumentsinstruments

Turning into a CrisisTurning into a Crisis

US Housing boom bubble busted in 2007US Housing boom bubble busted in 2007

Boom had led to a massive housing supplyBoom had led to a massive housing supply

Prices fell downPrices fell down

Default rate shoot upDefault rate shoot up

SPB no longer ready to pay through their SPB no longer ready to pay through their nosenose

Collateral was typically the home being Collateral was typically the home being bought, again this vicious cycle startedbought, again this vicious cycle started

Coincidence with US Economy Coincidence with US Economy slowdown made the matter worseslowdown made the matter worse

Price dropped to 50% of their peak in Price dropped to 50% of their peak in 20062006

Lenders left with less the value of Lenders left with less the value of their loans to book hefty lossestheir loans to book hefty losses

Turning into a systematic Turning into a systematic crisiscrisis

Original lenders had further sold their Original lenders had further sold their portfolios to other playersportfolios to other players

Some complex derivatives were also Some complex derivatives were also developed based on the loan developed based on the loan portfolios which sold further, one portfolios which sold further, one after anotherafter another

As a result, nobody is quite sure As a result, nobody is quite sure about the exact sizes of losses & who about the exact sizes of losses & who had taken how much hithad taken how much hit

Fannie Mae & Freddi Mac owned half Fannie Mae & Freddi Mac owned half of roughly $12 trillion outstanding in of roughly $12 trillion outstanding in home mortgagehome mortgage

Suffered $14bn in last 4 QsSuffered $14bn in last 4 Qs

Forced retreat of these two giants Forced retreat of these two giants from market created ripples of fear from market created ripples of fear across the playersacross the players

Impact of crisis: on USAImpact of crisis: on USA

Global banks & brokerages had to Global banks & brokerages had to write off an estimated $512 bnwrite off an estimated $512 bn

Heaviest punch on CITI group Heaviest punch on CITI group ($55.1bn) & Merrill Lynch ($52.2bn)($55.1bn) & Merrill Lynch ($52.2bn)

More than half of total losses are More than half of total losses are suffered by US based firms ($260bn)suffered by US based firms ($260bn)

European firms tanks $227bnEuropean firms tanks $227bn

Relatively modest $24bn hit on Asian Relatively modest $24bn hit on Asian firmsfirms

Bear Sterns, one of the largest Bear Sterns, one of the largest investment bank & securities traders investment bank & securities traders collapsedcollapsed

Bought up by JP Morgan Chase with Bought up by JP Morgan Chase with help of Federal Reservehelp of Federal Reserve

Lehman went bankruptLehman went bankrupt

ML bought by Bank of AmericaML bought by Bank of America

Nationalization of FM & FMNationalization of FM & FM

On global frontOn global front

US being the biggest borrower in the US being the biggest borrower in the world since most countries hold their world since most countries hold their foreign exchange reserve in dollars & foreign exchange reserve in dollars & invest them in US Securities, any invest them in US Securities, any crisis in US has a direct bearing on crisis in US has a direct bearing on themthemCountries with large reserves like Countries with large reserves like Japan China and India are at high riskJapan China and India are at high riskGlobal interconnectivity of financial Global interconnectivity of financial markets makes the situation worsemarkets makes the situation worse

NOW WE NOW WE COMECOME

TO THE POINTTO THE POINT

Lehman BrothersLehman Brothers

158 years old158 years oldHQ in ManhattanHQ in ManhattanCEO Richard Fuld CEO Richard Fuld 44thth largest investment bank largest investment bank26,000 employees worldwide26,000 employees worldwideMarket value in Feb. 2007 was $45.5bnMarket value in Feb. 2007 was $45.5bnPosted $4bn losses in Q4Posted $4bn losses in Q4File for Bankruptcy under chapter 11File for Bankruptcy under chapter 11Barclays to buy its core capital mkt. business for Barclays to buy its core capital mkt. business for $1.75bn, a paltry$1.75bn, a paltryCould save 10,000 jobs of LehmannitesCould save 10,000 jobs of Lehmannites

Merrill LynchMerrill Lynch

94 years old94 years old

60,000 employees 60,000 employees

HQ in ManhattanHQ in Manhattan

Market value in Feb.2007 was $86bnMarket value in Feb.2007 was $86bn

Bought by Bank of America for $50bn Bought by Bank of America for $50bn in a all stock transactionin a all stock transaction

Other banks on saleOther banks on sale

Morgan Stanley, 2Morgan Stanley, 2ndnd largest largest investment bank across the globeinvestment bank across the globe

Mutual WashingtonMutual Washington

Some others are also in the pipelineSome others are also in the pipeline

Lehman Bros meltdown shakes world's markets - 15 Sep 08.flv

Rescue Measures by Central Rescue Measures by Central banksbanks

SEC Securities & SEC Securities & Exchange Exchange Commission, a US Commission, a US Regulator banned Regulator banned short selling in 799 short selling in 799 financial financial companies stockscompanies stocks

$800 bn pumped in $800 bn pumped in worldwideworldwide

US Federal US Federal ReserveReserve

$180bn$180bn

Russian Govt.Russian Govt. $130bn$130bn

Bank of JapanBank of Japan $108bn$108bn

US Federal US Federal guarantorsguarantors

$50bn$50bn

Bank of Bank of EnglandEngland

$40bn$40bn

ECBECB $40bn$40bn

RBIRBI $18bn$18bn

AIG’s Adoption by Uncle SAMAIG’s Adoption by Uncle SAM

World’s largest InsurerWorld’s largest Insurer

Lost $13.2bn in first 6 months of Lost $13.2bn in first 6 months of 20082008

Sought to raise $40bn to avoid Sought to raise $40bn to avoid crippling credit rating downgradecrippling credit rating downgrade

Was also in talks with Warren BuffetsWas also in talks with Warren Buffets

US take it over for $86bn, ½ of US take it over for $86bn, ½ of India’s Annual BudgetIndia’s Annual Budget

Other Bailouts by USAOther Bailouts by USA

So far $900bn So far $900bn bailed out by US in bailed out by US in 20082008

Federal’s Federal’s housing housing administratoradministrator

$300b$300bnn

Federal’s term Federal’s term auction facilityauction facility

$200b$200bnn

FM & FMFM & FM $200b$200bnn

JP Morgan JP Morgan ChaseChase

$87bn$87bn

AIGAIG $85bn$85bn

Bear SternBear Stern $29bn$29bn

Grant to local Grant to local gov.gov.

$4bn$4bn

International StampedeInternational Stampede

Race against time to prevent global Race against time to prevent global financial collapsefinancial collapse

Domino’s effectDomino’s effect

Bank to sit on cashBank to sit on cash

Interbanking relations and faith Interbanking relations and faith touched a new lowtouched a new low

Several commit suicide across the Several commit suicide across the worldworld

RTS (Russia), Hangseng (Singapore), RTS (Russia), Hangseng (Singapore), Shanghai comp, FTSE 100 (UK), Shanghai comp, FTSE 100 (UK), Sensex, DAX 30 (Germany), S&P 500, Sensex, DAX 30 (Germany), S&P 500, Nikkei (Japan), Dow Jones (USA), Nikkei (Japan), Dow Jones (USA), NASDAQ comp, CAC40 (France), NASDAQ comp, CAC40 (France), KOSPI (S.Korea) all crashed like a KOSPI (S.Korea) all crashed like a planeplaneDow Jones tanks 500 pts within 10 Dow Jones tanks 500 pts within 10 min of opening on Mondaymin of opening on Monday10 major banks in US to create 10 major banks in US to create $70bn emergency crisis fund$70bn emergency crisis fund

Ripples in IndiaRipples in India

Rupee hit a 10 year low to Rs.47 A dollarRupee hit a 10 year low to Rs.47 A dollar

FIIs withdraw $800 million on Monday, the FIIs withdraw $800 million on Monday, the biggest withdrawal on a single day after biggest withdrawal on a single day after 9/119/11

RBI not to increase CRR in its Oct. RBI not to increase CRR in its Oct. Monetary ReviewMonetary Review

RBI to cut SLR (statutory liquidity ratio) by RBI to cut SLR (statutory liquidity ratio) by 1% to 24%1% to 24%

RBI to go for 2 LAF (liquidity adjustment RBI to go for 2 LAF (liquidity adjustment facility) in a single dayfacility) in a single day

Call money rates up to 15-17% from Call money rates up to 15-17% from 6-8% of one week ago6-8% of one week agoICICI worst hit as its London ICICI worst hit as its London subsidiary Had purchased Lehman subsidiary Had purchased Lehman bonds to the tune of Rs. 375 crorebonds to the tune of Rs. 375 croreIRDA asks TATA-AIG to submit IRDA asks TATA-AIG to submit reports on solvencyreports on solvencyReal estate sector, Hardest hitReal estate sector, Hardest hitCould loose 26,000 jobs across the Could loose 26,000 jobs across the sectorssectors

Blessings in DisguiseBlessings in Disguise

Every tunnels has a ray of hope at its endEvery tunnels has a ray of hope at its end

Crude price dippingCrude price dipping

Service sector growing at double digitService sector growing at double digit

Comparatively insulated Indian mkt. as 2/3 Comparatively insulated Indian mkt. as 2/3 of Indian economy is domestically drivenof Indian economy is domestically driven

More local investors in equity as a More local investors in equity as a replacement of global onereplacement of global one

Talent crunched A- Indians can now seek Talent crunched A- Indians can now seek to hire A+ talentto hire A+ talent

My QuestionMy Question

Is it good to dwell out taxpayers hard Is it good to dwell out taxpayers hard earned money for the losses of those earned money for the losses of those who were playing ROULETTE for who were playing ROULETTE for long?long?

Is it not the “ privatisation of profits Is it not the “ privatisation of profits and civilisation of losses? ”and civilisation of losses? ”

Presented By:Presented By:

GUNADITYA GUNADITYA SHARMASHARMA