subprime crisis_ in brief by siddhartha

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Information about subprime crisis_ in brief by siddhartha

Published on January 24, 2009

Author: sidred


Slide 1: SUBPRIME CRISIS By …. Siddhartha Reddy Pradeep Y.D. Representing GROUP – 4 “IBS” What is SUBPRIME? : What is SUBPRIME? SUBPRIME MORTGAGE – It is the mortgage for people with shaky credit, or specifically, people who is unlikely to be able to pay the mortgage. Usually it’s 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 gov’t policies. Rise in the housing price. Y ? …cont’d : Y ? …cont’d 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 period eventually led to a surplus inventory of homes causing home prices to decline . Causes …. Offering NINJA loans. Payment options. Initiatives by gov’t : Initiatives by gov’t The US gov’t 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 gov’t acquiring a 79.9% stake in the company. The US gov’t announced a $700 billion bail-out package to stimulate the economy. Investment banks like and converted themselves as regular banks. Mortgage-backed securities (MBS) : Mortgage-backed securities (MBS) Which derive their value from mortgage payments and housing prices. Had enabled financial institutions and investors around the world to invest in the U.S. housing market. Major banks and financial institutions had borrowed and invested heavily in MBS and reported losses of approximately US$435 billion as of 17 July 2008. There are four primary types of risks.. : There are four primary types of risks.. Credit risk - the risk that the homeowner or borrower will be unable or unwilling to pay back the loan; Asset price risk - the risk that assets will depreciate in value, resulting in financial losses. Liquidity risk - the risk that a business entity will be unable to obtain financing. Counterparty risk - the risk that a party to a contract will be unable or unwilling to uphold their obligations. Impacts on INDIA : Impacts on INDIA FOREX,equity and commodity markets. INDIAN RUPEE. INDIAN BOURSES ( came down from 21,200 in Jan 2008 to 7,700 level in Nov 2008) Reason The foreign banks and hedge funds started unloading their holding in INDIAN EQUITIES resulting in fall in the stock price and weakening the domestic currency. Hitting the IT enabled services since a majority of the Indian IT firms derive 75% of their revenues from US. Manufacturing sectors has to ramp up scale economies and improve productivity and operational efficiency. Tourism sector could be badly affected. Now it is the time to promote the aggressive health tourism. Impacts ….cont’d : Impacts ….cont’d A recession in US has seen the loss of some jobs in India. The subprime crisis has leg to near loss of confidence in the American stock market. The near recession situation in the US has lead to a loss of demand for Indian exports hence loss of export earnings for India. Investment banks and other financial institutions are on a job slashing spree to cut costs. There will be several implications for the banking sectors. Indian banks have to follow stricter norms while disbursing loans. The number of investor accounts at stock exchange has surged. A crash in the equity price is effecting more people than ever before. Slide 9: PICTORIAL- CRISIS Slide 11: “WORST CRISIS SINCE 1930’S WITH NO END YET IN SIGHT”

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