Created By:Parshwadeep Lahane

PARTNERS IN CRIMECustomers FED Mortgage

Brokers

Investment Banks

Investors

Credit Rating Agencies

Insurers

Modus Operandi• Bank would come out with schemes to give

loans to just anyone with the help of mortgage brokers

Principal + interest payable over long term

Loan Loan +Premium

Documents Documents

BANK(Lender)Mortgage

BrokerSubprime Customer

MBS for loan• Bank would package the loan into a security

and pass on to Investment banks

Principal + interest payable over long term

Loan Loan +Premium

Documents Documents

BANK(Lender)Mortgage

BrokerSubprime Customer

SIVInvestment

Bank

Loan +Premium

Documents converted to

Securities(MBS/ABS)

Off balance sheet entity

CDO• The investment banks will package these with

other securities and slice them into different categories of CDO

CDO

Securities(MBS)

Certification• Credit Rating agencies(CRA) would certify

these securities

Principal + interest payable over long term

Loan Loan +Premium

Documents Documents

BANK(Lender)Mortgage

BrokerSubprime Customer

SIVInvestment

Bank

Loan +Premium

Documents converted to

Securities(MBS/ABS)

Off balance sheet entity

CDO

CRA

Rating

Premium

Investors • Investment bank Structured Investment Vehicle(SIV)

will sell CDOs to the Investors across the globe

Principal + interest payable over long

term

Loan Loan +Premium

Documents Documents

BANK(Lender)Mortgage

BrokerSubprime Customer

SIVInvestment

Bank

Loan +Premium

Documents converted to

Securities(MBS/ABS)

Off balance sheet entity

CRA

Ratin

g

Prem

iumCDO

InvestorsLoan +

Premium

Insured

Principal + interest

payable over long term

Loan Loan +Premium

Documents Documents

BANK(Lender)Mortgage

BrokerSubprime Customer

SIVInvestment

Bank

Loan +Premium

Documents converted to

Securities(MBS/ABS)

Off balance sheet entity

CRA

Ratin

g

Prem

iumCDO

InvestorsLoan +

Premium

Insurer

Insu

ranc

e

Prem

ium

Other linkagesBank

MortgageBroker

Investment Bank

Insurer CRA

Mistakes• Wrong belief of housing prices always going up

• FED overlooked warnings

• Past data reference illusion

• High leveraging

• Miscalculated ratings fooled investors

• Appetite beyond capacity

• Slicing and dicing spread the risk but did not eliminate it

Result- Mortgage Market

Housing market nose dives

Sub prime borrower

Investors

Investment Banks

Nationalized Bankrupt

Credit Rating Agencies

Insurers

Saved by governmentfunding

Global Equity Markets

Lose 45% of wealth

Money market

Confidence in Market

Someone got lucky!

Alternate investment saw a surge

LEARNINGTHINK BEFORE YOU ACT

THANK YOU