Presented by

Valliappan P (128939)

SOM NIT Warangal

Why the financial crisis of 2008 happened?

The answer is simple: The housing bubble burst (U.S. subprime mortgage crisis )

Subprime lending means giving loans to people who may have difficulty in maintaining the repayment schedule. These loans are characterized by higher interest rates, poor quality collateral, and less favorable terms in order to compensate for higher credit risk. Example: Student loans in India are considered to be subprime.

What is subprime lending?

Lending decision by Financial Institutions

Borrowing decisions by individuals

Housing Bubble

formation

1

• Relaxation in lending regulations

• Poor creditworthiness of borrowers

2

• Rising EMI due to higher interest costs

• Borrowers Unable to pay

3

• Failure of Banks and Financial Institutions

Causes of crisis

Prime

Mortgage

Sub Prime Mortgage

Asset backed

Securities

Lenders – the biggest culprits

2006

2008

2009

1) Major banks suffered from huge losses.

2) Lehman Brothers went out of business.

3) Merrill Lynch had to sell itself to Bank of America for a fraction of its former value

4) Countrywide Financial Corporation, the biggest U.S. mortgage lender, eventually gets taken over by Bank of America.

5) In Sept 2008, AIG collapses as it could not afford to pay for all of these US mortgage defaults. The US government nationalises AIG by becoming 80% shareholder.

Impacts of Subprime crisis

Direct Impacts of the Crisis

Financial Institutions – Bankruptcy New Century Financial (USA)– Apr. 2, 2007 American Home Mortgage (USA) – Aug. 6, 2007 Sentinel management Group (USA) – Aug. 17, 2007 Ameriquest (USA) – Aug. 31, 2007 NetBank (USA) – Sept. 30, 2007 Terra Securities (Norway) – Nov. 28, 2007 American Freedom Mortgage Inc. (USA) – Jan. 30, 2007

Financial Institutions – Write-Downs

Citigroup (USA) - $24.1 bln Merrill Lynch (USA) - $22.5 bln UBS AG (Switzerland) - $16.7 bln Morgan Stanley (USA) - $10.3 Credit Agricole (France) - $4.8 bln HSBC (United Kingdom) - $3.4 bln Bank of America (USA) - $5.28 bln CIBC (Canada) – 3.2 bln Deutsche Bank (Germany) - $3.1 bln

Total Write downs and losses were around $300 - $350 billion US dollars

1 • Sub Prime Mortgage Crisis

2 •Collapse of Financial System

3 • Economic Crisis

4 • Job Loss

5 • Low consumer spending

6 • Recession Low Economic activities

7 •Very low GDP growth

8 • Poor Prosperity of the countries

Global Impacts of the Crisis

Investors lost confidence in the stock market.

Consumer spending slowed down due to lack of cash/ unwillingness.

U.S.A’s economic condition affected the global economy.

World economy slipped into recession.

Exports from China, Korea, Taiwan and India decreased.

Impact on India FIIs pulled out of money from the Indian stock market

Public Sector Banks, viz State Bank Of India, Bank Of Baroda, Canara Bank, Punjab National Bank etc did not have major exposure to credit derivatives market due to their limited overseas operations.

Stock market Crashed and BSE sensex crashed from 24000 level to 8000 level.

ICICI Bank incurred a loss of close to Rs.1000 Crores because of exposure to international securities market

“If companies around the globe are unable to borrow, they'll

begin to cut jobs, cease investment, and default on their debt in larger numbers.“ - Peter Coy BW, Oct 3, 2008

References:

1)www.worldbank.org

2)World Bank (2008), World Development Indicators 2008

3)Blanchard, Olivier (2009), “Sustaining a Global Recovery”, Finance & Development, September, International Monetary Fund

4)Calvo, Guillermo (1998), “Capital Flows and Capital-market Crises: The SimpleEconomics of Sudden Stops”, Journal of Applied Economics 1(1),pp 35-54.

Thank You..!