Subprime Mortgage Crisis 2008
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Transcript of Subprime Mortgage Crisis 2008
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Group:
Allen Chen
Dan Chen
Robin Thieu
Wendy Chen
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Created by Robin Thieu, 2008 Fall
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What caused the financial industry crisis? Congress: for overzealously pushing homeownership Fed: for keeping interest rate so low Predatory lenders: for taking advantage of unqualified and
vulnerable home buyers Home buyers: for getting over the heads White House: for letting banking regulations become too
loose Finance executives: for selling products they didn’t
understand while enjoying outsized profits Mark-to-market accounting: for accelerating downturn Rating agencies: for mischaracterizing paper Short-selling hedge funds: for betting on doomsday The transformation of investment banks from private
partnerships into publicly traded companiesSource: Jack , Suzy Welch (2008, September 25). BusinessWeek
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The Debt Trap
Source: The New York Times
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Financial Ratio
Created by Robin Thieu, 2008 Fall
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House
Income
Mortgage Lenders
(Countrywide, Indy Mac, Fannie &
Freddie)Banks(Citibank, BOA)
SPV
Investors
(Banks, Funds,
Insurance)
Investment Banks
(Bear Stearns, Lehman, Merrill Lynch)
CDOs
MBSs
Mortgage
Subprime
Insurers(AIG)
Rating
Credit Crunc
h
Created by Robin Thieu, 2008 Fall
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Macroeconomic Analysis
Created by Robin Thieu, 2008 Fall
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GDP and housing market
Source: The Federal Reserve
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Mortgage Rates
Source: Federal Home Loan Mortgage Corporation's (Freddie Mac)
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Home Price Indices
Source: Standard & Poor’s
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Total Subprime Mortgage Originations Growth
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Homeowners Equity vs. Mortgage
Source: The Federal Reserve
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Unemployment Rate
Source: State of the USA and BBC
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US Homeownership Rate
Source: State of the USA
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Macroeconomic Analysis ObservationsObservations -Housing bubble is pushed much higher than
the GDP growth
- From year 2000 to 2006, when the mortgage rate is low, housing price keeps going up
- Subprime borrowing was a major contributor to
an increase in home ownership rates and the demand for housing
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Macroeconomic Analysis ObservationsObservations-The growth of subprime mortgage results in
homeowners’ mortgage is greater than their equity
-Homeownership and housing price keep growing from year1994 to 2005 even though unemployment rate goes up and down
ConclusionConclusion Subprime mortgage is the main Subprime mortgage is the main
contributor for “housing bubble”contributor for “housing bubble”
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Mortgage Lenders & Banks
Created by Robin Thieu, 2008 Fall
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Making MBS
Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=980&hasAd=1&settings=normaSubprime0712
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Making MBS
Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=980&hasAd=1&settings=normaSubprime0712
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Making MBS
Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=980&hasAd=1&settings=normaSubprime0712
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Fannie Mae
Source: Analyticalwealth.com
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Mortgage Default
Source: The New York Times
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Stock price of FNM
Source: Thomson Financial
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FNM’ net losses in holding MBS
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Citigroup
11.7 billion wrote-off, in Q2 2008
55.1 billion write down in total asset
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Where AIG went wrongExposed to the U.S housing bubble: Mortgage insurance ABS, MBS, CDO investmentDerivative contracts: CDS
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Investment Banks
Business Model
The Process of Making CDOs
Risk Factors and Risk Exposure
The Future of Investment Banks
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Investment Banks
Created by Robin Thieu, 2008 Fall
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Investment Banks The Process of Making CDOs – Create CDOs based
on MBS
Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=980&hasAd=1&settings=normaSubprime0712
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Investment Banks The Process of Making CDOs – Cut it slices and
then issue bonds
Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=980&hasAd=1&settings=normaSubprime0712
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Investment Banks The Process of Making CDOs – the relationship
between Slices Rating and interest payments
Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=980&hasAd=1&settings=normaSubprime0712
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Investment Banks
Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=980&hasAd=1&settings=normaSubprime0712
The Process of Making CDOs – the Impact of Downgrade
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Investment Banks Risk Factors Risk Factors
- Fare Value of Subprime Mortgage Loan
- The Cost of Short-term Borrowing
Risk ExposureRisk Exposure
- Market Price of CDOs
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Investment Banks
The Future of Investment Banks
- In the Short – term In the Short – term :
the example of Goldman Sachs & Morgan Stanley
- In the Long- term In the Long- term : Performance
Matter!
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Credit Crunch
less funds available more expensive cost of capital
“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 CoyBW, Oct 3, 2008
Created by Robin Thieu, 2008 Fall
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Credit Manipulation
Created by Robin Thieu, 2008 Fall
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Thank you very much.
PQ + CQ > IQ