What is Subprime Crisis

8/2/2019 What is Subprime Crisis

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What is subprime crisis? How it caused financial mayhem?

The current upheaval in the global financial markets has caused more mayhem in a fortnight than the world has seen

in its entire economic history.Although there are many reasons responsible for bringing the world to the doorstep of financial doom, the main cause

of this financial disaster is said to be thesub-prime loan.'So what is this sub-prime loan? And why has it caused global panic? If it is related to the American housing sector,why should it affect Indian and other markets?A sub-prime loanSub-prime mortgage loans (or housing loans or junk loans) are very risky. But since profits are high where the risk ishigh, a lot of lenders get into this business to try and make a quick buck.Sub-prime loans are dicey as they are given to people with unstable incomes or low creditworthiness. Theseindividuals are not financially sound enough to be given a loan when judged under the strict standards that shouldnormally be followed by a bank or lending institution.However, there's more to it. Let us simplify this issue to understand better how sub-prime loans work and how theybrought the world down to its knees.Read on. . .Image: An advertisement for home loan modifications hangs on a suburban telephone pole in Moreno Valley,California. The number of unsold properties has hit an all-time high in places like Moreno Valley.It all begins with an American wanting to live the famed American dream.So he seeks a housing loan to give shape to his dream home. But there is a slight problem. He doesn't have good

credit rating. This means that he is unable to clear all the stringent conditions that a bank imposes on an individualbefore it sanctions a loan.Since his credit is not good enough, no bank will give him a home loan as there is a fear that the chances of a defaultby him are high. Banks don't like customers who default on their payments.But lo!, before the American dream can fade away, there enters a second American -- usually a robust financialinstitution -- who has good credit rating and is willing to take on some amount of risk.

Given his good credit rating, the bank is willing to give the second American a loan. The bank gives the loan at acertain rate of interest.The second American then divides this loan into a lot of small portions and gives them out as home loans to lots ofother Americans -- like the first American -- who do not have a great credit rating and to whom the bank would nothave given a home loan in the first place.The second American gives out these loans at a rate of interest that is much higher rate than the rate at which heborrowed money from the bank. This higher rate is referred to as the sub-prime rate and this home loan market isreferred to as the sub-prime home loan market.Image: Tourists pose with the Wall St. bull in the financial district in New York City.
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Also by giving out a home loan to lots of individuals, the second American is trying to hedge his bets. He feels thateven if a few of his borrowers default, his overall position would not be affected much, and he will end up making aneat profit.Now if this home loan market is sub-prime, what is prime? The prime home loan market refers to individuals whohave good credit ratings and to whom the banks lend directly.Now let's get back to the sub-prime market. The institution giving out loans in the sub-prime market does not stophere. It does not wait for the principal and the interest on the sub-prime home loans to be repaid, so that it can repayits loan to the bank (the prime lender), which has given it the loan.Image: John Parker protests as foreclosed homes are auctioned off outside the Norwalk Courthouse inNorwalk, CaliforniaSo what does the institution do?It goes ahead andsecuritises' these loans. Securitisation means converting these home loans into financial

securities, which promise to pay a certain rate of interest. These financial securities are then sold to big institutionalinvestors.Many investment banks (or institutions like the second American' in our story) sold complicated securities that were

backed by debt which was very risky.And how are these investors repaid? The interest and the principal that is repaid by the sub-prime borrowers throughequated monthly installments (EMIs) is passed onto these institutional investors.Image: A sign is posted in front of a bank owned home that is for sale in Richmond, California.September 25, 2008

The institution giving out the sub-prime loans takes the money that it gets by selling the financial securities andpasses it on to the bank he had taken the loan from, thereby repaying the loan. And everybody lives happily everafter. Or so it would have seemed.The sub-prime home loans were given out as floating rate home loans. A floating rate home loan as the namesuggests is not fixed. As interest rates go up, the interest rate on floating rate home loans also go up. As interestrates to be paid on floating rate home loans go up, the EMIs that need to be paid to service these loans go up as well.Image: Hundreds of people facing difficulties paying their mortgages wait in line in front of a hotel inWashington, DC to receive free financial counseling from the Neighborhood Assistance Corporation ofAmerica.

With US interest rising, the EMIs too increased. Higher EMIs hit the sub-prime borrowers hard. A lot of them in thefirst place had unstable incomes and poor credit rating.They, thus, defaulted. Once more and more sub-prime borrowers started defaulting, payments to the institutionalinvestors who had bought the financial securities stopped, leading to huge losses.The problem primarily began with the United States keeping its interest rates very low for a very long time, thusencouraging Americans to go in for housing loans, or mortgages. Lower interest rates led to buyers wanting to takeon bigger loans, and thus bigger and better homes.Image: An Orange County Sheriff eviction notice hangs on a house to be sold in a foreclosure auction ofmore than 1,500 southern California homes in Laguna Hills, California


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But life was fine. With the American economy doing well at that time and housing prices soaring on the back of hugedemand for real estate and bigger and better homes, financial institutions saw a mouthwatering opportunity in themortgage market.In their zeal to make a quick buck, these institutions relaxed the strict regulatory procedures before extending housingloans to people with unstable jobs and weak credit standing.Few controls were put in place to handle the situation in case the housing bubble' burst. And when the US

economy began to slow down, the house of cards began to fall.The crisis began with the bursting of the United States housing bubble.Image: A long exposure view of the floor of the New York Stock Exchange.A slowing US economy, high interest rates, unrealistic real estate prices, high inflation and rising oil tags together ledto a fall in stock markets, growth stagnation, job losses, lack of consumer spending, a virtual halt to new jobs, andforeclosures and defaults.Sub-prime homeowners began to default as they could no longer afford to pay their EMIs. A deluge of such defaults

inundated these institutions and banks, wiping out their net worth. Their mortgage-backed securities were almostworthless as real estate prices crashed.The moment it was found out that these institutions had failed to manage the risk, panic spread. Investors realisedthat they could hardly put any value on the securities that these institutions were selling. This caused many a WallStreet pillar to crumble.Image: US Treasury Secretary Henry Paulson holds a news conference at the Treasury Department.As defaults kept rising, these institutions could not service their loans that they had taken from banks. So they turnedto other financial firms to help them out, but after a while these firms too stopped extending credit realizing that thecollateral backing this credit would soon lose value in the falling real estate market.Now burdened with tons of debt and no money to pay it back, the back of these financial entities broke, leading to the

current meltdown.Image: An advertisement seen through the window of a bank near Wall Street in New York City.

The problem worsened because institutions giving out sub-prime home loans could easily securitise it. Once aninstitution securitises a loan, it does not remain on the books of the institution.Hence that institution does not take the risk of the loan going bad. The risk is passed onto the investors who buy thefinancial securities issued for securitising the home loan.Another advantage of securitisation, which has now become a disadvantage, is that money keeps coming in.Once an institution securitises the first lot of home loans and repays the bank it has borrowed from, it can borrowagain to give out loans. The bank having been repaid and made its money does not have any inhibitions in lendingout money again.Image: The Citibank logo at a bank branch in San FranciscoGiven the fact that institutions giving out the loan did not take the risk, their incentive was in just giving out the loan.Whether the individual taking the home loan had the capacity to repay the loan or not, wasn't their problem.


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Thus proper due diligence to give out the home loan was not done and loans were extended to individuals who aremore likely to default.Other than this, greater the amount of loan that the institution gave out, greater was the amount it could securitiseand, hence, greater the amount of money it could earn.After borrowers started defaulting, it came to light that institutions giving out loans in the sub-prime market had beeninflating the incomes of borrowers, so that they could give out greater amount of home loans.By giving out greater amounts of home loan, they were able to securitise more, issue more financial securities andearn more money. Quite a vicious cycle, eh?Image: A foreclosure sign sits in front of a home for sale in Stockton, California.And so the story continued, till the day borrowers stop repaying. Investors who bought the financial securities couldbe serviced.Well, that still does not explain, why stock markets in India, fell? Here's why. . .Institutional investors who had invested in securitised paper from the sub-prime home loan market in the US, sawtheir investments turning into losses. Most big investors have a certain fixed proportion of their total investmentsinvested in various parts of the world. So...Image: US is not the only nation to be hit by the subprime bomb. A poll by researchers Fitch has revealed 10'sub-prime' blackspots across the UK -- areas where large numbers of homeowners with chequered credithistory have been given loans -- with the worst area named as Newport in South Wales, UK.

Once investments in the US turned bad, more money had to be invested in the US, to maintain that fixed proportion.In order to invest more money in the US, money had to come in from somewhere. To make up their losses in the sub-prime market in the United States, they went out to sell their investments in emerging markets like India where theirinvestments have been doing well.So these big institutional investors, to make good of their losses in the sub-prime market, began to sell theirinvestments in India and other markets around the world. Since the amount of selling in the market is much higherthan the amount of buying, the Sensex began to tumble.The flight of capital from the Indian markets also led to a fall in the value of the rupee against the US dollar.Image: A deserted play ground in front of a newly built and nearly empty apartment building in Sesena nearMadrid, Spain. The downturn of the Spanish housing market has turned the place into a ghost town.Any other reason, apart from sub-prime crisis?Of course! Sub-prime crisis alone could not have caused such mayhem, although it is to blame for the beginning ofthe end.Thiscrisis is spreadingfrom sub-prime to prime mortgages, home equity loans, to commercial real estate, tounsecured consumer credit (credit cards, student loans, auto loans), to leveraged loans that financed reckless debt-laden leveraged buy outs, to municipal bonds, to industrial and commercial loans, to corporate bonds, to thederivative markets whose risk are indeterminate, etc.It has been a total systemic failure that has its roots in the US real estate and the sub-prime loan market.Note: Some analysts say that the worst might not be over. . .
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Image: A sign advertising 'condominiums for sale' in San Francisco, California."The United States is so broke, its people at every level -- from the Federal Reserve on down -- don't know whetherto shit or go blind," wrote James Howard Kunstler an American author and social critic - in one of his blogs.But what unprecedented events led to this great financial catastrophe? As an op-ed in The Wall Street Journalputs it,"With the benefit of hindsight, everyone can see that the US economy built up an enormous credit bubble that hasnow popped. . . this bubble was created principally by a Federal Reserve that kept real interest rates too low for toolong. In doing so the Fed created a subsidy for debt and a commodity price spike."The Fed's 'cheap money' policy created artificial demand for housing which drove prices to unsustainable levels. Asgreed took over, dubious sub-prime liabilities were sold to hedge funds, insurance companies and foreign banks. Andthen the American financial markets were hit by a severe liquidity and credit crunch. High oil tags, lower spending bythe corporate sector, rising unemployment, etc added to the woes of not just the Americans, but the entire world."Fastening your seat belts may not be enough for this ride. Better superglue yourselves to the floorboards and prayfor God's mercy," concludes Kunstler. So when did the fall really begin?Click here to find out. . .Image: A sign outside a home for sale n North Las Vegas, NevadaAugust 9, 2007 is the official date when the crisis is said to have hit global finances. But the rot had started muchearlier.In 2006, the US housing market started to feel the pain of high interest rates -- which, between 2004 and 2006, hadrisen from one per cent to 5.35 per cent -- resulting in default rates on *sub-prime loans rising to record level.(*Highrisk loans to customers with poor or no credit histories).February 22, 2007: HSBC fires head of its US mortgage lending business as losses reach $10.5 billion. On February23, the Bombay Stock Exchange's sensitive index -- the Sensex -- ended down 356 points at 13,656. (Because of thetime difference between India and the US, the market figures are of those a day later)March 8, 2007: Biggest US house builder DR Horton warns of huge losses from sub-prime fall-out.

March 12, 2007: Shares in New Century Financial, one of the biggest sub-prime lenders in the US, were suspendedamid fears it might be heading for bankruptcy.Sensex gained 80 points to close at 12,983 on March 13.March 13, 2007: Wall Street hit by sub-prime fears and on March 14, the sell-off on US and Asian markets saw theSensex close with a loss of 453 points at 12,530. The NSE Nifty closed at 3,641, down 130 points.Image: The headquarters of The New Century Financial Corporation in Irvine, California

March 16: US-based sub-prime firm Accredited Home Lenders Holding said it would sell $2.7 billion of its sub-primeloan book -- at a heavy discount -- in order to generate some cash.On March 19, the Indian market closed at 12,645, up 215 points.April 2 2007: New Century Financial, which was once the second-largest originator of subprime mortgages in UnitedStates files for Chapter 11 bankruptcy and lays off 3,299 people.Sensex gained 169 points to close at 12,625 on April 3, 2007.May 3, 2007: GM finance unit loses heavily on sub-prime mortgages, and UBS closes its US sub-prime lending arm,Dillon Read Capital Management.Sensex ends down 144 points at 13,934, on May 4.
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June 22, 2007: Investment bank Bear Stearns revealed it had spent $3.2 billion bailing out two of its funds exposedto the sub-prime market. The bailout of the fund was the largest by a bank in almost a decade.The Index ended with a gain of 21 points at 14,488.July 18, 2007: Bear Stearns rings the warning bell. It tells investors that they will get little, if any, of the moneyinvested in two of its hedge funds after rival banks refuse to help it bail them out.The India market was unrattled by the news, and it closed with a gain of 249 points at 15,550, on July 19.Image: A Bear Stearns employee leaves the company's headquarters in New YorkJuly 20, 2007: US Federal Reserve chairman Ben Bernanke warns that the US sub-prime crisis could cost up to$100 billion.The Sensex continued with its march and ended up 167 points at 15,732 on July 23.July 27, 2007: Worries about the sub-prime crisis hammered global stock markets and the main US Dow Jones stockindex slipped.The Sensex was no exception as it ended down 542 points on that day. July 31, 2007: Bear Stearns stopped clients from withdrawing cash from a third fund, saying it has beenoverwhelmed by redemption requests. The lender also filed for bankruptcy protection for the two funds i t had to bailout earlier.Next day, that is, August 1, the Sensex ended with a hefty loss of 645 points at 14,936. The NSE Nifty ended at4,346, down 183 points. Elsewhere in Asia, Hong Kong's Hang Seng slumped 730 points to 22,455. Japan's Nikkeiplunged 378 points to 16,871. Taiwan's Taiwan Weighted index crashed 395 points to 8892, and China's ShanghaiComposite index shed 170 points at 4,301.August 6, 2007: American Home Mortgage, one of the largest US independent home loan providers, filed forbankruptcy after laying off the majority of its staff.And Sensex ended down 235 points on that day and on August 7 it gained 30 points at close.

August 9, 2007 French banking major, BNP Paribas announced that it could not fairly value the underlying assets inthree funds -- Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia -- as a result ofexposure to US subprime mortgage lending markets.Faced with potentially massive exposure, the European Central Bank immediately stepped in to ease market worriesby opening lines of euro 96.8 billion (then $130 billion) in low-interest credit. The Federal Reserve, the Bank ofCanada and the Bank of Japan also intervened.On August 10, 2007, the Sensex marginally shrugged off the US subprime woes and closed with a loss of 232 pointsat 14,868.Image: BNP Paribas headquarters in Paris | Photograph: Eric Piermont/AFP/Getty ImagesAlso read:Why Lehman Bros went bust; what it means for you

Why Lehman Bros went bust; what it means for youSeptember 16, 2008

Lehman Brothers is no more. Merrill Lynch has gone down the Bank of America maw. AIG too could go belly up. Witha doubt, these developments in America are the most shocking events to have hit global financial markets. So wheredid it all begin? And what does it mean for the Indian stock markets? Find out. . .
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What is (or was)Lehman Brothers?America's fourth-largest investment bank Lehman Brothers Holdings Inc has filed the biggest bankruptcy petitionknown to mankind.The 158-year-old firm was founded by brothers Henry, Emanuel and Mayer Lehman, Jewish immigrants to the USfrom Germany, in 1850. Henry set up a general store in Alabama in 1844 and was later joined by his brothers. In1850 they set up the merchant bank in New York after having made money in railway bonds. So what went wrong?Compiled by Rediff Business DeskImage: The headquarters of the investment bank Lehman Brothers in Manhattan in New York City.August 16, 2007: Largest mortgage lender Countrywide draws on its entire $11.5 billion credit line as liquidity crisislooms. Australian mortgage lender Rams also admits liquidity problems.And on August 17, the Sensex tanks 217 points at 14,142August 17, 2007: The Fed cut the rate at which it lends to banks by half of a percentage point to 5.75 per cent, andonce more warns of credit crunch.Taking cues from the global markets following the surprise 50bps rate cut by the US Fed on Friday (Aug 17), the

Sensex closed with a gain of 286 points at 14,427 on Monday. The NSE Nifty ended at 4,209, up 101 points.August 21, 2007: UK sub-prime lenders begin to withdraw mortgages.On August 22, the Sensex ended with a gain of 260 points at 14,249.August 28, 2007: Leipzig, Germany based Sachsen LB Landesbank faced collapse after investing in the sub-primemarket. Landesbank Baden-Wuerttemberg buys it for euro 250m. It was one of Europe's biggest victims of the creditcrisis.But the ripple effect had not touched the Indian markets and the Sensex ended with a gain of 74 points at 14,993.NSE Nift closed up 39 points at 4,359 on August 29.September 3, 2007 German corporate lender IKB announces a a loss of $1bn on investments linked to the US sub-prime market.Sensex gained 43 points on September 4 to close at 15,465.Image: Marcus West (L) and Larry Heard participate in a protest at a Countrywide home loans center inOrlando, Flori September 4, 2007: London Interbank Offered Rate or *Libor rate rises to 6.7975%, highest sinceDecember 1998. (*It is the rate of interest at which banks offer to lend money to one another).Bank of China reveals $9bn in sub-prime losses but Chinese government said its foreign exchange reserves will notbe affectedThe Sensex ended September 5 with a marginal loss of 19 points at 15,446. The NSE Nifty ended at 4,476, down 3points.September 14, 2007: British bank, Northern Rock, which relied heavily on the markets, rather than savers' depositsto fund its mortgage lending asked for and was granted emergency financial support from the Bank of England. The

bank is now owned by the UK government.On September 17 the Index closed with a loss of 99 points at 15,504.September 18, 2007: The US Federal Reserve cut its main interest rate by half a percentage point for the first time infour years, to 4.75 per cent, a move that resulted in a strong rally across the globe.On September 19, the Sensex ended with its biggest-ever single-day gain of 654 points at 16,323. The Nifty gained186 points to close at 4,732.September 19, 2007: The Bank of England announces that it will auction pound 10 billion.The Sensex gained 25 points at 16,348 on September 20. The Nifty gained 15 points to close at 4,748.


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Image: Northern Rock branch in Northumberland Street |da

October 1, 2007: Swiss bank UBS world's biggest bank announced losses of $3.4 billion from sub-prime relatedinvestments. Later investment bank chairman and chief executive officer Huw Jenkins stepped down.Citigroup unveils a sub-prime related loss of $3.1 billion. Two weeks later Citigroup is forced to write down a further$5.9 billion. Within six months, its losses stand at a whopping $40 billion. On November 5, its chief executive andchairman Charles Prince resigned.On October 3, Sensex nears 18K, ends up 561 points. The NSE Nifty ended at 5211, up 142 pointsOctober 5, 2007: Investment bank Merrill Lynch reveals $5.6 billion sub-prime losses. On October 30, Merrill Lynchchief Stan O'Neal resigned.Next day, the Sensex ended with a loss of 282 points at 17,491.November 9, 2007: US's fourth largest lender Wachovia revealed a $1.1 billion loss due to decline in value of itsmortgage debt plus $600m to cover loan losses (total $1.7 billion).Sensex ends down 171 points.November 12, 2007: The three biggest US banking groups -- Citigroup, Bank of America and JPMorganChase --agree to a $75 billion superfund to restore confidence to credit markets.November 13, 2007: Bank of America writes off $3 billion in sub-prime losses.Sensex bounced back and ended up nearly 300 points.Image: Merrill Lynch office in Singapore

November 14, 2007: Mizuho, Japan's second largest banking group, saw a 17 per cent drop in first-half net profitsand cut its full-year operating profit forecast by 13 per cent, largely as a result of sub-prime-related losses at its

securities arm.On November 14, in one of the biggest ever rally, the Sensex zoomed 894 points, but the next day it ended down 144points at 19,785.November 15, 2007: British banking major Barclays said it had written down $2.6 billion in sub-prime losses.Sensex ended down 87 points at 19,698 on November 16.November 20, 2007: US mortgage guarantor Freddie Mac sets aside $1.2bn to cover bad loans and reports a $2bnloss.Sensex ended with a loss of 678 points at 18,603 on November 21, one of the biggest single-day loss in absoluteterms. The Nifty lost 220 points to close at 5,561.December 4, 2007: US mortgage giant Fannie Mae issues $7 billion of shares to cover losses linked to the housingmarket.On December 6, the Sensex ended up 58 points at 19,796.Image: Freddie Mac headquarters in McClean, Virginia |December 6, 2007: President George W Bush outlines plans to protect more than a million homeowners hit by theUS housing slump. The Bank of England cut UK interest rates for the first time since 2005, amid signs that theeconomy is slowing.Sensex ended up 170 points at 19,966 on December 7.


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December 10, 2007: Swiss bank UBS reports a further $10-billion write-down caused by bad debts in the UShousing market. Lloyds TSB reveals that bad debt linked to the US sub-prime mortgage crisis will cost it pound 200million.December 11, 2007: Fed cut interest rates for a third time to 4.25 per cent to ease the credit crunch.On December 12, the Sensex gained 85 points.December 13, 2007: World central banks agree coordinated action to inject at least $100 billion into short-term inter-bank credit markets to restore confidence.The Sensex, however, ended down 74 points at 20,031 on December 14.Image: A sign hangs outside a Lloyds bank on Threadneedle St in London

December 19, 2007: Morgan Stanley writes off $9.4bn in sub-prime losses and sells a 9.9 per cent stake in thecompany to the Chinese state investment company CIC for $5bn to rebuild its capital.Sensex ended up 71 points at 19,163 on December 20.January 4, 2008: US unemployment rises sharply as job report sparks fall in stock marketSensex remains unfazed and ends up 126 points on January 6.January 7, 2008: President George W Bush admits that the credit crunch could slow the US economy in 2008, butsays it is still fundamentally strong.Sensex hits 21,000; ends up 61 points on January 8.January 9, 2008: Bear Stearns boss James Cayne steps down after the firm reveals $1.9 billion in sub-prime losses,the largest in its history.World Bank said that world economic growth will slow in 2008 due to credit crunch, but strong performance in China

and India will cushion impact.The Sensex ended with a loss of 288 points at 20,582 on January 10.Image: People walk by the Morgan Stanley headquarters in Times Square in New York City


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anuary 15, 2008: Citigroup, the largest bank in the US, reported a $9.8 billion loss for the fourth quarter and wrotedown $18 billion in sub-prime losses.Sensex tumbled to a low of 19,513, down 738 points on January 16.January 28, 2008: Belgian bank Fortis warned its losses connected to bad US mortgage debt could be as high as$1.47 billion.Sensex ended down 61 points at 18,091.January 29, 2008: The US Federal Bureau of Investigation launched an investigation into 14 companies involved inthe sub-prime mortgage crisis.Sensex continued to be in the red, as it ended down 333 points at 17,759 on January 30.January 30, 2008: The US Federal Reserve cut interest rates to 3% from 3.5%. It was the second cut in nine days.US economic growth slowed.Sensex ends down 110 points at 17,649 on January 31.February 5, 2008: US financial firm GMAC, which owns sub-prime lender Residential Capital, said it has made a$2.3 billion loss in 2007, compared with a $2.1 billion profit the year before.Image: The headoffice of Fortis Bank in Utrecht |February 6, 2008: Wall Street saw its worst share losses in almost a year, amid fears that the worst US housingslump in 25 years is crippling the wider economy.On February 7 the Sensex closed with a loss of over 600 points at 17,527. The NSE Nifty closed with a loss of 190points at 5,133.February 10, 2008: Leaders from the G7 group of industrialised nations said worldwide losses from the US mortgagecrisis could reach $400 billion.Sensex shed 834 points to close at 16,631 on February 11.February 12, 2008: Swiss bank Credit Suisse said losses on sub-prime investments were $1.8 billion. Sensex endsup 341 points.February 13, 2008: Britain's Bradford & Bingley cut the value of its sub-prime mortgage-related investments by$284.5 million. Japan's financial watchdog said Japanese banks suffered losses of $5.6 billion by the end of 2007.The Sensex closed with a huge gain of 817 points at 17,764 on February 14.Image: Credit Suisse Bank in Geneva |


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February 14, 2008: Commerzbank, Germany's second-biggest bank, cut $1.1 billion off the value of investmentslinked to the sub-prime mortgage crisis and warned its losses could worsen.March 7, 2008: The former bosses of Merrill Lynch and Citigroup were questioned by a Congressional panel overtheir bumper pay -- despite huge, sub-prime related bosses at their banks.The Sensex ended the day with a marginal loss of 52 points at 15,924 on March 10. The NSE Nifty finished with again of 29 points at 4,800.March 11, 2008: Central banks made another coordinated attempt to ease conditions in the credit markets, byannouncing $200 billion of new emergency lending for banks.March 14, 2008: Investment fund Carlyle Capital failed as the credit crisis spreads from sub-prime related products toother mortgage-backed investments.Bear Stearns received emergency funding, after its exposure to mortgage-backed investments underminedconfidence in the bank.And on March 17, Sensex ended with a hefty loss of 951 points at 14,809 -- one of its biggest single-day falls.Image: The building of the German Commerzbank building in Duesseldorf, Germany

March 17, 2008: Wall Street investment bank Bear Stearns was acquired by JPMorgan Chase for $240m, a fractionof its share price, in deal backed by $30 billion in Fed loans.The bank got into trouble over its huge exposure to sub-prime mortgage-backed securities.The Sensex settled at 14,833 -- up 24 points. The NSE Nifty ended with a gain of 30 points at 4,533.March 18, 2008: Wall Street investment banks Goldman Sachs and Lehman Brothers revealed that their first quarterprofits have been halved by the credit crunch.On March 19, Sensex gained 161 points.March 31, 2008: US Treasury announced major package to reform regulation of US financial markets and preventfuture financial crises.

Sensex ends down 18 points.

Image: A statue of the first United States Secretary of the Treasury Alexander Hamilton stands in front of theU.S. Treasury in Washington, DC

May 22, 2008: Swiss bank UBS, one of the worst affected by the credit crunch, launches a $15.5bn rights issue tocover some of the $37bn it lost on assets linked to US mortgage debt.Sensex fell 336 points on May 23.June 19, 2008: The FBI arrests 406 people, including brokers and housing developers, as part of a crackdown onalleged mortgage frauds worth $1 billion.Separately, two former Bear Stearns workers faced criminal charges related to the collapse of two hedge funds linkedto sub-prime mortgages. It is alleged they knew of the funds' problems but did not disclose them to investors, who losta total of $1.4 billion.Sensex ends down 278 points on June 23.July 13, 2008: US mortgage lender IndyMac collapsed -- the second-biggest bank in US history to fail.On July 14, the Sensex finally ended with a loss of 139 points at 13,331.


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Image: Ralph Cioffi and his wife walk out of a Brooklyn court house. Cioffi and Matthew Tannin were arrestedn New Jersey and Manhattan and had been indicted for conspiracy to commit securities fraud and mail fraudand could face up to 20 years in prisonJuly 14, 2008: Financial authorities step in to assist America's two largest lenders, Fannie Mae and Freddie Mac. Asguarantors of $5 trillion worth of home loans, they are crucial to the US housing market and authorities agreed theycould not be allowed to fail.

On July 15 Sensex tumbled by 654.32 points at 12,676.19, a level last seen on March 6, 2008.September 5, 2008: US unemployment rate rose to 6.1%.September 7, 2008: Mortgage lenders Fannie Mae and Freddie Mac -- which account for nearly half of theoutstanding mortgages in the US -- were rescued by the US government in one of the largest bailouts in US history.On September 8 the Sensex rose by 461 points.September 10, 2008: Wall Street bank Lehman Brothers posted a loss of $3.9 billion (2.2 billion) for the three

months to August.Sensex traded in the negative and ended down 339 points at 14,339.Image: The U.S. Securities and Exchange Commission in Washington, DC

September 15, 2008: After days of searching frantically for a buyer, Lehman Brothers filed for Chapter 11 bankruptcyprotection, becoming the first major bank to collapse since the start of the credit crisis.US bank Merrill Lynch agreed to be taken over by Bank of America for $50 billion.On September 17 Sensex declined by 255.90 points.September 17, 2008: Insurer American International Group apparently was too big to fail. The mammoth insurer,which had been pushed to the brink of bankruptcy by problems originating in the US mortgage crisis, is being bailedout by the Federal Reserve.The Fed will extend a 24-month bridge loan of $85.0 billion to the insurer, in return for an unprecedented acquisitionof a 79.9 per cent stake in the firm by the central bank.Barclays announces that it will buy Lehman US units for $1.75 billion.In a sharp pull-back: Sensex recovered over 700 points, to end up 53 points on September 18.Image: A Barclays Bank branch in North London |

September 19, 2008: The US government proposed to create a $700-billion rescue fund for the American financialsector.The fund will be used to buy back bad debt from ailing US banks and other financial institutions.President George W Bush urged the Congress to endorse his plan as soon as possible. Congress is expected to take

a decision in the coming days.The move increased the US public debt to $11.3 trillion.The President said: "This is a big package because it was a big problem." He argued that the drastic measures werenecessary to keep the economy going. The president admitted that the plan would be funded with tax money, butadded that "over time, we're going to get a lot of the money back."


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Relieved investors sent stocks soaring on Wall Street and around the globe. The Dow-Jones industrials average rose368 points after surging 410 points the day before on rumours that the federal action was afoot.The Sensex on September 19 ended with a significant gain of 5.5% (727 points) at 14,042. The NSE Nifty soaredover 5% (207 points) to 4,245.That, till now, is the scenario. If the events that led to the world's worst-ever financial crisis are not scary enough,some economists fear that this might not be the end of the problem. So will things worsen? Only time will tell. . .

Image: US President George W. Bush (L) speaks alongside Treasury Secretary Henry Paulson (R) regardingthe economy in the Rose Garden at the White House in Washington, DC

Why Lehman Bros went bust; what it means for you

Lehman Bros, which till June 2008 had not reported a quarterly loss even once, had earlier survived many aneconomic crises, like railroad bankruptcies of the 1800s, the Great Depression in the 1930s, and the collapse ofLong-Term Capital Management in the 1990s.Thus the collapse of the giant investment bank came as a major shock for the entire world markets that plunged afterLehman filed a Chapter 11 petition with US Bankruptcy Court in Manhattan.The $613 billion (some estimates put the size at $639 billion) bankruptcy thus throws up the question: why did theWall Street giant go bust? Here's why. . . Image: The Wall Street bull.

Why did Lehman Brothers go bankrupt?The giant investment bank succumbed to the sub-prime mortgage crisis that has rocked the United States and theglobal economy. Lehman was strangled by a massive credit crisis and fast plummeting real estate prices.The gargantuan $60 billion loss in bad real estate loans forced the bank to file for bankruptcy.However, the fall of the 158-year-year institution that started cotton trade in US before the American Civil War andfinanced the railroad that built a nation, got hit by a large dose of bad luck, pride, arrogance and greed. Primarily, thepride of its chief executive office Richard Fuld.But there were more reason. Check out what they were. . .Image: Pedestrian and vehicular traffic pass the headquarters building of Lehman Brothers.

Lehman's collapse was also triggered by the refusal of other banks to do business with it because of its complex and,at times, opaque ways of trading. Housing loans made by the bank to people with little support made these loans very

risky, and when interest rates rose, these borrowers could no more repay Lehman. This led to huge losses, the extentof which is not yet clear.Thus other banks stopped trading with Lehman. This led to it losing almost all business and triggered its fall.The final straw for Lehman was the fact that both Barclays Plc of the United Kingdom and Bank of America Corppulled out of takeover talks. BofA bought out Merrill Lynch for $50 billion.However, Barclays has now said that it is in discussions with Lehman Brothers about buying certain assets of thestricken US investment bank.


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"Barclays confirms that it is discussing with Lehman Brothers the possible acquisition of certain Lehman Brothersassets on terms that would be attractive to Barclay's shareholders," Britain's third largest bank said in a s tatement.Image: A Wall Street sign is seen in front of the New York Stock Exchange.When other banks do not want to buy Lehman, why is Barclays interested?Barclays wanted to buy Lehman out at a discount, so to speak. But when Lehman CEO Fuld decided that his bankwas worth much more than what Barclays had apparently offered, Barclays stepped back.Now that Lehman has filed for bankruptcy, its assets are available fairly cheap. However, the biggest problem is totake on Lehman's enormous liabilities.Image: A Barclays Bank branch signboard pictured in North London, and an ABN Amro signboard below.How far is the CEO of the company responsible for Lehman's fall?Wall Street analysts believe that it was the 'hubris' of Richard Fuld, the 62-year-old CEO of Lehman, who did not takethe telltale signs of impending doom very seriously. Fuld, nicknamed The Gorilla for his foul temper, intimidatingpresence and tough talk, rejected many bids to save Lehman because he thought that the sinking giant was muchbigger than Wall Street was giving it credit for, and wanted to get more price for the sale of the company. Analysts say if the bank was sold just a week before it went kaput, it could have been saved the ignominy of abankruptcy, but Fuld was far too adamant to see reason. Result: the end of a 158-year-old financial giant.Image: Richard Fuld, CEO, Lehman Brothers.

Why Lehman Bros went bust; what it means for youSeptember 16, 2008

Could the United States government helped, like it helped Bear Stearns in May this year, and Fannie Mae andFreddie Mac earlier this month?The US government could have helped, but US Treasury Secretary Henry Paulson said that it would not use up anymore taxpayer dollars to bail out Lehman Brothers as it would lead to investment banks getting away with theirgambling ways. Paulson had bailed out Fannie Mae, Freddie Mac and Bear Stearns, saying that if the governmenthad not done so, the US housing loan market would have collapsed leading to gigantic losses for hundreds of banksall over the globe that have invested in US property.Paulson, however, believes that a brokerage major like Lehman, which does not have a direct connection withordinary people who have taken on home loans, need not be bailed out as it would not cause any systemic damageto the US economy.Image: US Secretary of the Treasury Henry Paulson.

What is Subprime Crisis

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