11 September,

th 11

September, 2001

SUB-PRIME CRISIS Presente d by: Kush Gupta Rabin

Understanding the world of Sub-prime • Sub-prime mortgagesare loans made to borrowers which ØHave high credit risk, ØLack a strong credit history or ØHave high probabilities of default

Sub-prime as a Boon

Factors leading to Sub-prime Crisis Lower interest rate resulted into strong growth in mortgage origination

Credit Market Squeeze -Negative sentiments

Forced selling in Financial Markets

This has resulted into lower credit standard and steep rise in

CDO and other credit market losses & Downgrades

Resulted into liquidity crunch across the financial markets

Rise in inflation & other factors resulted into higher interest rates. Market

Rise in Mortgage Delinquencies

Decline in Home Sales resulted into increase in Housing Inventory

Decline In House Prices

Interest Rates Rally

The Housing Price Crash

Sub-Prime & Foreclosures

BANK LOSSES

CREDIT CRUNCH

•

Impact on Financial Institutions Bear Stearns filed for bankruptcy – sold off to JP

Morgan at $2 a share • French bank, BNP Paribas suspended 3 investment funds worth €2 billion • Dutch bank, NIBC announced losses of €137 million from mortgage backed securities • Northern Rock, UK’s 5th largest mortgage provider recorded withdrawal £1 billion in just 1 day – had to seek emergency funding from Bank of England

• Till date, financial institutions have written-down subprime-related losses of about USD 379 billion.

Impact on US Market • Dow Jones Index lost 10% between 13 – 17 August alone. • Mortgage Bonds, Equities → Commodities • Profits of US banks declined from $35.2 billion to $646 million, i.e., 89% during fourth quarter of 2007 – worst performance since 1990. • Sales volume of new homes dropped by 26% in 2007 v/s 2006 • Inventory of unsold new homes stood at 9.8 months • Financial institutions like Merrill Lynch, JP Morgan, Bear Stearns, Citibank laid off

Impact on International Market • Cumulative falls on major stock markets more than 10% • Erased staggering USD 4.5 trillion from global stock markets in 4 weeks • European Central Bank pumped 95 billion Euros into Euopean banking market • As per IMF, worldwide losses from US sub-prime crisis ran to $945 billion

Impact on Asian Market • Hong Kong's Hang Seng index fell 5.37% • In Japan, Nikkei index fell 3.35% • Shanghai fell 2.8% • Seoul was down 2.4% • Singapore's Straits Times index was off 3% • Indonesian index plunged 5% • India's Sensex fell almost 2%

Impact on Indian Market • ICICI Bank reported losses of $263 million in its investment exposures in USA • Even PSBs such as SBI, Bank of India, Bank of Baroda also hit by crisis • FII pull out July 26th– Aug 16 US$1.6 bn • Rs 3.3 tn eroded from Capital market • Depreciation in exchange rate from

Impact of SPC on a hypothetical NSE portfolio

Understandings & Lessons • Distorted Incentives without Accountability can spell Disaster • Central Bank faces moral hazard which needs to be resisted • Risk Allocation does not mean Risk Elimination • Complex mathematical models can also fail • True risk assessment of securities is

ADVICE • Wake up call for Indian regulatory authorities • Persuading retail investors by creating awareness among this segment

THANK