Subprime Crisis & India

SUBPRIME CRISIS & INDIA

Presented to – Mr. Satish K. Thukral Faculty – F. Management

By: KAMAL KANT SONI PG-08-36, INMANTEC, GHZ.

Americans were rolling in the dough.

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Then They started practically flushing their money down the toilet.

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Govt. spending, Corporate

NO PROBLEM Banks begin lending to people with BAD CREDIT (ARM) – Adjustable Rate Mortgage

WHAT IS

SUBPRIME LANDING RATE?

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Sub-prime Landing… Sub-prime lending is to borrow money to people with poor credit histories. Sub-prime lending rater are higher as compared to PLR

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Banks promised that housing prices will continue to rise.

Banks start selling

MORTGAGE BACKED SECURITIES*

*Investments of packaged home loans These are fine if the housing market goes up...bad if it doesn't.

9/11 shocks US and world economies

Fed drops interest rate to

1

Investors buy lots of mortgaged backed securities ...with very high fees

Real estate soars 10 – 20% from 2002 - 2006

Building up of the housing bubble

Home owners spend like celebs using Home Equity Loans

BUT…….

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LIQUIDITY OVER

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Starting 2006 housing bubble busted

So this happened...

Credit Bubble

Housing Bubble

Credit Bubble

Fed increases interest rate to

5.25

Adjustable Rate Mortgages increase with interest rates

Home Owners can't pay their mortgages

Home owners are forced out of their homes

When SUB-PRIME holders unable to repay

their loan, major banks who has shows losses in their balance sheet, file for Bankruptancy or got nationalized.

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In their BALANACE SHEET, In left side (liability), NOTHING IS

RIGHT, In right side (assets), NOTHING IS LEFT.

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So..What were

•During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79% from 2006. •Major banks and other financial institutions around the world have reported losses of approximately US$435 billion as of 17 July 2008. •During the week of September 14, 2008 the crisis accelerated, developing into a global financial crisis.resulting in the bankrupcy of some of the world’s biggest financial institutes..

The following week the Dow-Jones index of the largest companies traded

market declined 22%, the worst week in the FINANCIAL CRISIS & INDIA index's 118-year history 04/19/09 28

Since 1 January, 2008, owners of stocks in U.S.

corporations have suffered about $8 trillion in losses, as their holdings declined in value from $20 trillion to $12 trillion. Losses in other countries have averaged about 40%.

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Some of the world leading financial institutes and banks suffered heavy losses and some of them were declared as bankrupt the estimate of losses of some of the finanial institutes world wide is as follows: 31

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BEAR STERNS was acquired BY J P MORGAN in March 2008 FOR 1.2$ BILLION.IT AQUIRED AT PRICE OF JUST 10$ PER SHARE.

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Source:

Unemployment Rate

US Government digs deep to bailout the large financial institutions to the tune of...

$700B +

Neither presidential candidate really has a clue what to do...

Lets hope this thing works!

Canada: reduced interest rates and increasing liquidity Mexico: falling Peso and dwindling economy Brazil: Heavy credits, but stabilizing and recouping

“Borrow indefinitely: Only in America”

U.S.: ??? still working out financial bailouts; more bank failures to come

2009 budget deficit estimated to be close to $2 TRILLION, which is equal to 2.5% of GDP

Argentina: Heavy job losses, higher import tariffs and weaker Peso

Credit Crisis: The Americas

Which implies,

national debt can increase beyond 70% of GDP, the highest since the end of World War II 39

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A DOMINO EFFECT?

When America sneezes, the rest of the world catches a cold? ‘UNLIKELY’

Credit Crunch: Is it only in the United States?

Europe - European banks have lost more money than American banks due to investments in the U.S. mortgage market. Government stepping in to bail out banks from ‘going under’ in Denmark and U.K. Threat of recession in Irish Republic and Spain France, Germany, Italy and Portugal follow suit… Iceland is all but officially bankrupt

Some are most affected.

Japan: Mizuho, second largest bank lost more than

$6 bn Singapore: Temasek and GIC have become the biggest shareholders of Merill Lynch and UBS India: facing economic slowdown China: sitting on surplus goods

Some are indirectly affected

Australia, Malaysia, New Zealand, Singapore, South Korea and the Middle East have protected foreign currency deposits. Hence a promising economy…

Some are unaffected..

Poland: Part of Eurozone,but has a stable banking sector Ireland: First Eurozone country to slide into recession France: Sluggish economy heading for recession Hungary: -ve credit raing, heavy debts, huge current account deficit

Russia: Fast growing economy with large foreign reserves China: ??? Strained with economic surplus and counterfeit goods

India: Economic slowdown with high inflation and poverty

Singapore: Prosperous, government guarantee for deposits till 2010

BUT, the crisis is truly GLOBAL!

IMPACT ON CURRENCY

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Best Of A Bad Market

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Someone got lucky!

Alternate investment saw a surge

Impact on Crude Oil

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Global Market

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World Markets 50

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Credit Crunch

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A credit crunch is a sudden reduction in the general availability

Effect on INDIA

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Mr. Smith in USA, didn't paid his Loan

Mr. Sharma in India Lost His Investments

Even after providing so many home loans to their citizens the American banks still having the excess liquidity problem so they decided to invest in different stock markets of the world, along with Indian stock market

This Sudden Flow of Money in Indian Markets Resulted in Rise of Market

On the other side, in India After looking at Rise in Indian Stock Market

Due to credit crunch, American bank started pulling back there money from India…

•$16 Billion outflow from India in 2008 •Inflation at 12% •$291 Billion – Indian FX reserves as of 03 Oct. •IndianOil Corp costs to rise 70% to $45 Billion •Industrial growth plummets to 1.3% in August •Sensex down ~50% in 2008 63

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IMPACT ON INDIAN BANKS •ICICI Bank has the highest exposure of $1.5 billion. •SBI has an estimated exposure of $1 billion. •BoI of $300 million, and BoB of $150 million. •About 5-10 per cent of this figure could be the losses that these banks could incur.

In this way Mr. Smith didn’t paid his loan & due to this, Sharma g

Financial Crisis is in America….

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Steps taken by Indian Govt. Reduced into CRR to 5.5% Through cut into CRR, There is flow of 120+

thousand crore into Indian market Plan to lift the Ban from PN (i.e. participatory notes) Reduced the Prime Landing Rate by all Public sector Banks Reduced into ATF’s price (i.e. aircraft turbine fuel) Planning for putting Ban on short selling.

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So think before you invest because…

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After all, money doesn’t grow on trees

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What does the American Credit The end of American economic dominance and the birth of a new world order.. So, who will be the next superpower? Clue: Asian money is actually bailing out the western banks!

THANK YOU