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They were made foolish

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They were made foolish

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dog

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Defination of sub prime mortage • Sub prime mortgage crisis is an ongoing financial crisis triggered by a dramatic (more than normal) rise in mortgage delinquencies & foreclosures in the U.S • Rates are higher than prevailing market price because: • Low credit status of borrowers • Unsure employment status • Late payments, bankruptcies etc. • This sub prime lending includes mortgages, credit cards & car loans etc. Yogendra Singh PSB

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Sequence of events

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The crisis begins.....with facts • Dot com bubble and 11/09 attack • Decrease in interest rate

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• On June 30, 2004, the Federal Reserve began a cycle of interest rate hikes that raised the interest rates seventeen times and paused only in June 2006.

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• Several sub-prime mortgage holders defaulted on their loans and the first sign of a “crisis” emerged in March 2007 when shares in New Century Financial, one of the largest sub-prime lenders in the US and more than 100 sub prime mortgage lenders filed for bankruptcy.

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The subprime lending was 9% in 1996 but in 2004 it is 21%. So many sub prime loans are in default. Major banks and other financial institutions around the world have reported losses of approximately US$435 billion as of 17 July 2008. Yogendra Singh PSB

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• Right now there is “liquidity crisis” on wall street. Basically, because so many sub prime loans are in default, Wall Street investors are no longer supplying money to market which lenders use to lend out over and over again. Yogendra Singh PSB

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IMPACT OF GLOBAL RECESSION ON INDIA

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• Share market • Unemployment market • IT companies • Export market • Real estate market • FMCG / SMCG market • Financial services

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Corrective

Steps taken to Check Recession Yogendra Singh PSB

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• RBI needs to neutralise the outflow of FII money by unwinding the market stabilisation securities that it had used to sterilise the inflows when they happened. • This will mean drawing down the dollar reserves which is important at this hour. • In the IT sector, there should be correction in salary offerings rather than job cutting. • Public should spend wisely and save more. • In real estate the builders should drop prices, so as to bring buyers back into the market.

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Taxes including excise duty and custom duty should be reduced to lighten the adverse effect of economic crunch on various industries. • Also, the government should try and improve liquidity , while CRR and SLR must be cut further. • Indian Companies have to adopt a multi-pronged strategy, which includes diversification of the export markets, improving internal efficiencies to maintain cost competitiveness in a tight export market situation .

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Some quotes on the crisis • “We were at the brink of something that would have made anything that's happened in financial history look pale. We were very, very close to a system that was totally dysfunctional and would have not only gummed up the financial markets but gummed up the economy in a way that would take us years and years to repair” – Warren Buffet • “There could be a lot more bank closures in the coming months which could create significant investment opportunities. As many as thousand banks could go belly up” – Wilbur Ross • “It is quite likely that the current synchronized global economic boom and the universal, all encompassing asset bubble will lead to a colossal bust” – Dr. Marc Faber • “The money markets have completely broken down, with no trading taking place at all. There is no market any more. Central banks are the only providers of cash to the market, no one else is lending” – Christopher Reiger (Dresdner Kleinwort) Yogendra Singh PSB

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