BanksSubprime Crisis

Joel DamitierCorey Lyon

Danny Hernandez

History of Banks Citigroup

Merger of Citicorp and Travelers Group Worlds Largest Financial Services

Organization

HSBC Focused mostly on lending

Bank of America Largest Bank Holding Company in the U.S.

Leading Up to the Sub-Prime Crisis

Banks would refuse to lend money to those with bad credit or low income.

In order to get a mortgage, the qualifications were strict General process: 1. Broker provides mortgage loan 2. Broker sells mortgage to a bank 3. Firms collect thousands of mortgages each month

that should continue throughout the life of the mortgages

4. Firm sells shares of that income to investors

Leading Up to the Sub-Prime Crisis

Banks steadily loosened up on how they lend money:1. SIVA- stated income, verified assets 2. NIVA- no income, verified assets3. NINA- no income, no assets

Banks thought this would produce more mortgages and more securities

Impact In the U.S.COMPANY BUSINESS TYPE LOSS(BILLION USD)

Citigroup bank $ 39.10

UBS AG bank $ 37.70

Credit Agricole bank $ 4.80

HSBC bank $ 20.40

Bank of America bank $ 7.95

CIBC bank $ 3.20

Deutsche Bank bank $ 7.70

JP Morgan Chase bank $ 5.50

Wells Fargo bank $ 2.90

Wachovia bank $ 11.10

Banks and The Subprime Crisis

Stock Prices dropped making banks lose money on investments

Risky Lending Easy for consumers to get loans High interest rates Borrowers could not afford the payments Borrowers would default Home Foreclosures

Banks and The Subprime Crisis

Banks and The Subprime Crisis

HSBC was the first to announce that they would see larger than anticipated losses from rising defaults in 2007

New Century Financial filed for bankruptcy court protection in 2007

Bank of America agreed to acquire Merrill Lynch in 2008

BOA doesn’t buy Lehman Brothers.

Stock Prices During Subprime Crisis

Impact In the U.S. Between June 2007 and November 2008,

Americans lost more than a quarter of their net worth.

Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008.

Americans' second-largest household asset, dropped by 22 percent, from $10.3 trillion in 2006 to $8 trillion in mid-2008.

Impact In the U.S. Investors don’t want to buy Mortgage Back

Securities (MBS) Affect on Borrower

Interest rates riseMore difficult to get loansDefaulting

After The Crisis Bailouts- Government intervention New laws enacted(financial reformed) Bank health improvement

For the first quarter in 2010, the net income of banks was $18 billion opposed to $5.6 billion exactly a year prior to that

Stricter lending

Lessons Learned Responsible lending and borrowing better monitoring bank

activities( transparency). we can develop additional policy

instruments.