Main Subprime Projet

8/10/2019 Main Subprime Projet

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Subprime

Crisis and its

impact on

India

Contents page no.

Submitted by:

Atul Dogra 12

Ravneet Singh 48

Sapna Madan 60

Shruti Garg 69

Shoubhagya 67

t!av "ain 81

Sub#itted to$ %ro&' A"( )o!e

Section: FN9


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1' Subpri#e *ri!i! 4

2' )a*+ground in&or#ation ,

nder!tanding the *au!e! and ri!+! o& the !ubpri#e *ri!i! ,

nder!tanding the e&&e*t on *orporation! and inve!tor! 7

-' (au!e! o& (ri!i! 8

.he hou!ing do/nturn 8

Role o& borro/er! 9

Role o& &inan*ial in!titution! 9

Role o& !e*uritiation 10

Role o& #ortgage bro+er! 11

Role o& #ortgage under/riter! 11

Role o& govern#ent and &inan*ial in!titution! 11

Role o& *redit rating agen*ie! 12

Role o& *entral )an+ 12

4' &&e*t! 14

&&e*t on !to*+ #ar+et! 14

&&e*t on &inan*ial in!titution! 14

&&e*t on in!uran*e *o#panie! 1,

2


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6' pe*tation! and &ore*a!t! 24

7' :#pa*t o& S Subpri#e (ri!i! on :ndia 26

Subprime Mortgage Crisis.he subprime mortgage crisisi! an ongoing e*ono#i* proble# #ani&e!ting it!el&through li;uidityi!!ue! in the global ban+ing !y!te# o/ing to &ore*lo!ure!/hi*ha**elerated in the nited State! in late 2006 and triggered a global &inan*ial *ri!i!through 2007 and 2008' .he *ri!i! began /ith the bur!ting o& the S hou!ing bubbleandhigh de&ault rate! on !ubpri#e and other ad3u!table rate #ortgage!ri!+borro/er!/ith lo/er in*o#e or le!!er *redit hi!torythan pri#e borro/er!'

4
http://en.wikipedia.org/wiki/Liquidityhttp://en.wikipedia.org/wiki/Foreclosurehttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Financial_crisishttp://en.wikipedia.org/wiki/United_States_housing_bubblehttp://en.wikipedia.org/wiki/Subprime_lendinghttp://en.wikipedia.org/wiki/Adjustable_rate_mortgagehttp://en.wikipedia.org/wiki/Borrowerhttp://en.wikipedia.org/wiki/Credit_historyhttp://en.wikipedia.org/wiki/Liquidityhttp://en.wikipedia.org/wiki/Foreclosurehttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Financial_crisishttp://en.wikipedia.org/wiki/United_States_housing_bubblehttp://en.wikipedia.org/wiki/Subprime_lendinghttp://en.wikipedia.org/wiki/Adjustable_rate_mortgagehttp://en.wikipedia.org/wiki/Borrowerhttp://en.wikipedia.org/wiki/Credit_history


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oan in*entive! and a long>ter# trend o& ri!ing hou!ing pri*e! en*ouraged borro/er! toa!!u#e #ortgage!? believing they /ould be able to re&inan*e at #ore &avorable ter#!later' o/ever? on*e hou!ing pri*e! !tarted to drop #oderately in 2006@2007 in #anypart! o& the 'S'? re&inan*ing be*a#e #ore di&&i*ult' De&ault!and &ore*lo!ure a*tivityin*rea!ed dra#ati*ally a! ARM intere!t rate! re!et higher' During 2007? nearly 1'-

#illion 'S' hou!ing propertie! /ere !ub3e*t to &ore*lo!ure a*tivity? up 79 &ro# 2006'

.he #ortgage lender! that retained *redit ri!+party inve!tor! via#ortgage>ba*+ed !e*uritie!invigorate the *o##er*ial paper #ar+et!'

.he !ubpri#e *ri!i! al!o pla*e! do/n/ard pre!!ure one*ono#i* gro/th?be*au!e &e/eror #ore epen!ive loan! de*rea!e inve!t#ent by bu!ine!!e! and *on!u#er !pending?

/hi*h drive the e*ono#y' A !eparate but related dyna#i* i! the do/nturn in the hou!ing#ar+et? /here a !urplu! inventory o& ho#e! ha! re!ulted in a !igni&i*ant de*line in ne/ho#e *on!tru*tion and hou!ing pri*e! in #any area!' .hi! al!o pla*e! do/n/ard pre!!ureon gro/th'8EFith intere!t rate! on a large nu#ber o& !ubpri#e and other ARM due toad3u!t up/ard during the 2008 period? 'S' legi!lator!? the'S' .rea!ury Depart#ent?and &inan*ial in!titution! are ta+ing a*tion' A !y!te#ati* progra# to li#it or de&er intere!trate ad3u!t#ent! /a! i#ple#ented to redu*e the e&&e*t' :n addition? lender! and borro/er!&a*ing de&ault! have been en*ouraged to *ooperate to enable borro/er! to !tay in theirho#e!' )an+! have !ought and re*eived over B2,0 billion in additional &und! &ro#inve!tor! to o&&!et lo!!e!'9E.he ri!+! to the broader e*ono#y *reated by the &inan*ial#ar+et *ri!i! and hou!ing #ar+et do/nturn /ere pri#ary &a*tor! in !everal de*i!ion! bythe 'S' ederal re!erve to *ut intere!t rate! and thee*ono#i* !ti#ulu! pa*+agepa!!edby (ongre!! and !igned by %re!ident George F' )u!hon ebruary 1-? 2008'10E11E12E)otha*tion! are de!igned to !ti#ulate e*ono#i* gro/th and in!pire *on&iden*e in the &inan*ial#ar+et!'

Background information

,
http://en.wikipedia.org/wiki/Default_(finance)http://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Credit_riskhttp://en.wikipedia.org/wiki/Securitizationhttp://en.wikipedia.org/wiki/Mortgage-backed_securitieshttp://en.wikipedia.org/wiki/Collateralized_debt_obligationshttp://en.wikipedia.org/wiki/Institutional_investorhttp://en.wikipedia.org/wiki/Institutional_investorhttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Commercial_paperhttp://en.wikipedia.org/wiki/Commercial_paperhttp://en.wikipedia.org/wiki/Credit_crunchhttp://en.wikipedia.org/wiki/Liquidityhttp://en.wikipedia.org/wiki/Economic_growthhttp://en.wikipedia.org/wiki/Economy_of_the_United_Stateshttp://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-7%23cite_note-7http://en.wikipedia.org/wiki/United_States_Congresshttp://en.wikipedia.org/wiki/U.S._Treasury_Departmenthttp://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-8%23cite_note-8http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-8%23cite_note-8http://en.wikipedia.org/wiki/Economic_Stimulus_Act_of_2008http://en.wikipedia.org/wiki/George_W._Bushhttp://en.wikipedia.org/wiki/February_13http://en.wikipedia.org/wiki/2008http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-9%23cite_note-9http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-10%23cite_note-10http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-Yahoo-mail-11%23cite_note-Yahoo-mail-11http://en.wikipedia.org/wiki/Default_(finance)http://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Credit_riskhttp://en.wikipedia.org/wiki/Securitizationhttp://en.wikipedia.org/wiki/Mortgage-backed_securitieshttp://en.wikipedia.org/wiki/Collateralized_debt_obligationshttp://en.wikipedia.org/wiki/Institutional_investorhttp://en.wikipedia.org/wiki/Institutional_investorhttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Commercial_paperhttp://en.wikipedia.org/wiki/Commercial_paperhttp://en.wikipedia.org/wiki/Credit_crunchhttp://en.wikipedia.org/wiki/Liquidityhttp://en.wikipedia.org/wiki/Economic_growthhttp://en.wikipedia.org/wiki/Economy_of_the_United_Stateshttp://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-7%23cite_note-7http://en.wikipedia.org/wiki/United_States_Congresshttp://en.wikipedia.org/wiki/U.S._Treasury_Departmenthttp://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-8%23cite_note-8http://en.wikipedia.org/wiki/Economic_Stimulus_Act_of_2008http://en.wikipedia.org/wiki/George_W._Bushhttp://en.wikipedia.org/wiki/February_13http://en.wikipedia.org/wiki/2008http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-9%23cite_note-9http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-10%23cite_note-10http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-Yahoo-mail-11%23cite_note-Yahoo-mail-11


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.he ter# !ubpri#e lending re&er! to the pra*ti*e o& #a+ingloan!to borro/er! /ho donot ;uali&y &or #ar+et intere!t rate!o/ing to variou! ri!+ &a*tor!? !u*h a! in*o#e level?!ie o& the do/n pay#ent #ade? *redit hi!tory? and e#ploy#ent !tatu!' .he value o& 'S'!ubpri#e #ortgage! /a! e!ti#ated at B1'- trillion a! o& Mar*h 2007? /ith over 7',#illion &ir!t>lien!ubpri#e #ortgage! out!tanding'Approi#ately 16 o& !ubpri#e loan!

/ith ad3u!table rate #ortgage! day! delin;uent or in &ore*lo!urepro*eeding! a! o& C*tober 2007? roughly triple the rate o& 200,'1,E)y "anuary 2008? thedelin;uen*y rate had ri!en to 21 and by May 2008 it /a! 2,'

u#ber o& 'S' ou!ehold %ropertie! Sub3e*t to ore*lo!ure A*tion! by uarter

Subpri#e ARM! only repre!ent 6'8 o& the loan! out!tanding in the S? yet theyrepre!ent 4-'0 o& the &ore*lo!ure! !tarted during the third ;uarter o& 2007' During 2007?nearly 1'- #illion propertie! /ere !ub3e*t to 2'2 #illion &ore*lo!ure &iling!? up 79 and

7, re!pe*tively ver!u! 2006' ore*lo!ure &iling! in*luding de&ault noti*e!? au*tion !alenoti*e! and ban+ repo!!e!!ion! *an in*lude #ultiple noti*e! on the !a#e property' Moreho#eo/ner! *ontinue to re*eive &ore*lo!ure noti*e!? /ith one in every ,19 hou!ehold!re*eiving a &ore*lo!ure &illing in April? 2008'

.he e!ti#ated value o& !ubpri#e ad3u!table>rate #ortgage! /ide e*ono#y po!e! a *riti*al *hallenge &or govern#ent!?bu!ine!!e!? and inve!tor!' .he *ri!i! *an be attributed to a nu#ber o& &a*tor!? !u*h a! theinability o& ho#eo/ner! to #a+e their#ortgagepay#ent!H poor 3udg#ent by theborro/er and5or the lenderH and #ortgage in*entive! !u*h a! tea!er intere!t rate! thatlater ri!e !igni&i*antly' urther? de*lining ho#e pri*e! have #ade re>&inan*ing #oredi&&i*ult' A! a re!ult o& innovation! in !e*uritiation? ri!+! related to the inability o&ho#eo/ner! to #eet #ortgage pay#ent! have been di!tributed broadly? /ith a !erie! o&*on!e;uential i#pa*t!' .here are &our pri#ary *ategorie! o& ri!+ involved$

(redit ri!+$ .raditionally? the ri!+ o& de&ault ba*+ed !e*uritie!


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Subpri#e borro/ing /a! a #a3or *ontributor to an in*rea!e in ho#e o/ner!hip rate! andthe de#and &or hou!ing' .he overall 'S' ho#eo/ner!hip rate in*rea!ed &ro# 64 per*entin 1994


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A variety o& &a*tor! have *ontributed to an in*rea!e in the pay#ent delin;uen*y rate &or!ubpri#e ARM borro/er!? /hi*h re*ently rea*hed 21? roughly &our ti#e! it! hi!tori*allevel'

a!y *redit? *o#bined /ith the a!!u#ption that hou!ing pri*e! /ould *ontinue to

appre*iate? al!o en*ouraged #any !ubpri#e borro/er! to obtain ARM! they *ould nota&&ord a&ter the initial in*entive period' Cn*e hou!ing pri*e! !tarted depre*iating#oderately in #any part! o& the 'S'

Mortgage &raudby borro/er! &ro# S Depart#ent o& the .rea!ury

Mi!repre!entation o& loan appli*ation data i! another *ontributing &a*tor' :n a "anuary 1-?2008*olu#n in thee/ Lor+ .i#e!? George Ma!on niver!itye*ono#i*! pro&e!!or.yler (o/en/rote? .here ha! been plenty o& tal+ about Jpredatory lending?J butJpredatory borro/ingJ #ay have been the bigger proble#' A! #u*h a! 70 per*ent o&re*ent early pay#ent de&ault! had &raudulent #i!repre!entation! on their original loanappli*ation!? a**ording to one re*ent !tudy' .he re!ear*h /a! done by )a!e%ointAnalyti*!? /hi*h help! ban+! and lender! identi&y &raudulent tran!a*tion!H the !tudyloo+ed at #ore than three #illion loan! &ro# 1997 to 2006? /ith a #a3ority &ro# 200, to2006' Appli*ation! /ith #i!repre!entation! /ere al!o &ive ti#e! a! li+ely to go into

de&ault' Many o& the &raud! /ere !i#ple rather than ingeniou!' :n !o#e *a!e!? borro/er!/ho /ere a!+ed to !tate their in*o#e! 3u!t lied? !o#eti#e! reporting &ive ti#e! a*tualin*o#eH other borro/er! &al!i&ied in*o#e do*u#ent! by u!ing *o#puter!'

S Depart#ent o& the .rea!ury !u!pi*iou! a*tivity report o& #ortgage &raudin*rea!ed by1?411 per*ent bet/een 1997 and 200,'

#o$e of financia$ institutions

A variety o& &a*tor! have *au!ed lender! to o&&er an in*rea!ing array o& higher>ri!+ loan!to higher>ri!+ borro/er!' .he!e high ri!+ loan! in*luded the o :n*o#e? o "ob and no

A!!et! loan!? !o#eti#e! re&erred to a!in3a loan!'.he !hare o& !ubpri#e #ortgage! tototal origination! /a! ,


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period? /hi*h !hould have had the oppo!ite e&&e*t' .he *o#bination i! *o##on to *la!!i*boo# and bu!t *redit *y*le!'

:n addition to *on!idering higher>ri!+ borro/er!? lender! have o&&ered in*rea!ingly high>ri!+ loan option! and in*entive!' Cne ea#ple i! the intere!t>only ad3u!table>rate

#ortgage party

inve!t#ent' .here are #any partie! involved' Due to !e*uritiation? inve!tor appetite &or#ortgage>ba*+ed !e*uritie! grade rating! to M)S? loan! /ith a high ri!+ o& de&ault *ould be originated?pa*+aged and the ri!+ readily tran!&erred to other!' A!!et !e*uritiation began /ith the!tru*tured &inan*ing o& #ortgage pool! in the 1970!' .he !e*uritied !hare o& !ubpri#e#ortgage! party inve!tor!= in*rea!ed &ro# ,4 in 2001? to7, in 2006'Alan Green!pan!tated that the !e*uritiation o& ho#e loan! &or people /ithpoor *redit not the loan! the#!elve! /ere to bla#e &or the *urrent global *redit*ri!i!'

#o$e of mortgage brokers

Mortgage bro+er!do not lend their o/n #oney' .here i! not a dire*t *orrelation bet/eenloan per&or#an*e and in*o#e' .hey have a &inan*ial in*entive &or !elling *o#ple?ad3u!table rate #ortgage!


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A**ording to a !tudy by Fhole!ale A**e!! Mortgage Re!ear*h K (on!ulting :n*'? in2004 Mortgage bro+er! originated 68 o& all re!idential loan! in the'S'? /ith !ubpri#eand Alt>A loan! a**ounting &or 42'7 o& bro+erage!J total produ*tion volu#e'

.he *hair#an o& the Mortgage )an+er! A!!o*iation *lai#ed bro+er! pro&ited &ro# a

ho#e loan boo# but didnJt do enough to ea#ine /hether borro/er! *ould repay'

#o$e of mortgage under"riters

nder/riter! deter#ine i& the ri!+ o& lending to a parti*ular borro/er under *ertainpara#eter! i! a**eptable' Mo!t o& the ri!+! and ter#! that under/riter! *on!ider &all underthe three (N! o& under/riting$ *redit? *apa*ity and *ollateral' See#ortgage under/riting'

:n 2007? 40 per*ent o& all !ubpri#e loan! /ere generated by auto#ated under/riting' Ane*utive vi*e pre!ident o& (ountry/ide o#e oan! :n*' !tated in 2004 %rior toauto#ating the pro*e!!? getting an an!/er &ro# an under/riter too+ up to a /ee+' Fe are

able to produ*e a de*i!ion in!ide o& -0 !e*ond! today' ''' And previou!ly? every #ortgagere;uired a !tandard !et o& &ull do*u#entation' So#e thin+ that u!er! /ho!e la *ontrol!and /illingne!! to rely on !hort*ut! led the# to approve borro/er! that under a le!!>auto#ated !y!te# /ould never have #ade the *ut are at &ault &or the !ubpri#e #eltdo/n'

#o$e of goernment and regu$ators

*ono#i!t Robert Outtnerha! *riti*ied the repeal o& the Gla!!>Steagall A*ta!*ontributing to the !ubpri#e #eltdo/n' A tapayer>&unded govern#ent bailout related to#ortgage! during the Saving! and oan *ri!i! #ay have *reated a #oral haard and a*teda! en*ourage#ent to lender! to #a+e !i#ilar higher ri!+ loan!' Additionally? there i!

debate a#ong e*ono#i!t! regarding the e&&e*t o& the (o##unity Reinve!t#ent A*t?/ithdetra*tor! *lai#ing it en*ourage! lending to un*redit/orthy *on!u#er!and de&ender!*lai#ing a thirty year hi!tory o& lending /ithout in*rea!ed ri!+'

So#e have argued that? de!pite atte#pt! by variou! 'S' !tate! to prevent the gro/th o& a!e*ondary #ar+et in repa*+agedpredatory loan!?the .rea!ury Depart#entJ!C&&i*e o& the(o#ptroller o& the (urren*y? at the in!i!ten*e o& national ban+!? !tru*+ do/n !u*hatte#pt! a! violation! o& ederal ban+ing la/!'

:n re!pon!e to a *on*ern that lending /a! not properly regulated? the ou!e and Senateare both *on!idering bill! to regulate lending pra*ti*e!'

a/#a+er! re*eived &avorable treat#ent &ro# &inan*ial in!titution! involved in the!ubpri#e indu!tryH !ee (ountry/ide inan*ial politi*al loan !*andal? belo/'

#o$e of credit rating agencies

(redit rating agen*ie! are no/ under !*rutiny &or giving inve!t#ent>grade rating! to!e*uritiationtran!a*tion!


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rating! /ere 3u!ti&ied by variou! *redit enhan*e#ent! in*luding over*ollateraliationA !e*uritie! /ere to !pe*ulativegrade rating!' SK% had do/ngraded a total o& 16?-81 tran*he! o& 'S' RM)S and (DC!o& A)S &ro# all rating! *ategorie! out o& -1?9-, tran*he! originally rated? over hal& o& allRM)S abd (DC! o& A)S originally rated by SK%' Sin*e *ertain type! o& in!titutionalinve!tor! are allo/ed to only *arry inve!t#ent>grade .er# (apital Manage#entin 1998 /oulden*ourage large &inan*ial in!titution! to a!!u#e #ore ri!+? in the belie& that the ederalRe!erve /ould intervene on their behal&'

A *ontributing &a*tor to the ri!e in ho#e pri*e! /a! the lo/ering o& intere!t rate! earlierin the de*ade by the ederal Re!erve? to di#ini!h the blo/ o& the *ollap!e o& the dot>*o#bubbleand *o#bat the ri!+ o& de&lation'' ro# 2000 to 200-? the ederal Re!ervelo/ered the &ederal &und! rate target &ro# 6', to 1'0'76E.he *entral ban+ /a!

1-
http://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Lenders_of_last_resorthttp://en.wikipedia.org/wiki/Housing_bubblehttp://en.wikipedia.org/wiki/Dot-com_bubblehttp://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/Moral_hazardhttp://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_New_Yorkhttp://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_New_Yorkhttp://en.wikipedia.org/wiki/Long-Term_Capital_Managementhttp://en.wikipedia.org/wiki/Dot-com_bubblehttp://en.wikipedia.org/wiki/Dot-com_bubblehttp://en.wikipedia.org/wiki/Federal_funds_ratehttp://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-75%23cite_note-75http://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Lenders_of_last_resorthttp://en.wikipedia.org/wiki/Housing_bubblehttp://en.wikipedia.org/wiki/Dot-com_bubblehttp://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/Moral_hazardhttp://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_New_Yorkhttp://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_New_Yorkhttp://en.wikipedia.org/wiki/Long-Term_Capital_Managementhttp://en.wikipedia.org/wiki/Dot-com_bubblehttp://en.wikipedia.org/wiki/Dot-com_bubblehttp://en.wikipedia.org/wiki/Federal_funds_ratehttp://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-75%23cite_note-75


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*on*erned /ith pro#oting *ontinued e*ono#i* epan!ion a&ter the dot>*o# bubble? andbelieved that intere!t rate! *ould be lo/ered !a&ely be*au!e the rate o&in&lation/a! lo/'.he ederal Re!erveJ! in&lation &igure!? ho/ever? /ere &la/ed' Ri*hard F' i!her?%re!ident and (C o& the ederal Re!erve )an+ o& Dalla!?!tated that the ederalRe!erveJ! intere!t rate poli*y during thi! ti#e period /a! #i!guided by thi! erroneou!ly

lo/ in&lation data? thu! *ontributing to the hou!ing bubble$

&A good *entral ban+er +no/! ho/ *o!tly i#per&e*t data *an be &or the e*ono#y' .hi!i! e!pe*ially true o& in&lation data' :n late 2002 and early 200-? &or ea#ple? *ore %(#ea!ure#ent! /ere indi*ating in&lation rate! that /ere *ro!!ing belo/ the 1 per*entlo/er boundary' At the ti#e? the e*ono#y /a! epanding in &it! and !tart!' Given thein*iden*e o& negative !ho*+! during the prior t/o year!? the ed /a! /orried about thee*ono#yJ! ability to /ith!tand another one' Deter#ined to get gro/th going in thi!potentially de&lationary environ#ent? the CM( adopted an ea!y poli*y and pro#i!ed to+eep rate! lo/' A *ouple o& year! later? ho/ever? a&ter the in&lation nu#ber! had

undergone a &e/ revi!ion!? /e learned that in&lation had a*tually been a hal& point higherthan &ir!t thought'

:n retro!pe*t? the real &ed &und! rate turned out to be lo/er than /hat /a! dee#edappropriate at the ti#e and /a! held lo/er longer that it !hould have been' :n thi! *a!e?poor data led to a poli*y a*tion that a#pli&ied !pe*ulative a*tivity in the hou!ing andother #ar+et!' .oday? a! anybody not &ro# the &or#er planet o& %luto +no/!? the hou!ing#ar+et i! undergoing a !ub!tantial *orre*tion and in&li*ting real *o!t! to #illion! o&ho#eo/ner! a*ro!! the *ountry' :t i! *o#pli*ating the ta!+ o& a*hieving our #onetary

ob3e*tive o& *reating the *ondition! &or !u!tainable non>in&lationary gro/th' '

14
http://en.wikipedia.org/wiki/Dot-com_bubblehttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_Dallashttp://en.wikipedia.org/wiki/Dot-com_bubblehttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_Dallas


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(ffects

(ffect on stock markets

Cn "uly 19? 2007? the Do/ "one! :ndu!trial Averagehit a re*ord high? *lo!ing above14?000 &or the &ir!t ti#e' )y Augu!t 1,? the Do/ had dropped belo/ 1-?000 and the SK%,00had *ro!!ed into negative territory year>to>date' Si#ilar drop! o**urred in virtuallyevery #ar+et in the /orld? /ith )rail and Oorea being hard>hit' arge daily drop!be*a#e *o##on? /ith? &or ea#ple? the OCS%:dropping about 7 in one day? although2007J! large!t daily drop by the SK% ,00 in the 'S' /a! in ebruary? a re!ult o& the!ubpri#e *ri!i!'

Mortgage lender! and ho#e builder! &ared terribly? but lo!!e! *ut a*ro!! !e*tor!? /ith!o#e o& the /or!t>hit indu!trie!? !u*h a! #etal! K #ining *o#panie!? having only thevague!t *onne*tion /ith lending or #ortgage!'

(ri!i! ha! *au!ed pani* in &inan*ial #ar+et! and en*ouraged inve!tor! to ta+e their #oneyout o& ri!+y #ortgage bond! and !ha+y e;uitie! and put it into *o##oditie!a! !tore! o&value'

(ffect on financia$ institutions

Many ban+!? #ortgage lender!? real e!tate inve!t#ent tru!t!


16/28

.he *ri!i! al!o a&&e*ted :ndian ban+!/hi*h have ventured into SA' :(:(:? :ndiaJ!!e*ond large!t ban+? ha! reported #ar+>to>#ar+et lo!! o& B26- #illion in it! loan! andinve!t#ent epo!ure!' Cther !tate o/ned ban+! !u*h a! State )an+ o& :ndia? )an+ o&:ndiaand )an+ o& )arodahave re&u!ed to relea!e their &igure!'

At lea!t 100 #ortgage *o#panie! have either !hut do/n? !u!pended operation! or been!old !in*e 2007'

A! in*rea!ing a#ount! o& bad debt are pa!!ed on to pro&e!!ional debt *olle*tor!? the*olle*tion indu!try i! pro3e*ted to gro/ by 9', per*ent in 2008 and /ill *ontinue toeperien*e gro/th a! long a! delin;uen*ie! *ontinue to #ount''

)*aes) of the credit crunch

.he .D !pread and other indi*ator! o& *redit ri!+ !ho/ that the *redit *ri!i! !in*eAugu!t 2007 ha! *o#e in three /ave!? the ebbing o& /hi*h ha! been roughly *oin*ident

/ith the &ir!t rate *ut! &ro# the ed? the introdu*tion o& e#ergen*y ne/ #onetary&a*ilitie!by the ed? and the ed>a!!i!ted !ale o& )ear Stearn!? re!pe*tively'

(ffect on insurance companies

.here i! *on*ern that !o#e ho#eo/ner! are turning to ar!on a! a /ay to e!*ape &ro##ortgage! they *anJt or re&u!e to pay' .he ): report! that ar!ongre/ 4 in !uburb! and2'2 in *itie! &ro# 200, to 2006' A! o& "anuary 2008? the 2007 nu#ber! /ere not yetavailable'

(ffect on municipa$ bond )mono$ine) insurers

A !e*ondary *au!e and e&&e*t o& the *ri!i! relate! to the role o& #uni*ipal bond#onoline in!uran*e*orporation! !u*h a! A#ba*and M):A' )y in!uring#uni*ipalbond i!!ue!? tho!e bond! a*hieve higher debt rating!' o/ever? !o#e o& the!e *o#panie!al!o in!ured (DC! ba*+ed by lo/>rated tran*he! o& !ubpri#e #ortgage>ba*+ed!e*uritie!? and a! de&ault rate! on tho!e M)S have ri!en? the in!urer! have !u&&ered!igni&i*ant lo!!e!' A! a re!ult? rating agen*ie! have do/ngraded !everal bond in!urer!>>a!/ell a! the bond! they in!ure >>!o#e to lo/ !pe*ulative grade rating *ategorie!' .hedo/ngrade! &urther threaten the bond in!urer! be*au!e they be*o#e unable to under/ritene/ bu!ine!! going &or/ard' .he do/ngrade! #ay al!o re;uire &inan*ial in!titution!holding the bond! to lo/er their valuation or to !ell the#? a! !o#e entitie!

pen!ion &und!= are only allo/ed to hold the highe!t>grade bond!' .he e&&e*t o& !u*h adevaluation on in!titutional inve!tor! and *orporation! holding the bond!


17/28

(ffect on home o"ners

A**ording to the SK%5(a!e>Shiller hou!ing pri*e inde? by ove#ber 2007? average'S' hou!ing pri*e! had &allen approi#ately 8 &ro# their 2006 pea+'o/ever? there/a! !igni&i*ant variation in pri*e *hange! a*ro!! 'S' #ar+et!? /ith #any appre*iating

and other! depre*iating' .he pri*e de*line in De*e#ber 2007 ver!u! the year>ago period/a! 10'4' Sale! volu#e


18/28

(ffect on minorities

.here i! a di!proportionate level o& &ore*lo!ure! in !o#e #inority neighborhood!'

About 46 o& i!pani*! and ,, o& A&ri*an A#eri*an!/ho obtained #ortgage! in 200,

got higher>*o!t loan! *o#pared /ith about 17 o& /hite! and A!ian!? a**ording toederal Re!erve data' Cther !tudie! indi*ate they /ould have ;uali&ied &or lo/er>rateloan!'

(ffect on tenants

Many renter! have been &or*ed &ro# their ho#e! by &ore*lo!ure! due to their landlord!de&aulting on loan!' A**ording to a "anuary !tudy by theMortgage )an+er! A!!o*iation?one out o& every !even Maryland ho#e! that lender! began &ore*lo!ure pro*eeding! onla!t !u##er /a! not o**upied by the o/ner' ore*lo!ure void! any lea!e agree#ent? andrenter! have no legal right to *ontinue renting'

(ffect on "or$d economy

%eople ;ueuing out!ide aorthern Ro*+ban+ bran*h to /ithdra/ their !aving! due to&allout &ro# the !ubpri#e *ri!i!'

Fhen the *ri!i! &ir!t *a#e to light? #any analy!t! *alled it a do#e!ti* proble#>> one that/ould only a&&e*t S hou!ing #ar+et!' o/ever? the *ri!i! ;ui*+ly !pread throughout the/orld' :n Septe#ber 2007?orthern Ro*+a )riti!h )an+? eperien*ed an old &a!hionedrun on the ban+ a&ter it /a! revealed that the ban+ /a! having trouble rai!ing li;uidity'Fithin one day? *u!to#er! had /ithdra/n an e!ti#ated 1 billion' .hi! /a! the &ir!t ban+run in )ritain !in*e 1866' .he )an+ o& (hina


19/28

,ctions to manage the crisis

!he Federa$ #esere

.he 'S' *entral ban+ing !y!te#? the ederal Re!erve? in partner!hip /ith *entral ban+!

around the /orld? ha! ta+en !everal !tep! to addre!! the *ri!i!' ederal Re!erve (hair#an)en )ernan+e !tated in early 2008$ )roadly? the ederal Re!erveN! re!pon!e ha!&ollo/ed t/o tra*+!$ e&&ort! to !upport #ar+et li;uidity and &un*tioning and the pur!uit o&our #a*roe*ono#i* ob3e*tive! through #onetary poli*y'

:n Augu!t 2007? the ederal Cpen Mar+et (o##ittee announ*ed that do/n!ide ri!+! togro/th have in*rea!ed appre*iably? a !ignal that intere!t rate *ut! #ight be &orth*o#ing')et/een Septe#ber 18? 2007 and April -0? 2008? the target &or the ederal &und! rate/a!lo/ered &ro# ,'2, to 2 and the di!*ount rate /a! lo/ered &ro# ,'7, to 2'2,?through !i !eparate a*tion!' .he di!*ount rate i! the intere!t rate *harged to *o##er*ialban+! and other depo!itory in!titution! on loan! they re*eive &ro# their regional ederal

Re!erve )an+J! lending &a*ility via the Di!*ount /indo/'

.he ed and other *entral ban+! have *ondu*ted open #ar+et operation!to en!ure#e#ber ban+! have a**e!! to &und! ba*+ed !e*uritie!' .hi! help! the!e entitie! avoid !elling the M)S at a !teep lo!!' Se*ond?the available &und! !ti#ulate the *o##er*ial paper #ar+et and general e*ono#i* a*tivity'Spe*i&i* re!pon!e! by *entral ban+! are in*luded in the!ubpri#e *ri!i! i#pa*t ti#eline'

.he ed i! u!ing the .er# au*tion &a*ilityter# loan! ba*+ed and other debt' .he ed indi*atedthat both the .A and repur*ha!e agree#ent a#ount! /ill *ontinue and be in*rea!ed a!ne*e!!ary' During Mar*h 2008? the ed al!o epanded the type! o& in!titution! to /hi*h itlend! #oney and the type! o& *ollateral it a**ept! &or loan!'

ed (hair#an )ernan+e al!o delivered a !pee*h Mar*h 4? 2008 titled Redu*ing

%reventable Mortgage ore*lo!ure!' e advo*ated !everal !olution!? in*luding theredu*tion o& loan prin*ipal a#ount!' .hi! !olution /a! highlighted to addre!! a gro/ing*on*ern that an e!ti#ated 8'8 #illion 'S' ho#eo/ner!


20/28

ba*+ed !e*uritie! 99,>C%' Are&inan*ing &a*ility *alled A>Se*ure/a! al!o *reated'1-,E.hi! i! part o& an ongoing*ollaborative e&&ort bet/een the S Govern#ent and private indu!try to help !o#e !ub>pri#e borro/er! *alled the ope o/ Allian*e'

.he ope o/ Allian*e relea!ed a report in ebruary? 2008 indi*ating it helped ,4,?000!ubpri#e borro/er! /ith !ha+y *redit in the !e*ond hal& o& 2007? or 7'7 per*ent o& 7'1#illion !ubpri#e loan! out!tanding in Septe#ber 2007' A !po+e!per!on a*+no/ledged

that #u*h #ore #u!t be done' During ebruary 2008? a progra# *alled %ro3e*t i&eline/a! announ*ed' Si o& the large!t 'S' lender!? in partner!hip /ith the ope o/Allian*e? agreed to de&er &ore*lo!ure a*tion! &or -0 day! &or ho#eo/ner! 90 or #ore day!delin;uent on pay#ent!' .he intent o& the progra# /a! to en*ourage #ore loanad3u!t#ent!? to avoid &ore*lo!ure!'

(orporation!? trade group!? and *on!u#er advo*ate! have begun to *ite !tati!ti*! on thenu#ber! and type! o& ho#eo/ner! a!!i!ted by loan #odi&i*ation progra#!' .here i! !o#e

20
http://en.wikipedia.org/wiki/Credit_derivativeshttp://en.wikipedia.org/wiki/Counterpartyhttp://en.wikipedia.org/wiki/Loss_mitigationhttp://en.wikipedia.org/wiki/Loss_mitigationhttp://en.wikipedia.org/wiki/George_W._Bushhttp://en.wikipedia.org/wiki/Adjustable_rate_mortgagehttp://en.wikipedia.org/wiki/Sichttp://en.wikipedia.org/wiki/FHA-Securehttp://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-134%23cite_note-134http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-134%23cite_note-134http://en.wikipedia.org/wiki/Hope_Now_Alliancehttp://en.wikipedia.org/wiki/Credit_derivativeshttp://en.wikipedia.org/wiki/Counterpartyhttp://en.wikipedia.org/wiki/Loss_mitigationhttp://en.wikipedia.org/wiki/Loss_mitigationhttp://en.wikipedia.org/wiki/George_W._Bushhttp://en.wikipedia.org/wiki/Adjustable_rate_mortgagehttp://en.wikipedia.org/wiki/Sichttp://en.wikipedia.org/wiki/FHA-Securehttp://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-134%23cite_note-134http://en.wikipedia.org/wiki/Hope_Now_Alliance


21/28

di!pute regarding the appropriate #ea!ure!? !our*e! o& data? and ade;ua*y o& progre!!' Areport i!!ued in "anuary 2008 !ho/ed that #ortgage lender! #odi&ied ,4?000 loan! ande!tabli!hed 18-?000 repay#ent plan! in the third ;uarter o& 2007? a period in /hi*h there/ere -84?000 ne/ &ore*lo!ure!' (on!u#er group! *lai#ed the #odi&i*ation! a&&e*ted le!!than 1 per*ent o& the - #illion !ubpri#e loan! /ith ad3u!table rate! that /ere out!tanding

in the third ;uarter'

.he State ore*lo!ure %revention For+ing Group? a *oalition &or#ed by 11 !tateattorneyJ! general and ban+ regulator!? reported in April 2008 that the in*rea!ing pa*e o&&ore*lo!ure! e*eed! the ability o& loan !ervi*er! to +eep up' Seventy per*ent o& !ubpri#e#ortgage holder! are not getting the help re;uired' early t/o>third! o& loan /or+out!re;uire #ore than !i /ee+! to *o#plete under the *urrent *a!e>by>*a!e #ethod o&revie/' .he group ha! re*o##ended applying a #ore !y!te#ati* #ethod o& loan#odi&i*ation that *an auto#ati*ally be applied to a large nu#ber o& !trugglingho#eo/ner! and !lo/ing do/n the pa*e o& &ore*lo!ure!'

Bank financia$ hea$th

Ma3or &inan*ial in!titution! had obtained over B260 billion in ne/ *api tal &unded ban+! are in a better po!ition to loan at &avorable intere!trate!? /hi*h o&&!et! the li;uidity and un*ertainty a!pe*t! o& the *ri!i!' .hat ban+! and!e*uritie! &ir#! have been able to pla*e !u*h large volu#e! o& debt /ith inve!tor! i! an

indi*ation to !o#e analy!t! that the!e &ir#! /ill !urvive the *redit *ri!i!'

)an+! have obtained !o#e o& thi! *apital &ro# !overeign /ealth &und!? /hi*h are entitie!that *ontrol the !urplu! !aving! o& developing *ountrie!' An e!ti#ated 'S' B69 billionha! been inve!ted by the!e entitie! in large &inan*ial in!titution! over the pa!t year' Cn"anuary 1,? 2008? !overeign /ealth &und! provided a total o& B21 billion to t/o #a3or'S' &inan*ial in!titution!' Sovereign /ealth &und! are e!ti#ated to *ontrol nearly B2'9trillion' Mu*h o& thi! /ealth i! oil and ga! related' A! they repre!ent the !urplu! &und! o&govern#ent!? the!e entitie! *arry at lea!t the per*eption that their inve!t#ent! haveunderlying politi*al #otive!'

(ertain #a3or ban+! have al!o redu*ed their dividendpayout!

14,E

to in*rea!e li;uidity and&urther dividend redu*tion! are epe*ted by !o#e analy!t! in 2008'146EC& the -?776 'S'D:(in!ured in!titution! that paid *o##on !to*+ dividend! in the &ir!t ;uarter o& 2007?al#o!t hal&


22/28


23/28

-a" enforcement

or#er )ear Stearn!hedge &und#anager Matthe/ .anninJ!perp /al+a&ter beingarre!ted on 2008>06>19 by the ):and *harged /ith lying to inve!tor! about the *ollap!eo& the !ubpri#e #ortgage#ar+et'

.he nu#ber o& ):agent! a!!igned to #ortgage>related *ri#e! in*rea!ed by ,0 per*entbet/een 2007 and 2008' :n "une 2008? .he ): !tated that it! #ortgage &raud *a!eloadha! doubled in the pa!t three year! to #ore than 1?400 pending *a!e!' )et/een 1 Mar*hand 18 "une 2008? 406 people /ere arre!ted &or#ortgage &raud in an ): !ting a*ro!! the

*ountry' %eople arre!ted in*lude buyer!? !eller! and other! a*ro!! the /ide>ranging#ortgage indu!try' Cn 19 "une 2008? t/o &or#er )ear Stearn! #anager! /ere arre!ted bythe ):? and /ere the &ir!t Fall Street ee*utive! arre!ted related to the !ubpri#e lending*ri!i!' .hey /ere !u!pe*ted o& #i!leading inve!tor! about the ri!+y !ubpri#e #ortgage#ar+et'

-itigation

itigation related to the !ubpri#e *ri!i! i! under/ay' A !tudy relea!ed in ebruary 2008indi*ated that 278 *ivil la/!uit! /ere &iled in &ederal *ourt! during 2007 related to the!ubpri#e *ri!i!' .he nu#ber o& &iling! in !tate *ourt! /ere not ;uanti&ied but are al!o

believed to be !igni&i*ant' .he !tudy &ound that 4- per*ent o& the *a!e! /ere *la!! a*tion!brought by borro/er!? !u*h a! tho!e that *ontended they /ere vi*ti#! o& di!*ri#inatorylending pra*ti*e!' Cther *a!e! in*lude !e*uritie! la/!uit! &iled by inve!tor!? *o##er*ial*ontra*t di!pute!? e#ploy#ent *la!! a*tion!? and ban+rupt*y>related *a!e!' De&endant!in*luded #ortgage ban+er!? bro+er!? lender!? apprai!er!? title *o#panie!? ho#e builder!?!ervi*er!? i!!uer!? under/riter!? bond in!urer!? #oney #anager!? publi* a**ounting &ir#!?and *o#pany board! and o&&i*er!'

or#er )ear Stearn! #anager! /ere na#ed in *ivil la/!uit! brought in 2007 byinve!tor!? in*luding )ar*lay! )an+ %(? /ho *lai#ed they had been #i!led' )ar*lay!*lai#ed that )ear Stearn! +ne/ that *ertain a!!et! in the )ear Stearn! igh>Grade

Stru*tured (redit Strategie! nhan*ed everage Ma!ter und /ere /orth #u*h le!! thantheir pro&e!!ed value!' .he !uit *lai#ed that )ear Stearn! #anager! devi!ed a plan to#a+e #ore #oney &or the#!elve! and &urther to u!e the nhan*ed und a! a repo!itory&or ri!+y? poor>;uality inve!t#ent!' .he la/!uit !aid )ear Stearn! told )ar*lay! that theenhan*ed &und /a! up al#o!t 6 through "une 2007 /hen in reality? the port&olioJ!a!!et value! /ere plu##eting'

Media

2-
http://en.wikipedia.org/wiki/Bear_Stearnshttp://en.wikipedia.org/wiki/Hedge_fundhttp://en.wikipedia.org/w/index.php?title=Matthew_Tannin&action=edit&redlink=1http://en.wikipedia.org/wiki/Perp_walkhttp://en.wikipedia.org/wiki/Federal_Bureau_of_Investigationhttp://en.wikipedia.org/wiki/United_States_housing_bubble#Subprime_mortgage_industry_collapsehttp://en.wikipedia.org/wiki/Subprime_mortgagehttp://en.wikipedia.org/wiki/FBIhttp://en.wikipedia.org/wiki/Mortgage_fraudhttp://en.wikipedia.org/wiki/Barclays_Bank_PLChttp://en.wikipedia.org/wiki/High-Grade_Structured_Credit_Strategies_Enhanced_Leverage_Master_Fundhttp://en.wikipedia.org/wiki/High-Grade_Structured_Credit_Strategies_Enhanced_Leverage_Master_Fundhttp://en.wikipedia.org/wiki/Image:BSC_Fund_Manager_Tannin_Perp_Walk.jpghttp://en.wikipedia.org/wiki/Bear_Stearnshttp://en.wikipedia.org/wiki/Hedge_fundhttp://en.wikipedia.org/w/index.php?title=Matthew_Tannin&action=edit&redlink=1http://en.wikipedia.org/wiki/Perp_walkhttp://en.wikipedia.org/wiki/Federal_Bureau_of_Investigationhttp://en.wikipedia.org/wiki/United_States_housing_bubble#Subprime_mortgage_industry_collapsehttp://en.wikipedia.org/wiki/Subprime_mortgagehttp://en.wikipedia.org/wiki/FBIhttp://en.wikipedia.org/wiki/Mortgage_fraudhttp://en.wikipedia.org/wiki/Barclays_Bank_PLChttp://en.wikipedia.org/wiki/High-Grade_Structured_Credit_Strategies_Enhanced_Leverage_Master_Fundhttp://en.wikipedia.org/wiki/High-Grade_Structured_Credit_Strategies_Enhanced_Leverage_Master_Fund


24/28

.he #edia *an help edu*ate the publi* and partie! involved' :t *an al!o en!ure the top!ub3e*t #aterial epert! are engaged and have a voi*e to en!ure a rea!oned debate aboutthe pro! and *on! o& variou! !olution!'

(conomic Stimu$us ,ct of 0112

%re!ident )u!h al!o !igned into la/ on ebruary 1-? 2008 ane*ono#i* !ti#ulu! pa*+ageo& B168 billion? #ainly in the &or# o& in*o#e ta rebate!? to help !ti#ulate e*ono#i*gro/th' .he e*ono#i* !ti#ulu! pa*+age in*luded the #ailing o& rebate *he*+! totapayer!' Su*h #ailing! !tarted the /ee+ o& April 28? 2008' .he!e #ailing!? ho/ever?*oin*ided /ith unepe*ted all>ti#e3u#p! in &ood and ga!oline pri*e!' .hi! *oin*iden*epro#pted !o#e to ;ue!tion /hether the !ti#ulu! pa*+age /ould have the de!ired e&&e*tor /hether *on!u#er! /ould 3u!t u!e it to #a+e up &or the gap generated by the higher&ood and &uel pri*e!' So#e (ongre!!#en even *onte#plated legi!lation &or a !e*ondround o& !ti#ulu! rebate *he*+! to en!ure the initial intention o& the !ti#ulu! pa*+age hadthe epe*ted e&&e*t' .he .rea!ury Se*retary !trongly oppo!ed !u*h initiative' Senator!

M*(ain and (linton? #ean/hile propo!ed eli#inating the &ederal ga!oline ta &or the!u##er #onth! in!tead'

Fannie Mae and Freddie Mac

.he ederal ational Mortgage A!!o*iation


25/28


26/28

negative develop#ent &eed! &urther deterioration? *alling it a vi*iou! *y*le and addingthat they *ontinue to believe *ondition! /ill get /or!e'

(itigroupe*ono#i!t! !tated in #id>Mar*h 2008 regarding the li+elihood o& a re*e!!ionthat P.he !el&>&eeding do/nturn no/ in pla*e !ho/! !ign! o& be*o#ing deeply

entren*hed'Q

A! o& ove#ber 22? 2007? analy!t! at a leading inve!t#ent ban+ e!ti#ated lo!!e! on!ubpri#e (DC /ould be approi#ately 'S' B148 billion'177EA! o& De*e#ber 22? 2007?a leading bu!ine!! periodi*al e!ti#ated !ubpri#e de&ault! bet/een 'S' B200@-00 billion'A! o& Mar*h 1? 2008 analy!t! &ro# three large &inan*ial in!titution! e!ti#ated the i#pa*t/ould be bet/een 'S' B-,0@600 billion'

Cn Mar*h 20? 2008? theCrganiation &or *ono#i* (ooperation and Develop#entdo/ngraded it! e*ono#i* &ore*a!t! &or thenited State!? theurooneand "apan &or the&ir!t hal& o& 2008'

Alan Green!pan? the &or#er (hair#an o& the ederal Re!erve? !tated$ .he *urrent *redit*ri!i! /ill *o#e to an end /hen the overhang o& inventorie! o& ne/ly built ho#e! i!largely li;uidated? and ho#e pri*e de&lation *o#e! to an end' .hat /ill !tabilie the no/>un*ertain value o& the ho#e e;uity that a*t! a! a bu&&er &or all ho#e #ortgage!? but #o!ti#portantly &or tho!e held a! *ollateral &or re!idential #ortgage>ba*+ed !e*uritie!' Ierylarge lo!!e! /ill? no doubt? be ta+en a! a *on!e;uen*e o& the *ri!i!' )ut a&ter a period o&protra*ted ad3u!t#ent? the 'S' e*ono#y? and the /orld e*ono#y #ore generally? /ill beable to get ba*+ to bu!ine!!'

:n May 2008? nited State! &ore*lo!ure &iling! ro!e an unpre*edented 48 per*ent? up

nearly ,0 per*ent *o#pared /ith a year earlier'

181E

.he *au!e i! attributed to a*o#bination o& de*rea!ing ho#e value!? /ea+ hou!ing !ale!? !tri*ter #ortgage lending*riteria and the in*rea!ingly !luggi!h 'S' e*ono#y' o#eo/ner! in de!perate &inan*ial!trait! are pre!ented /ith &e/er option! on ho/ to re!olve their debt' Aggravating thi!proble#? #ortgage rate! are in*rea!ing due to the per*eption o& /hat the ederal Re!erve#ight do to battle in&lation' urther? it ha! been re*ently reported that in&lation rate!i!!ued by the 'S' govern#ent are #anipulated in !u*h a /ay a! not to truly re&le*t thereal in&lation rate'

:#pa*t o& S Subpri#e (ri!i! on :ndia

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http://en.wikipedia.org/wiki/Vicious_cyclehttp://en.wikipedia.org/wiki/Citigrouphttp://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-176%23cite_note-176http://en.wikipedia.org/wiki/March_20http://en.wikipedia.org/wiki/2008http://en.wikipedia.org/wiki/Organization_for_Economic_Cooperation_and_Developmenthttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Eurozonehttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/2008http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-rawstory-180%23cite_note-rawstory-180http://en.wikipedia.org/wiki/Vicious_cyclehttp://en.wikipedia.org/wiki/Citigrouphttp://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-176%23cite_note-176http://en.wikipedia.org/wiki/March_20http://en.wikipedia.org/wiki/2008http://en.wikipedia.org/wiki/Organization_for_Economic_Cooperation_and_Developmenthttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Eurozonehttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/2008http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-rawstory-180%23cite_note-rawstory-180


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:ndian &inan*e #ini!ter %alaniappan (hida#bara# ha! !aid the !ubpri#e *ri!i! /illhave no dire*t i#pa*t on the *ountry? but !aid a !e*ondary i#pa*t i! po!!ible

J.he !ubpri#e *ri!i! #ay have a !e*ondary i#pa*t on the *ountryJ! e*ono#y a! the*ri!i! #ay lead to a !lo/do/n in !o#e o& tho!e *ountrie! /hi*h are i#portant &or

:ndiaJ! e*ono#y'J

At the global level? e!pe*ially in advan*ed #ar+et! !u*h a! S? O? ran*e? Ger#anyand "apan? to na#e a &e/? the lin+age! bet/een #ar+et! are !trong' %ri*ing andparti*ipant lin+age! are !trong' A! intere!t rate! have ri!en and !ub>pri#e ha! a&&e*tedri!+ appetite Mar*h 2007?he !aid'So&t/are &ir#! !u*h a! :n&o!y! are better prote*ted &ro# the S loan #ar+et tur#oilthan *o#panie! that earn revenue &ro# ba*+>o&&i*e !ervi*e! !u*h a! tran!a*tionpro*e!!ing and ri!+ #anage#ent' Still? any S !lo/do/n /ould hit the entirein&or#ation te*hnology indu!try? /hi*h earned t/o>third! o& it! ,0 billion dollar! in

annual revenue &ro# the S'

.he i#pa*t o& S !ubpri#e *ri!i! on :ndia /ill not be &elt to a very large etent'*ono#i!t! !ay that there are enough rea!on! to thin+ li+e/i!e' .he /rite up belo/give! rea!on! a! to /hy the i#pa*t /ill not be &elt to a large etent'

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.he :#pa*t o& S !ubpri#e *ri!i! on :ndia #ay not be very large a**ording toe*ono#i!t!' :t i! being anti*ipated that the developing *ountrie! #ight be !pared &or ayear or t/o and neither o& the *ountrie! /ould be a&&e*ted either by e*ono#i*re*e!!ion in the SA or the prevailing S !ubpri#e *ri!i!' .hi! notion /a! put

&or/ard by the leading e*ono#i!t o& the Forld )an+'

urther? it i! being &atho#ed that even i& there i! an i#pa*t o& S !ubpri#e *ri!i! on:ndia and (hina? it /ill not be ta+ing pla*e earlier than t/o year!' o/ever? it /ill be/rongly !aid i& the developing nation! li+e :ndia and (hina /ould be entirelyuntou*hed by the ripple e&&e*t' .he prevailing e*ono#i* *ondition in the!e *ountrie!are !o !trong that it #ay not &eel the upheaval a! it /ould have &elt had the e*ono#yo& the!e *ountrie! been !luggi!h'

%robable e&&e*t! on &inan*ial #ar+et! o& :ndia and (hina$

Cne po!!ible i#pa*t o& S !ubpri#e *ri!i! on global #ar+et! /ould be *ertainun&ore!een lo!!e! pertaining to !e*uritie!' :& !u*h a !ituation ari!e!? it /ould &urther#a+e *redit *ondition! !tringent' (on!e;uently? lo!! in*urred on !e*uritie! /ouldin*rea!e' A! a *u#ulative e&&e*t? the &inan*ial #ar+et! /ould !piral do/n/ard*au!ing the #onetary poli*ie! to be*o#e loo!er'

Fith regard to e;uity #ar+et!? it i! being anti*ipated that e;uity #ar+et! #ay godo/n and the *o!t o& *apital

Date post:	02-Jun-2018
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