SUBPRIME CRISIS & INDIA

Presented to – Mr. Satish K. Thukral By: KAMAL KANT SONI

Faculty – F. Management PG-08-36, INMANTEC, GHZ.

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Americans were rolling in the dough.

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Then They started practically flushing their money down the toilet.

Govt. spending, Corporate spending, Like a Flood of Money

Banks begin lending to people with BAD CREDIT (ARM) – Adjustable Rate Mortgage

NO PROBLEM

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WHAT IS

SUBPRIME LANDING RATE?

Sub-prime Landing…

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Sub-prime lending is to borrow money to people with poor credit histories.

Sub-prime lending rater are higher as compared to PLR

Banks promised that housing prices will continue to rise.

Banks start selling MORTGAGE BACKED SECURITIES*

*Investments of packaged home loansThese 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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EXCESS LIQUIDITY resulting in...

HIGH DEMAND resulting in…

LOW SUPPLY resulting in…

INFLATION resulting in…

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LIQUIDITY OVER

DOWN IN REAL ESTATE PRICE

Starting 2006 housing bubble busted

Credit Bubble Housing Bubble Credit Bubble

So this happened...

Fed increases interest rate to

5.25

Adjustable Rate Mortgages increase with interest rates

HomeOwners can't pay their mortgages

Home owners are forced out of their homes

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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.

So..What were the consequences..?

• 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..

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market declined 22%, the worst week in the index's 118-year history

The following week the Dow-Jones index of the largest companies traded on the U.S Stock

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:

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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Sep-08 Sep-08

September 7, 2008: Federal takeover of Fannie Mae and

Freddie Mac

September 14, 2008: Merrill Lynch sold to Bank of

America amidst fears of a liquidity crisis and Lehman

Brothers collapse September 15, 2008: Lehman Brothers files for

bankruptcy protection

September 16, 2008: Moody's and Standard and

Poor's downgrade ratings on AIG's credit on concerns over continuing losses to

mortgage-backed securities, sending the company into

fears of insolvency.

September 17, 2008: The US Federal Reserve loans

$85 billion to American In-ternational Group (AIG) to

avoid bankruptcy.

September 19, 2008: Paul-son financial rescue plan un-veiled after a volatile week in

stock and debt markets.

September 25, 2008: Wash-ington Mutual was seized by

the Federal Deposit Insur-ance Corporation, and its

banking assets were sold to JP Morgan Chase for

$1.9bn.

September 29, 2008: The House rejected bail-out bill,

DJIA down 7% October 3,2008: The House pass the bail out bill

Subprime Mortgage Crisis - "Red September"

Source: Bloomberg

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!

Credit Crisis: The Americas

Canada:reduced interest rates and increasing liquidity

Mexico: falling Peso and dwindling economy

Brazil: Heavy credits, but stabilizing and recouping

U.S.: ???still working out financial bail-outs; more bank failures to come

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

“Borrow indefinitely: Only in America”

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

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

Source: Bloomberg.com04/11/202339

Credit Crunch: Is it only in the United States?

A DOMINO EFFECT?

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

Some are most affected.

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 indirectly 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 slowdownChina: sitting on surplus goods

Some are unaffected..

Australia, Malaysia, New Zealand, Singapore, South Korea and the Middle East have protected foreign currency deposits.

Hence a promising economy…

BUT, the crisis is truly GLOBAL!

Ireland: First Eurozone country to slide into recession

Poland: Part of Eurozone,but has a stable banking sector

Russia: Fast growing economy with large foreign reserves

Singapore: Prosperous, government guarantee for deposits till 2010

China: ???Strained with economic surplus and counterfeit goods

India: Economic slowdown with high inflation and poverty

France: Sluggish economy heading for recession

Hungary: -ve credit raing, heavy debts, huge current account deficit

IMPACT ON CURRENCY

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Best Of A Bad Market

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Someone got lucky!

Oct,2006

Oct,2007

Oct,2008

400 600 800 1000

Gold Price (USD per ounce)

Alternate investment saw a surge

Impact on Crude Oil

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Global Market

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World Markets

*% change in one year till 25 oct.

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Credit Crunch

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A credit crunch is a sudden reduction in the general availability of loans (or credit), or a sudden increase in the cost of obtaining loans from Banks.

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 & to make money double, Sharma g invested his money in the Stock Market

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

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•$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

• 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.

IMPACT ON INDIAN BANKS

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

Financial Crisis is in America….

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Why I need to WORRY?

My Money is safe in SBI.

I did’t invested money in Stock ex.

Thank GOD!!!

A Common Man

BUT…

Rising in Unemploy

ment

Down in value of

Currency

Value of our

investment decrease

Down in share

market

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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 marketPlan to lift the Ban from PN (i.e. participatory

notes)Reduced the Prime Landing Rate by all Public

sector BanksReduced 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 Crisis signify?

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 YOUFire the questions PLZ….