Sub Prime Crisis

What is SubPrime?

SubPrime essentially refers to the market which operates on interest rates below the prime rates. Refers to loans offered to borrowers having a heightened perceived risk of default, such as:

a history of loan delinquency or default, a recorded bankruptcy, limited debt experience. Also, US subprime loans are usually classified as those where the borrower has a credit score below a particular level, e.g. a FICO (the best-

Causus Belli : US Real Estate Market

Between 1997 and 2006, the price of the typical American house increased by 124%. Housing Loan Rates rose from 1% from the beginning of the decade to nearly 5.35% by 2006. The Sub Prime loans are offered on floating interest rates. The Housing market crashed with unaffordable interest rates and a majority

Fanning the Fire: Investment Banks

Investment Banks such as Lehman Brothers, Bear Stearns, Merrill Lynch, CitiBank, in fact all the names you have heard, purchased Mortgage Based Securities (MBS) from the sub-prime lenders. These investments helped provide greater capital for further sub-prime lending. The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae and The Federal Home Loan Mortgage Corporation, commonly known as Freddie

The Vicious Cycle:

Sub Prime Lenders and Investment Banks

Sub-Prime Borrower

U.S. Real Estate Prices

The Catastrophe - I:

In February 2007 HSBC, wrote down its holdings of subprime-related MBS by $10.5 billion, the first major subprime related loss to be reported. During 2007, at least 100 mortgage companies either shut down, suspended operations or were sold. The crisis caused panic in financial markets and encouraged investors to take their money out of risky mortgage bonds and shaky equities. Northern Rock, encountering difficulty

The Catastrophe - II:

Bear Stearns was acquired by J.P. Morgan Chase in March 2008 for $1.2 billion. Fannie Mae and Freddie Mac were both placed in conservatorship in September 2008.The two have more than US$ 5 trillion in mortgage backed securities (MBS) and other debt outstanding. Merrill Lynch was acquired by Bank of America in September 2008 for $50 billion. Lehman Brothers declared bankruptcy on 15 September 2008, after the Secretary of the Treasury Henry Paulson, citing moral hazard, refused to bail it out.

The Fallout: Stock Market crashes

Most big investors have a certain fixed proportion of their total investments invested in various parts of the world.

To make up their losses in the sub-prime market in the United States, they went out to sell their investments in emerging markets like India where their investments have been doing well. Since the amount of selling in the market is much higher than the amount of buying, the Indian and other Asian markets began

The Future:

Job layoffs and pink slips will become a norm for most industries which are hit directly and indirectly by the crisis. For the Indian perspective, the financial sector will be deeply impacted and all other sectors dependent on the US economy and its companies in a direct manner (such as the IT companies!!!) will take a hit in their growth. Basically for all you guys, it means a direct hit on your employability by the biggest hirers in our country.

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