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Slide 1: Collapsed (Individuals + Corporate + Banks) = Collapsed System Sub-Prime Crisis An Economic Perspective PaisaMatters.com
Slide 2: 1995 – 2006: The Bright and Sunny Days… The days of high levels of employment and high disposable income in the hands of individuals saw  High demand for commodities and goods Source: www.bloomberg.com PaisaMatters.com
Slide 3: 1995 – 2006: The Bright and Sunny Days…  Increasing demand led to increased production levels  Jobs creation and an all around industrial and economic growth PaisaMatters.com
Slide 4: 1995 – 2006: The Bright and Sunny Days… Source: www.ofm.wa.gov PaisaMatters.com
Slide 5: 1995 – 2006: The Bright and Sunny Days… Source: epress.anu.edu.au
Slide 6: 1995 – 2006: The Bright and Sunny Days…  The consumer generated organic infusion of money generated strong liquidity in the economy  The increasing aspirations and risk taking ability coupled with low interest rates fuelled strong credit growth  Banking system flushed with liquidity felt a need to accelerate the credit growth PaisaMatters.com
Slide 7: 1995 – 2006: The Bright and Sunny Days…  High income levels and desire to own a dream home had already created a good mortgage loan portfolio  Low interest rates made the housing more affordable and allowed to borrow more  The prime mortgage loan market was falling short of propelling the desired exponential credit growth  There was a huge population with ‘less than perfect credit’ to be tapped PaisaMatters.com
Slide 8: 1995 – 2006: The Bright and Sunny Days…  Borrowers with less than perfect credit - the Subprime borrowers, presented a mouthwatering opportunity for bankers in the mortgages market  Banks started chasing the subprime borrowers with easy loans  People who otherwise could not have afforded a home, bought homes with the high interest rate loans PaisaMatters.com
Slide 9: 1995 – 2006: The Bright and Sunny Days… Welcome to the world of Sub-Prime Mortgages PaisaMatters.com
Slide 10: 1995 – 2006: The Bright and Sunny Days…  Subprime loans are mortgages given to borrowers with ‘less than perfect’ credit or poor credit history  Most subprime borrowers are ones with low and inconsistent income  Because subprime loans are riskier, they carry a higher rate of interest  Not all subprime mortgage loans were used for buying houses but to refinance other obligations like credit card debts, making them even more risky PaisaMatters.com
Slide 11: 1995 – 2006: The Bright and Sunny Days…  Borrowers were happy to get loans without worrying about credit worthiness  Mortgage brokers were happy as they were paid to underwrite these easy selling subprime loans without a responsibility to recover  Bankers were happy with the credit growth and higher returns from subprime loans  A Win-Win for all, but not for long. PaisaMatters.com
Slide 12: 1995 – 2006: The Bright and Sunny Days… PaisaMatters.com
Slide 13: 1995 – 2006: The Bright and Sunny Days…  The bankers who originated subprime loans converted them to bundles of securities and sold the packaged Mortgage Backed Securities (MBS) in financial markets  This allowed banks to pass on the risk of default to investors of MBS  This allowed banks to get these loans off their balance sheet and borrow more, only to originate more subprime loans  The buyers of these subprime MBS thought they were taking a calculated risk of default in lieu of higher returns PaisaMatters.com
Slide 14: 1995 – 2006: The Bright and Sunny Days…  In the “High Risk – High Reward” equation, the involved risks were grossly overlooked for the lucrative rewards PaisaMatters.com
Slide 15: 1995 – 2006: The Bright and Sunny Days…  Low interest rates +  Rising property prices +  Banks chasing after borrowers with easy loan offers Result Swollen sub-prime mortgage portfolio & huge debt ridden population Source: Flickr.com Source: i.ehow.com PaisaMatters.com
Slide 16: 1995 – 2006: The Bright and Sunny Days… PaisaMatters.com
Slide 17: Q4 2006 – Q2 2007: The Gloomy Evenings  Too much money chasing too few goods resulted in increase in commodity prices and rising inflation rate  The interest rates started moving northwards  Because most of these loans were Adjustable Rate Mortgages (ARMs), the loan installment amount increased  Pressure started to mount on borrowers monthly cash outflows to meet the fixed obligations PaisaMatters.com
Slide 18: Q4 2006 – Q2 2007: The Gloomy Evenings..  Falling demand for properties led to a rapid decrease in property prices PaisaMatters.com
Slide 19: Q4 2006 – Q2 2007: The Gloomy Evenings..  Rising oil prices and falling stock markets saw an erosion of investments  Decreasing demand all around resulted in reduced production levels and job losses  Economic slowdown was slowly making an entry PaisaMatters.com
Slide 20: Q3 2007 Onwards: The Scary Nights…  The subprime borrowers with inconsistent and low incomes could not pay the increased loan installments  Banks started to tighten the credit norms preventing subprime borrowers to refinance existing debts to lower payments  Borrowers could not sell the property to repay debts as the house was worth less that what they bought for  This left borrowers with an option to bring in more money or miss the loan payments PaisaMatters.com
Slide 21: Q3 2007 Onwards: The Scary Nights…  Improving cash flows was a distant possibility for subprime borrowers, missing payments was obvious  The sub-prime loan defaults started mounting  With a further continuous increase in interest rates, it became almost impossible for borrowers to repay the increased mortgage bills  Loan foreclosures started increasing PaisaMatters.com
Slide 22: Q3 2007 Onwards: The Scary Nights… PaisaMatters.com
Slide 23: Q3 2007 Onwards: The Scary Nights…  Because there were not many buyers for foreclosed properties, banks could not recover their outstanding loans by selling the foreclosed properties  With tightened credit norms, fewer borrowers qualified for new loans leading to more homes to sell to fewer buyers  Banks left with no other option but to write off the outstanding defaulted loans  Once considered cash cows, the high return fetching mortgage backed securities (MBS) became worthless PaisaMatters.com
Slide 24: Q3 2007 Onwards: The Scary Nights…  In deteriorating economic conditions, sub-prime loan defaults were followed by defaults in – prime mortgages – home equity loans – unsecured consumer loans (car loans, student loans, credit cards) and – commercial loans PaisaMatters.com
Slide 25: Q3 2007 Onwards: The Scary Nights… PaisaMatters.com
Slide 26: Q3 2007 Onwards: The Scary Nights…  Tons of outstanding credit with no recovery in sight saw financial institutions broke  This caused more than two dozen lenders to close, sell themselves to larger firms or report unprecedented losses  Once massive, some financial institutions filed for bankruptcy Source: nancarrow-webdesk.com PaisaMatters.com
Slide 27: Q3 2007 Onwards: The Scary Nights…  The panic started to spread  Stock markets crashed Source: newsimg.bbc.co.uk  Lost confidence in financial system  Wall street pillars started crumbling  USA is witnessing one of the largest systemic collapse in its history PaisaMatters.com
Slide 28: Q3 2007 Onwards: The Scary Nights… Financial Times – 20 September 2008 “…bank boards and bank executives have failed to understand complex mortgage-backed banking products, as have central bankers, regulators and credit rating agencies.” PaisaMatters.com
Slide 29: ?: The Dawn Ahead… Costly though, surely, a lesson for the economy Is the worst over yet? … Probably not ! How long before the economy starts looking-up again? …Nobody knows! Hopefully Sooner, is the Dawn Ahead… PaisaMatters.com