Hide Notes 

Slide 1: Group: Allen Chen Dan Chen Robin Thieu Wendy Chen
Slide 2: Created by Robin Thieu, 2008 Fall
Slide 3: What caused the financial industry crisis?  Congress: for overzealously pushing homeownership  Fed: for keeping interest rate so low  Predatory lenders: for taking advantage of unqualified and vulnerable home buyers  Home buyers: for getting over the heads  White House: for letting banking regulations become too loose  Finance executives: for selling products they didn’t understand while enjoying outsized profits     Mark-to-market accounting: for accelerating downturn Rating agencies: for mischaracterizing paper Short-selling hedge funds: for betting on doomsday The transformation of investment banks from private partnerships into publicly traded companies Source: Jack , Suzy Welch (2008, September 25). BusinessWeek
Slide 4: The Debt Trap Source: The New York Times
Slide 5: Financial Ratio Created by Robin Thieu, 2008 Fall
Slide 6: Created by Robin Thieu, 2008 Fall House Incom e Mortgag e Subprim e (Countrywide, Indy Mac, Fannie & Freddie) Mortgage Lenders Credit Crunch MBSs (Citibank, BOA) Banks Insure rs (AIG) Rating Investors (Banks, Funds, Insurance) CDOs SPV (Bear Stearns, Lehman, Merrill Lynch) Investment Banks
Slide 7: Macroeconomic Analysis Created by Robin Thieu, 2008 Fall
Slide 8: GDP and housing market Source: The Federal Reserve
Slide 9: Mortgage Rates Source: Federal Home Loan Mortgage Corporation's (Freddie Mac)
Slide 10: Home Price Indices Source: Standard & Poor’s
Slide 11: Total Subprime Mortgage Originations Growth
Slide 12: Homeowners Equity vs. Mortgage Source: The Federal Reserve
Slide 13: Unemployment Rate Source: State of the USA and BBC
Slide 14: US Homeownership Rate Source: State of the USA
Slide 15: Macroeconomic Analysis  Observations -Housing bubble is pushed much higher than the GDP growth - From year 2000 to 2006, when the mortgage rate is low, housing price keeps going up - Subprime borrowing was a major contributor to an increase in home ownership rates and the demand for housing
Slide 16: Macroeconomic Analysis  Observations -The growth of subprime mortgage results in homeowners’ mortgage is greater than their equity -Homeownership and housing price keep growing from year1994 to 2005 even though unemployment rate goes up and down  Conclusion Subprime mortgage is the main contributor for “housing bubble”
Slide 17: Mortgage Lenders & Banks Created by Robin Thieu, 2008 Fall
Slide 18: Making MBS Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=
Slide 19: Making MBS Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=
Slide 20: Making MBS Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=
Slide 21: Fannie Mae Source: Analyticalwealth.com
Slide 22: Mortgage Default Source: The New York Times
Slide 23: Stock price of FNM Source: Thomson Financial
Slide 24: FNM’ net losses in holding MBS
Slide 25: Citigroup  11.7 billion wrote- off, in Q2 2008  55.1 billion write down in total asset
Slide 26: Where AIG went wrong Exposed to the U.S housing bubble:  Mortgage insurance  ABS, MBS, CDO investment Derivative contracts: CDS
Slide 27: Investment Banks  Business Model  The Process of Making CDOs  Risk Factors and Risk Exposure  The Future of Investment Banks
Slide 28: Investment Banks Created by Robin Thieu, 2008 Fall
Slide 29: Investment Banks  The Process of Making CDOs – Create CDOs based on MBS Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=
Slide 30: Investment Banks  The Process of Making CDOs – Cut it slices and then issue bonds Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=
Slide 31: Investment Banks  The Process of Making CDOs – the relationship between Slices Rating and interest payments Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=
Slide 32: Investment Banks  The Process of Making CDOs – the Impact of Downgrade Source: The website of the Wall Street Journal , http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=
Slide 33: Investment Banks  Risk Factors - Fare Value of Subprime Mortgage Loan - The Cost of Short-term Borrowing  Risk Exposure - Market Price of CDOs
Slide 34: Investment Banks  The Future of Investment Banks - In the Short – term : the example of Goldman Sachs & Morgan Stanley - In the Long- term : Performance Matter!
Slide 35: Credit Crunch  less funds available  more expensive cost of capital Created by Robin Thieu, 2008 Fall “If companies around the globe are unable to borrow, they'll begin to cut jobs, cease investment, and default on their debt in larger numbers.“ Peter Coy BW, Oct 3, 2008
Slide 36: Credit Manipulation Created by Robin Thieu, 2008 Fall
Slide 37: PQ + CQ > IQ Thank you very much.