A STUDY ON SUBPRIME CRISIS AND

ITS EFFECTS ON INDIA

Project submitted in partial fulfillment of the requirement for the award of the degree of
MASTER O !"S#$ESS A%M#$#STRAT#O$&
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TABLE OF CONTENTS:
1. CHAPTER I page no
INTRODUCTION - 7
Objective of the Study - 23
Scope of the Study - 24
Limittio!" of the Study - 24
2. CHAPTER II
Subp#ime Le!di!$ C#i"i" - 2%
&ffect of Subp#ime C#i"i" o! U'S'( - 27
(ctio!" t)e! to m!$e the - 47
c#i"i" i! U'S'(
Imp*ictio!" o! diffe#e!t cou!t#ie" - +,

3' CHAPTER III
Impct o! I!di - %7
-e"u#e" tht c! be t)e! - %.
4' CHAPTER I!
SU--(R/ (ND CONCLUSION - 72
0ib*io$#phy - 7%
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C1(2T&R I
INTRODUCTION
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THE ECONOMY OF THE UNITED STATES OF AMERICA:
The eco!omy of the U!ited Stte" h" bee! &#th3" *#$e"t "i!ce the e#*y 4.75"
647 It" $#o"" dome"tic p#oduct 89D2: ;" e"timted " <43'. t#i**io! i! 2557'
627 It i" mi=ed eco!omy !d p#ivte fi#m" m)e the mjo#ity of mic#oeco!omic
deci"io!"> ;hi*e bei!$ #e$u*ted by the $ove#!me!t'
The U'S' eco!omy mi!ti!" hi$h *eve* of p#oductivity 89D2 pe# cpit>
<4+>,55 i! 2557 ;ith the U'S' popu*tio! hitti!$ 352 mi**io!:> *thou$h it i" !ot the
;o#*d3" hi$he"t' The U'S' eco!omy h" mi!ti!ed hi$h ove#** 9D2 $#o;th
#te> *o; u!emp*oyme!t #te> !d hi$h *eve*" of #e"e#ch !d cpit*
i!ve"tme!t' -jo# eco!omic co!ce#!" i! the U'S' i!c*ude !tio!* debt> e=te#!*
debt> e!tit*eme!t *ibi*itie" fo# #eti#i!$ bby boome#" tht hve *#edy be$u!
e!te#i!$ the Soci* Secu#ity "y"tem> co#po#te debt> mo#t$$e debt *o; "vi!$"
#te> !d *#$e cu##e!t ccou!t deficit'
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?u!dme!t* &*eme!t" of the U'S' &co!omy@
The U!ited Stte" i" #ich i! mi!e#* #e"ou#ce" !d fe#ti*e f#m "oi*> !d it i"
fo#tu!te to hve mode#te c*imte' It *"o h" e=te!"ive co"t*i!e" o! both the
(t*!tic !d 2cific Oce!"> " ;e** " o! the 9u*f of -e=ico' Rive#" f*o; f#om
f# ;ithi! the co!ti!e!t> !d the 9#et L)e"Afive *#$e> i!*!d *)e" *o!$ the
U'S' bo#de# ;ith C!dAp#ovide dditio!* "hippi!$ cce""' The"e e=te!"ive
;te#;y" hve he*ped "hpe the cou!t#y3" eco!omic $#o;th ove# the ye#" !d
he*ped bi!d (me#ic3" +5 i!dividu* "tte" to$ethe# i! "i!$*e eco!omic u!it'
The !umbe# of vi*b*e ;o#)e#" !d> mo#e impo#t!t*y> thei# p#oductivity he*p
dete#mi!e the he*th of the U'S' eco!omy' Th#ou$hout it" hi"to#y> the U!ited
Stte" h" e=pe#ie!ced "tedy $#o;th i! the *bo# fo#ce> phe!ome!o! both
cu"e !d effect of *mo"t co!"t!t eco!omic e=p!"io!' The p#omi"e of hi$h
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;$e" b#i!$" m!y hi$h*y ")i**ed ;o#)e#" f#om #ou!d the ;o#*d to the U!ited
Stte"'
I! the U!ited Stte"> the co#po#tio! h" eme#$ed " ! ""ocitio! of o;!e#">
)!o;! " "toc)ho*de#"> ;ho fo#m bu"i!e"" e!te#p#i"e $ove#!ed by comp*e=
"et of #u*e" !d cu"tom"' 0#ou$ht o! by the p#oce"" of m"" p#oductio!>
co#po#tio!" "uch " 9e!e#* &*ect#ic hve bee! i!"t#ume!t* i! "hpi!$ the
U!ited Stte"' Th#ou$h the "toc) m#)et> (me#ic! b!)" !d i!ve"to#" hve
$#o;! thei# eco!omy by i!ve"ti!$ !d ;ithd#;i!$ cpit* f#om p#ofitb*e
co#po#tio!"' Tody i! the e# of $*ob*iBtio! (me#ic! i!ve"to#" !d
co#po#tio!" hve i!f*ue!ce ** ove# the ;o#*d' The (me#ic! $ove#!me!t h"
*"o bee! i!"t#ume!t* i! i!ve"ti!$ i! the eco!omy> i! #e" "uch " p#ovidi!$
chep e*ect#icity 8"uch " f#om the 1oove# Dm:> !d mi*it#y co!t#ct" i! time"
of ;#'
Chi*e co!"ume#" !d p#oduce#" m)e mo"t deci"io!" tht mo*d the eco!omy>
$ove#!me!t ctivitie" hve po;e#fu* effect o! the U'S' eco!omy i! t *e"t fou#
#e"' St#o!$ $ove#!me!t #e$u*tio! i! the U'S' eco!omy "t#ted i! the e#*y
4,55" ;ith the #i"e of the 2#o$#e""ive -oveme!tD p#io# to thi" the $ove#!me!t
p#omoted eco!omic $#o;th th#ou$h p#otective t#iff" !d "ub"idie" to i!du"t#y>
bui*t i!f#"t#uctu#e> !d e"tb*i"hed b!)i!$ po*icie"> i!c*udi!$ the $o*d "t!d#d>
to e!cou#$e "vi!$" !d i!ve"tme!t i! p#oductive e!te#p#i"e"'
STABILI"ATION AND #RO$TH:
The fede#* $ove#!me!t ttempt" to u"e both mo!et#y po*icy 8co!t#o* of the
mo!ey "upp*y th#ou$h mech!i"m" "uch " ch!$e" i! i!te#e"t #te": !d fi"c*
po*icy 8t=e" !d "pe!di!$: to mi!ti! *o; i!f*tio!> hi$h eco!omic $#o;th> !d
*o; u!emp*oyme!t'
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?o# m!y ye#" fo**o;i!$ the 9#et Dep#e""io! of the 4,35"> #ece""io!"A
pe#iod" of "*o; eco!omic $#o;th !d hi$h u!emp*oyme!tA;e#e vie;ed " the
$#ete"t of eco!omic th#et"' Che! the d!$e# of #ece""io! ppe#ed mo"t
"e#iou"> $ove#!me!t "ou$ht to "t#e!$the! the eco!omy by "pe!di!$ hevi*y it"e*f
o# cutti!$ t=e" "o tht co!"ume#" ;ou*d "pe!d mo#e> !d by fo"te#i!$ #pid
$#o;th i! the mo!ey "upp*y> ;hich *"o e!cou#$ed mo#e "pe!di!$' I! the
4,75"> mjo# p#ice i!c#e"e"> p#ticu*#*y fo# e!e#$y> c#eted "t#o!$ fe# of
i!f*tio!' (" #e"u*t> $ove#!me!t *ede#" cme to co!ce!t#te mo#e o!
co!t#o**i!$ i!f*tio! th! o! combti!$ #ece""io! by *imiti!$ "pe!di!$> #e"i"ti!$
t= cut"> !d #ei!i!$ i! $#o;th i! the mo!ey "upp*y'
Ide" bout the be"t too*" fo# "tbi*iBi!$ the eco!omy ch!$ed "ub"t!ti**y
bet;ee! the 4,%5" !d the 4,,5"' I! the 4,%5"> $ove#!me!t hd $#et fith i!
fi"c* po*icyAm!ipu*tio! of $ove#!me!t #eve!ue" to i!f*ue!ce the eco!omy'
Si!ce "pe!di!$ !d t=e" #e co!t#o**ed by the p#e"ide!t !d the U'S' Co!$#e"">
the"e e*ected offici*" p*yed *edi!$ #o*e i! di#ecti!$ the eco!omy' ( pe#iod of
hi$h i!f*tio!> hi$h u!emp*oyme!t> !d hu$e $ove#!me!t deficit" ;e)e!ed
co!fide!ce i! fi"c* po*icy " too* fo# #e$u*ti!$ the ove#** pce of eco!omic
ctivity' I!"ted> mo!et#y po*icy ""umed $#o;i!$ p#omi!e!ce piece'
Si!ce the "t$f*tio! of the 4,75"> the U'S' eco!omy h" bee! ch#cte#iBed by
"ome;ht "*o;e# i!f*tio!' I! 4,.+> the U'S' be$! it" $#o;i!$ t#de deficit ;ith
Chi!'
I! #ece!t ye#"> the p#im#y eco!omic co!ce#!" hve ce!te#ed o!@ hi$h !tio!*
debt 8<, t#i**io!:> hi$h co#po#te debt 8<, t#i**io!:> hi$h mo#t$$e debt 8ove# <45
t#i**io! " of 255+ ye#-e!d:> hi$h u!fu!ded -edic#e *ibi*ity 8<35 t#i**io!:> hi$h
u!fu!ded Soci* Secu#ity *ibi*ity 8<42 t#i**io!:> !d hi$h e=te#!* debt 8mou!t
o;ed to fo#ei$! *e!de#":> hi$h t#de deficit"' I! 255%> the U'S eco!omy hd it"
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*o;e"t "vi!$ #te "i!ce 4,33' The"e i""ue" hve #i"ed co!ce#!" mo!$
eco!omi"t" !d u!fu!ded *ibi*itie" !d !tio!* po*itici!"'
The U'S' eco!omy mi!ti!" #e*tive*y hi$h 9D2> #e"o!b*y hi$h 9D2
$#o;th #te> !d *o; u!emp*oyme!t #te> m)i!$ it tt#ctive to immi$#!t"
;o#*d;ide'
Na%&ona' De(%:
The !tio!* debt> *"o )!o;! " the U'S' pub*ic debt 8p#t of ;hich i" the $#o""
fede#* debt:> i" the ove#** co**ective "um of ye#*y bud$et deficit o;ed by **
b#!che" of the U!ited Stte" $ove#!me!t> p*u" i!te#e"t' The eco!omic
"i$!ific!ce of thi" debt !d it" pote!ti* #mifictio!" fo# futu#e $e!e#tio!" of
(me#ic!" #e co!t#ove#"i* i""ue" i! the U!ited Stte"'
(" of E!u#y 35> 255.> the tot* U'S' fede#* debt ;" pp#o=imte*y <,'2 t#i**io!
o# bout <7,>555 i! ve#$e fo# ech of the 447 mi**io! (me#ic! t=pye#"' The
bo##o;i!$ cp debt cei*i!$ " of 255+ "tood t <.'4. t#i**io!' I! -#ch 255%>
Co!$#e"" #i"ed tht cei*i!$ ! dditio!* <5'7, t#i**io! to <.',7 t#i**io!> ;hich i"
pp#o=imte*y %.F of 9D2' Co!$#e"" h" u"ed thi" method to de* ;ith !
e!c#ochi!$ debt cei*i!$ i! p#eviou" ye#"> " the fede#* bo##o;i!$ *imit ;"
#i"ed i! 2552 !d 2553'
Chi*e the U'S' !tio!* debt i" the ;o#*d3" *#$e"t i! b"o*ute "iBe> mo#e
co!ve!ie!t me"u#e i" tht of it" "iBe #e*tive to the !tio!3" 9D2' Che! the
!tio!* debt i" put i!to thi" pe#"pective it ppe#" co!"ide#b*y *e"" tody th!
i! p"t ye#"> p#ticu*#*y du#i!$ Co#*d C# II' 0y thi" me"u#e> it i" *"o
co!"ide#b*y *e"" th! tho"e of othe# i!du"t#i*iBed !tio!" "uch " Ep! !d
#ou$h*y eGuiv*e!t to tho"e of "eve#* Ce"te#! &u#ope! !tio!"'
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E)%e*na' De(%: L&a(&'&%&e+ %o Fo*e&gne*+:
9#o"" U'S' *ibi*itie" to fo#ei$!e#" #e <4%'3 t#i**io! " t e!d 255%' The U'S' Net
International Investment Position (NIIP) dete#io#ted to !e$tive <2'+ t#i**io! t
the e!d of 255%> o# bout mi!u" 4,F of 9D2'
The e=te#!* debt i" ! ccou!ti!$ e!t#y tht *#$e*y #ep#e"e!t" US dome"tic
""et" pu#ch"ed ;ith t#de do**#" !d o;!ed ove#"e"> *#$e*y by US t#di!$
p#t!e#"'

1o;eve#> thi" i" !ot the ;ho*e pictu#e> " fo#ei$! ho*di!$" of
$ove#!me!t debt cu##e!t*y mou!t to bout 27F of the tot*> o# "ome 2 t#i**io!
do**#"'
?o# cou!t#ie" *i)e the U!ited Stte"> *#$e !et e=te#!* debt i" c#eted ;he! the
v*ue of fo#ei$! ""et" 8debt !d eGuity: he*d by dome"tic #e"ide!t" i" *e"" th!
the v*ue of dome"tic ""et" he*d by fo#ei$!e#"' I! "imp*e te#m"> " fo#ei$!e#"
buy p#ope#ty i! the US> thi" dd" to the e=te#!* debt' Che! thi" occu#" i!
$#ete# mou!t" th! (me#ic!" buyi!$ p#ope#ty ove#"e"> !tio!" *i)e the
U!ited Stte" #e "id to be debtor nations> but thi" i" !ot co!ve!tio!* debt *i)e
*o! obti!ed f#om b!)' 1o;eve#> fo#ei$!e#" *"o pu#ch"e U'S' debt
i!"t#ume!t"> "uch " $ove#!me!t bo!d"> ;hich #e fo#m" of co!ve!tio!* debt'
If the e=te#!* debt #ep#e"e!t" fo#ei$! o;!e#"hip of dome"tic ""et"> the #e"u*t i"
tht #e!t* i!come> "toc) divide!d"> cpit* $i!" !d othe# i!ve"tme!t i!come i"
#eceived by fo#ei$! i!ve"to#"> #the# th! by US #e"ide!t"' O! the othe# h!d>
;he! US debt i" he*d by ove#"e" i!ve"to#"> they #eceive i!te#e"t !d p#i!cip*
#epyme!t"' (" the t#de imb*!ce put" e=t# do**#" i! h!d" out"ide of the
US> the"e do**#" my be u"ed to i!ve"t i! !e; ""et" 8fo#ei$! di#ect i!ve"tme!t>
"uch " !e; p*!t": o# be u"ed to buy e=i"ti!$ US ""et" "uch " "toc)"> #e*
e"tte !d bo!d"' Cith mou!ti!$ t#de deficit> the i!come f#om the"e ""et"
i!c#e"i!$*y t#!"fe#" ove#"e"'
Of mjo# co!ce#! i" the fct tht the m$!itude of the NII2 8o# !et e=te#!* debt:
i" Guite bit *#$e# th! mo"t !tio!* eco!omie"' ?ue*ed by the "iBb*e t#de
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deficit> the e=te#!* debt i" "o *#$e tht m!y ;o!de# if the t#de "itutio! c! be
"u"ti!ed i! the *o!$ te#m' Comp*icti!$ the mtte# i" tht m!y of (me#ic3"
t#di!$ p#t!e#"> "uch " Chi!> depe!d fo# much of thei# e!ti#e eco!omy o!
e=po#t"> !d e"peci**y e=po#t" to (me#ic' -!y co!t#ove#"ie" e=i"t bout the
cu##e!t t#de !d e=te#!* debt "itutio!> !d it i" #$ub*e ;hethe# !yo!e
u!de#"t!d" ho; the"e dy!mic" ;i** p*y out i! ! hi"to#ic**y u!p#ecede!ted
f*oti!$ e=ch!$e #te "y"tem' Chi*e v#iou" "pect" of the U'S' eco!omic
p#ofi*e hve p#ecede!t" i! the "itutio!" of othe# cou!t#ie" 8!otb*y $ove#!me!t
debt " pe#ce!t$e of 9D2:> the "hee# "iBe of the US> !d the i!te$#* #o*e of
the US eco!omy i! the ove#** $*ob* eco!omic e!vi#o!me!t> c#ete co!"ide#b*e
u!ce#ti!ty bout the futu#e'
In%e*na%&ona' %*a,e
The U!ited Stte" i" the mo"t "i$!ific!t !tio! i! the ;o#*d ;he! it come" to
i!te#!tio!* t#de' ?o# decde"> it h" *ed the ;o#*d i! impo#t" ;hi*e
"imu*t!eou"*y #emi!i!$ " o!e of the top th#ee e=po#te#" of the ;o#*d'
(" the mjo# epice!te# of ;o#*d t#de> the U!ited Stte" e!joy" *eve#$e tht
m!y othe# !tio!" do !ot' ?o# o!e> "i!ce it i" the ;o#*d3" *edi!$
co!"ume#> it i" the !umbe# o!e cu"tome# of comp!ie" ** #ou!d the ;o#*d'
-!y bu"i!e""e" compete fo# "h#e of the U!ited Stte" m#)et' I!
dditio!> the U!ited Stte" occ"io!**y u"e" it" eco!omic *eve#$e to
impo"e eco!omic "!ctio!" i! diffe#e!t #e$io!" of the ;o#*d' US( i" the top
e=po#t m#)et fo# *mo"t %5 t#di!$ !tio!" ;o#*d;ide'
The U'S' i" membe# of "eve#* i!te#!tio!* t#de o#$!iBtio!"' The pu#po"e
of joi!i!$ the"e o#$!iBtio!" i" to come to $#eeme!t ;ith othe# !tio!" o!
t#de i""ue"> *thou$h the#e i" "ome di"$#eeme!t mo!$ U'S' citiBe!" "
to ;hethe# o# !ot the U'S' $ove#!me!t "hou*d be m)i!$ the"e t#de
$#eeme!t" i! the fi#"t p*ce'
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Si!ce it i" the ;o#*d3" *edi!$ impo#te#> the#e #e m!y U'S' do**#" i! ci#cu*tio!
** #ou!d the p*!et' The "tb*e U'S' eco!omy !d fi#*y "ou!d mo!et#y
po*icy h" *ed to fith i! the U'S' do**# " the ;o#*d3" mo"t "tb*e cu##e!cy>
*thou$h tht my be ch!$i!$ i! #ece!t time"'
I! o#de# to fu!d the !tio!* debt 8*"o )!o;! " pub*ic debt:> the U!ited Stte"
#e*ie" o! "e**i!$ U'S' t#e"u#y bo!d" to peop*e both i!"ide !d out"ide the
cou!t#y> !d i! #ece!t time" the *tte# hve become i!c#e"i!$*y impo#t!t'
-uch of the mo!ey $e!e#ted fo# the t#e"u#y bo!d" cme f#om U'S'
do**#" ;hich ;e#e u"ed to pu#ch"e impo#t" i! the U!ited Stte"'
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1vi!$ t)e! comp#ehe!"ive vie; of the eco!omy of T1& UNIT&D ST(T&S
O? (-&RIC(> it i" o!*y pe#ti!e!t to $et i!to the topic of thi" p#oject- The Sub
2#ime Le!di!$ -o#t$$e C#i"i"' Let u" fi#"t cGui!t ou#"e*ve" ;ith the
te#mi!o*o$y of thi" co!cept befo#e ve!tu#i!$ i!to the "hoc) !d ;e tht thi"
te#mi!o*o$y h" c#eted i! the fo#m of #ece""io! i! the U!ited Stte" !d ho; it
#the# th! bei!$ *imited to o!*y the U!ited Stte" h" effected *mo"t ** the
mjo# eco!omie" of the ;o#*d'
S-(p*&.e Len,&ng:
Subp#ime *e!di!$ 8*"o )!o;! " 0-ppe#> !e#-p#ime> o# "eco!d ch!ce
*e!di!$: i" the p#ctice of m)i!$ *o!" to bo##o;e#" ;ho do !ot Gu*ify fo# the
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be"t m#)et i!te#e"t #te" becu"e of thei# deficie!t c#edit hi"to#y' The ph#"e
*"o #efe#" to b!)!ote" t)e! o! p#ope#ty tht c!!ot be "o*d o! the p#im#y
m#)et> i!c*udi!$ *o!" o! ce#ti! type" of i!ve"tme!t p#ope#tie" !d ce#ti!
type" of "e*f-emp*oyed pe#"o!"'
Subp#ime *e!di!$ i" #i")y fo# both *e!de#" !d bo##o;e#" due to the combi!tio!
of hi$h i!te#e"t #te"> poo# c#edit hi"to#y> !d dve#"e fi!!ci* "itutio!" u"u**y
""ocited ;ith "ubp#ime pp*ic!t"' ( "ubp#ime *o! i" offe#ed t #te hi$he#
th! (-ppe# *o!" due to the i!c#e"ed #i")' Subp#ime *e!di!$ e!comp""e"
v#iety of c#edit i!"t#ume!t"> i!c*udi!$ "ubp#ime mo#t$$e"> "ubp#ime c# *o!">
!d "ubp#ime c#edit c#d"> mo!$ othe#"' The te#m H"ubp#imeH #efe#" to the
c#edit "ttu" of the bo##o;e# 8bei!$ *e"" th! ide*:> !ot the i!te#e"t #te o! the
*o! it"e*f'
Subp#ime *e!di!$ i" hi$h*y co!t#ove#"i*' Oppo!e!t" hve **e$ed tht "ubp#ime
*e!de#" hve e!$$ed i! p#edto#y *e!di!$ p#ctice" "uch " de*ibe#te*y *e!di!$
to bo##o;e#" ;ho cou*d !eve# meet the te#m" of thei# *o!"> thu" *edi!$ to
defu*t> "eiBu#e of co**te#*> !d fo#ec*o"u#e' The#e hve *"o bee! ch#$e" of
mo#t$$e di"c#imi!tio! o! the b"i" of #ce' 2#opo!e!t" of "ubp#ime *e!di!$
mi!ti! tht the p#ctice e=te!d" c#edit to peop*e ;ho ;ou*d othe#;i"e !ot hve
cce"" to the c#edit m#)et'
The co!t#ove#"y "u##ou!di!$ "ubp#ime *e!di!$ h" e=p!ded " the #e"u*t of !
o!$oi!$ *e!di!$ !d c#edit c#i"i" both i! the "ubp#ime i!du"t#y> !d i! the $#ete#
fi!!ci* m#)et" ;hich be$! i! the U!ited Stte"' Thi" phe!ome!o! h" bee!
de"c#ibed " fi!!ci* co!t$io! ;hich h" *ed to #e"t#ictio! o! the vi*bi*ity
of c#edit i! ;o#*d fi!!ci* m#)et"' 1u!d#ed" of thou"!d" of bo##o;e#" hve
bee! fo#ced to defu*t !d "eve#* mjo# (me#ic! "ubp#ime *e!de#" hve fi*ed
fo# b!)#uptcy'
12
Ba/0g*o-n,
Subp#ime *e!di!$ evo*ved ;ith the #e*iBtio! of dem!d i! the m#)etp*ce
!d bu"i!e""e" p#ovidi!$ "upp*y to meet it' Cith b!)#uptcie" !d
co!"ume# p#opo"*" bei!$ ;ide*y cce""ib*e> co!"t!t*y f*uctuti!$
eco!omic e!vi#o!me!t> !d co!"ume# debt *o! o! the #i"e> t#ditio!*
*e!de#" #e mo#e cutiou" !d hve bee! tu#!i!$ ;y #eco#d !umbe# of
pote!ti* cu"tome#"' Stti"tic**y> pp#o=imte*y 2+F of the popu*tio! of
the U!ited Stte" f**" i!to thi" cte$o#y'
I! the thi#d Gu#te# of 2557> Subp#ime dju"tb*e #te mo#t$$e" 8(R-": o!*y
#ep#e"e!t %'.F of the mo#t$$e" out"t!di!$ i! the US> yet they #ep#e"e!t
43'5F of the fo#ec*o"u#e" "t#ted' Subp#ime fi=ed mo#t$$e" #ep#e"e!t
%'3F of out"t!di!$ *o!" !d 42'5F of the fo#ec*o"u#e" "t#ted i! the
"me pe#iod'
De1&n&%&on
Chi*e the#e i" !o offici* c#edit p#ofi*e tht de"c#ibe" "ubp#ime bo##o;e#> mo"t i!
the U!ited Stte" hve c#edit "co#e be*o; 723' ?ede#* Ntio!* -o#t$$e
(""ocitio! commo!*y )!o;! " ?!!ie -e h" *e!di!$ $uide*i!e" fo# ;ht it
co!"ide#" to be Hp#imeH bo##o;e#" o! co!fo#mi!$ *o!"' Thei# "t!d#d p#ovide"
$ood comp#i"o! bet;ee! tho"e ;ho #e Hp#ime bo##o;e#"H !d tho"e ;ho #e
H"ubp#ime bo##o;e#"'H 2#ime bo##o;e#" hve c#edit "co#e bove %25 8c#edit
"co#e" #e bet;ee! 3+5 !d .+5 ;ith medi! i! the U'S' of %7. !d me! of
723:> debt-to-i!come #tio 8DTI: !o $#ete# th! 7+F 8me!i!$ tht !o mo#e
th! 7+F of !et i!come py" fo# hou"i!$ !d othe# debt:> !d combi!ed *o!
to v*ue #tio of ,5F> me!i!$ tht the bo##o;e# i" pyi!$ 45F do;! pyme!t'
(!y bo##o;e# "ee)i!$ *o! ;ith *e"" th! tho"e c#ite#i i" "ubp#ime bo##o;e#
by ?!!ie -e "t!d#d"'
13
S-(p*&.e 'en,e*+
To cce"" thi" i!c#e"i!$ m#)et> *e!de#" ofte! t)e o! #i")" ""ocited ;ith
*e!di!$ to peop*e ;ith poo# c#edit #ti!$"' Subp#ime *o!" #e co!"ide#ed to c##y
f# $#ete# #i") fo# the *e!de# due to the fo#eme!tio!ed c#edit #i")
ch#cte#i"tic" of the typic* "ubp#ime bo##o;e#' Le!de#" u"e v#iety of
method" to off"et the"e #i")"' I! the c"e of m!y "ubp#ime *o!"> thi" #i") i"
off"et ;ith hi$he# i!te#e"t #te' I! the c"e of "ubp#ime c#edit c#d"> "ubp#ime
cu"tome# my be ch#$ed hi$he# *te fee"> hi$he# ove# *imit fee"> ye#*y fee"> o#
up f#o!t fee" fo# the c#d' Subp#ime c#edit c#d cu"tome#"> u!*i)e p#ime c#edit
c#d cu"tome#"> #e $e!e#**y !ot $ive! H$#ce pe#iodH to py *te' The"e *te
fee" #e the! ch#$ed to the ccou!t> ;hich my d#ive the cu"tome# ove# thei#
c#edit *imit> #e"u*ti!$ i! ove# *imit fee"' Thu" the fee" compou!d> #e"u*ti!$ i!
hi$he# #etu#!" fo# the *e!de#"' The"e i!c#e"ed fee" compou!d the difficu*ty of
the mo#t$$e fo# the "ubp#ime bo##o;e#> ;ho i" defi!ed " "uch by thei#
u!"uitbi*ity fo# c#edit'
S-(p*&.e (o**o2e*+
Subp#ime offe#" ! oppo#tu!ity fo# bo##o;e#" ;ith *e"" th! ide* c#edit #eco#d
to $i! cce"" to c#edit' 0o##o;e#" my u"e thi" c#edit to pu#ch"e home"> o# i!
the c"e of c"h out #efi!!ce> fi!!ce othe# fo#m" of "pe!di!$ "uch "
pu#ch"i!$ c#> pyi!$ fo# *ivi!$ e=pe!"e"> #emode*i!$ home> o# eve! pyi!$
do;! o! hi$h i!te#e"t c#edit c#d' 1o;eve#> due to the #i") p#ofi*e of the
"ubp#ime bo##o;e#> thi" cce"" to c#edit come" t the p#ice of hi$he# i!te#e"t
#te"' O! mo#e po"itive !ote> "ubp#ime *e!di!$ 8!d mo#t$$e" i! p#ticu*#:>
p#ovide method of Hc#edit #epi#HD if bo##o;e#" mi!ti! $ood pyme!t #eco#d>
they "hou*d be b*e to #efi!!ce bc) o!to mi!"t#em #te" fte# pe#iod of
time' C#edit #epi# u"u**y t)e" t;e*ve mo!th" to chieveD ho;eve#> i! the UI>
mo"t "ubp#ime mo#t$$e" hve t;o o# th#ee-ye# tie-i! !d bo##o;e#" my
fce dditio!* ch#$e" fo# #ep*ci!$ thei# mo#t$$e" befo#e the tie-i! h"
e=pi#ed'
14
9e!e#**y> "ubp#ime bo##o;e#" ;i** di"p*y #!$e of c#edit #i") ch#cte#i"tic"
tht my i!c*ude o!e o# mo#e of the fo**o;i!$@
T;o o# mo#e *o! pyme!t" pid p"t 35 dy" due i! the *"t 42 mo!th">
o# o!e o# mo#e *o! pyme!t" pid p"t ,5 dy" due the *"t 3% mo!th"D
Eud$me!t> fo#ec*o"u#e> #epo""e""io!> o# !o!-pyme!t of *o! i! the
p#io# 4. mo!th"D
0!)#uptcy i! the *"t 7 ye#"D
Re*tive*y hi$h defu*t p#obbi*ity " evide!ced by> fo# e=mp*e> c#edit
bu#eu #i") "co#e 8?ICO: of *e"" th! %25 8depe!di!$ o! the
p#oductJco**te#*:> o# othe# bu#eu o# p#op#iet#y "co#e" ;ith !
eGuiv*e!t defu*t p#obbi*ity *i)e*ihood'
TYPES:
S-(p*&.e .o*%gage+
(" ;ith "ubp#ime *e!di!$ i! $e!e#*> "ubp#ime mo#t$$e" #e u"u**y defi!ed by
the type of co!"ume# to ;hich they #e mde vi*b*e' (cco#di!$ to the U'S'
Dep#tme!t of T#e"u#y $uide*i!e" i""ued i! 2554> HSubp#ime bo##o;e#" typic**y
hve ;e)e!ed c#edit hi"to#ie" tht i!c*ude pyme!t de*i!Gue!cie" !d po""ib*y
mo#e "eve#e p#ob*em" "uch " ch#$e-off"> jud$me!t"> !d b!)#uptcie"' They
my *"o di"p*y #educed #epyme!t cpcity " me"u#ed by c#edit "co#e">
debt-to-i!come #tio"> o# othe# c#ite#i tht my e!comp"" bo##o;e#" ;ith
i!comp*ete c#edit hi"to#ie"'H
I! dditio!> m!y "ubp#ime mo#t$$e" hve bee! mde to bo##o;e#" ;ho *c)
*e$* immi$#tio! "ttu" i! the U!ited Stte"'
15
Subp#ime mo#t$$e *o!" #e #i")ie# *o!" i! tht they #e mde to bo##o;e#"
u!b*e to Gu*ify u!de# t#ditio!*> mo#e "t#i!$e!t c#ite#i due to *imited o#
b*emi"hed c#edit hi"to#y' Subp#ime bo##o;e#" #e $e!e#**y defi!ed " i!dividu*"
;ith *imited i!come o# hvi!$ ?ICO c#edit "co#e" be*o; %25 o! "c*e tht
#!$e" f#om 355 to .+5' Subp#ime mo#t$$e *o!" hve much hi$he# #te of
defu*t th! p#ime mo#t$$e *o!" !d #e p#iced b"ed o! the #i") ""umed by
the *e!de#'
(*thou$h mo"t home *o!" do !ot f** i!to thi" cte$o#y> "ubp#ime mo#t$$e"
p#o*ife#ted i! the e#*y p#t of the 24"t Ce!tu#y' (bout 24 pe#ce!t of ** mo#t $$e
o#i$i!tio!" f#om 2554 th#ou$h 255% ;e#e "ubp#ime> up f#om , pe#ce!t f#om
4,,% th#ou$h 2554> "y" Eoh! Lo!")i> chief eco!omi"t fo# -oody3" I!ve"to#"
Se#vice' Subp#ime mo#t$$e" tot*ed <%55 bi**io! i! 255%> ccou!ti!$ fo# bout
o!e-fifth of the U'S' home *o! m#)et'
The#e #e m!y diffe#e!t )i!d" of "ubp#ime mo#t$$e"> i!c*udi!$@
I!te#e"t-o!*y mo#t$$e"> ;hich **o; bo##o;e#" to py o!*y i!te#e"t fo#
pe#iod of time 8typic**y +K45 ye#":D
H2ic) pyme!tH *o!"> fo# ;hich bo##o;e#" choo"e thei# mo!th*y
pyme!t 8fu** pyme!t> i!te#e"t o!*y> o# mi!imum pyme!t ;hich my be
*o;e# th! the pyme!t #eGui#ed to #educe the b*!ce of the *o!:D
(!d i!iti* fi=ed #te mo#t$$e" tht Guic)*y co!ve#t to v#ib*e #te"'
Thi" *"t c*"" of mo#t$$e" h" $#o;! p#ticu*#*y popu*# mo!$ "ubp#ime
*e!de#" "i!ce the 4,,5"' Commo! *e!di!$ vehic*e" ;ithi! thi" $#oup i!c*ude the
H2-2. *o!H> ;hich offe#" *o; i!iti* i!te#e"t #te tht "ty" fi=ed fo# t;o ye#"
fte# ;hich the *o! #e"et" to hi$he# dju"tb*e #te fo# the #emi!i!$ *ife of the
*o!> i! thi" c"e 2. ye#"' The !e; i!te#e"t #te i" typic**y "et t "ome m#$i!
ove# ! i!de=> fo# e=mp*e> +F ove# 42-mo!th LI0OR' L#itio!" o! the H2-2.H
i!c*ude the H3-27H !d the H+-2+H'
16
S-(p*&.e C*e,&% Ca*,+
C#edit c#d comp!ie" i! the U!ited Stte" be$! offe#i!$ "ubp#ime c#edit c#d"
to bo##o;e#" ;ith *o; c#edit "co#e" !d hi"to#y of defu*t" o# b!)#uptcy i! the
4,,5"' The"e c#d" u"u**y be$i! ;ith *o; c#edit *imit" !d u"u**y c##y
e=t#eme*y hi$h fee" !d i!te#e"t #te" " hi$h " 35F o# mo#e' I! 2552> "
eco!omic $#o;th i! the U!ited Stte" "*o;ed> the defu*t #te" fo# "ubp#ime
c#edit c#d ho*de#" i!c#e"ed d#mtic**y> !d m!y "ubp#ime c#edit c#d
i""ue#" ;e#e fo#ced to "c*e bc) o# ce"e ope#tio!"'
I! 2557> m!y !e; "ubp#ime c#edit c#d" be$! to "p#out fo#th i! the m#)et' ("
mo#e ve!do#" eme#$ed> the m#)et becme mo#e competitive> fo#ci!$ i""ue#" to
m)e the c#d" mo#e tt#ctive to co!"ume#"' I!te#e"t #te" o! "ubp#ime c#d"
!o; "t#t t ,',F but i! "ome c"e" "ti** #!$e up to 24F !!u* pe#ce!t$e #te
8(2R:'
Subp#ime c#edit c#d" ho;eve# c! he*p co!"ume# imp#ove poo# c#edit "co#e"'
-o"t "ubp#ime c#d" #epo#t to mjo# c#edit #epo#ti!$ $e!cie" "uch "
T#!"U!io! !d &Guif=' Co!"ume#" tht py thei# bi**" o! time "hou*d "ee
po"itive #epo#ti!$ to the"e $e!cie" ;ithi! ,5 dy"'
P*oponen%+
I!dividu*" ;ho hve e=pe#ie!ced "eve#e fi!!ci* p#ob*em" #e u"u**y *be*ed
" hi$he# #i") !d the#efo#e hve $#ete# difficu*ty obti!i!$ c#edit> e"peci**y fo#
*#$e pu#ch"e" "uch " utomobi*e" o# #e* e"tte' The"e i!dividu*" my hve
hd job *o""> p#eviou" debt o# m#it* p#ob*em"> o# u!e=pected medic* i""ue">
u"u**y u!fo#e"ee! !d cu"i!$ mjo# fi!!ci* "etbc)"' (" #e"u*t> *te
pyme!t"> ch#$e-off"> #epo""e""io!" !d eve! fo#ec*o"u#e" my #e"u*t'
17
Due to the"e p#eviou" c#edit p#ob*em"> the"e i!dividu*" my *"o be p#ec*uded
f#om obti!i!$ !y type of co!ve!tio!* *o! fo# *#$e pu#ch"e> "uch " !
utomobi*e' To meet thi" dem!d> *e!de#" hve "ee! tht tie#ed p#ici!$
##!$eme!t> o!e ;hich **o;" the"e i!dividu*" to #eceive *o!" but py
hi$he# i!te#e"t #te> my **o; *o!" ;hich othe#;i"e ;ou*d !ot occu#'
?#om "e#vici!$ "t!dpoi!t> the"e *o!" hve hi$he# co**ectio! defu*t" !d #e
mo#e *i)e*y to e=pe#ie!ce #epo""e""io!" !d ch#$e off"' Le!de#" u"e the hi$he#
i!te#e"t #te to off"et the"e !ticipted hi$he# co"t"'
2#ovided tht co!"ume# e!te#" i!to thi" ##!$eme!t ;ith the u!de#"t!di!$
tht they #e hi$he# #i")> !d mu"t m)e di*i$e!t effo#t" to py> the"e *o!" do
i!deed "e#ve tho"e ;ho ;ou*d othe#;i"e be u!de#"e#ved' Co!ti!ui!$ the
e=mp*e of ! uto *o!> the co!"ume# mu"t pu#ch"e ! utomobi*e ;hich i"
;e** ;ithi! thei# me!"> !d c##ie" pyme!t ;e** ;ithi! thei# bud$et'
C*&%&/&+.
Cpit* m#)et" ope#te o! the b"ic p#emi"e of #i") ve#"u" #e;#d' I!ve"to#"
t)i!$ #i") o! "toc)" e=pect hi$he# #te of #etu#! th! do i!ve"to#" i! #i")-f#ee
T#e"u#y bi**"> ;hich #e bc)ed by the fu** fith !d c#edit of the U!ited Stte"'
The "me $oe" fo# *o!"' Le"" c#edit;o#thy "ubp#ime bo##o;e#" #ep#e"e!t
#i")ie# i!ve"tme!t> "o *e!de#" ;i** ch#$e them hi$he# i!te#e"t #te th! they
;ou*d ch#$e p#ime bo##o;e# fo# the "me *o!'
To void the i!iti* hit of hi$he# mo#t$$e pyme!t"> mo"t "ubp#ime bo##o;e#"
t)e out dju"tb*e-#te mo#t$$e" 8o# (R-": tht $ive them *o;e# i!iti*
i!te#e"t #te' 0ut ;ith pote!ti* !!u* dju"tme!t" of 2F o# mo#e pe# ye#> the"e
*o!" c! e!d up ch#$i!$ much mo#e' So <+55>555 *o! t 4F i!te#e"t #te
fo# 35 ye#" eGute" to pyme!t of bout <2>455 mo!th' 0ut the "me *o!
t 45F fo# 27 ye#" 8fte# the dju"tb*e pe#iod e!d": eGute" to pyme!t of
<4>225' ( %-pe#ce!t$e-poi!t i!c#e"e i! the #te cu"ed "*i$ht*y mo#e th!
7+F i!c#e"e i! the pyme!t'
18
O! the othe# h!d> i!te#e"t #te" o! (R-" c! *"o $o do;! - i! the US> the
i!te#e"t #te i" tied to fede#* $ove#!me!t-co!t#o**ed i!te#e"t #te"> "o ;he! the
?ed cut" #te"> (R- #te" $o do;!> too' (R- i!te#e"t #te" u"u**y dju"t o!ce
ye#> !d the #te i" b"ed o! ! ve#$e of the fede#* #te" ove# the *"t 42
mo!th"' (*"o> mo"t (R-" *imit the mou!t of ch!$e i! #te'
The cyc*e of i!c#e"ed fee" due to defu*t-p#o!e bo##o;e#" defu*ti!$ i" viciou"
cyc*e' Thou$h "ome "ubp#ime bo##o;e#" my be b*e to #epi# thei# c#edit #ti!$>
much defu*t !d e!te# the viciou" cyc*e' Chi*e thi" e!h!ce" the p#ofit" of the
"ubp#ime *e!de#> it *"o *ed" to fu#the# viciou" cyc*i!$ " the "ubp#ime *e!de#"
#e u!b*e to #ecove# ;ht h" bee! *e!t to "ubp#ime bo##o;e#"' 1e!ce the
cu##e!t "ubp#ime mo#t$$e c#i"i"'
Mo*%gage ,&+/*&.&na%&on
Some "ubp#ime *e!di!$ p#ctice" hve #i"ed co!ce#!" bout mo#t$$e
di"c#imi!tio! o! the b"i" of #ce' 0*c) !d othe# mi!o#itie" di"p#opo#tio!te*y
f** i!to the cte$o#y of H"ubp#ime bo##o;e#"H becu"e of *o;e# c#edit "co#e">
hi$he# debt-to-i!come #tio"> !d hi$he# combi!ed *o! to v*ue #tio"' 0ecu"e
they #e hi$he# #i") bo##o;e#"> they #e mo#e *i)e*y to "ee) "ubp#ime mo#t$$e"
;ith hi$he# i!te#e"t #te" th! thei# ;hite cou!te#p#t"' &ve! ;he! medi!
i!come *eve*" ;e#e comp#b*e> home buye#" i! mi!o#ity !ei$hbo#hood" ;e#e
mo#e *i)e*y to $et *o! f#om "ubp#ime *e!de#' I!te#e"t #te" !d the vi*bi*ity
of c#edit #e ofte! tied to c#edit "co#e"> !d the #e"u*t" of 2554 Te="
Dep#tme!t of I!"u#!ce "tudy fou!d tht of the 2 mi**io! Te=!" "u#veyed>
Hb*c) po*icyho*de#" hd ve#$e c#edit "co#e" tht ;e#e 45F to 3+F ;o#"e th!
tho"e of ;hite po*icyho*de#"' 1i"p!ic"3 ve#$e "co#e" ;e#e +F to 2+F ;o#"e>
;hi*e ("i!"3 "co#e" ;e#e #ou$h*y the "me " ;hite"' (f#ic!-(me#ic!" #e i!
the $$#e$te *e"" *i)e*y to hve hi$he# th! ve#$e c#edit "co#e !d "o t)e
o! hi$he# *eve*" of debt ;ith "m**e# do;!-pyme!t" th! ;hite" !d ("i!" of
"imi*# i!come"'
19
O(3e/%&4e+ o1 %5e S%-,6:
To u!de#"t!d the me!i!$ of MSubp#ime C#i"i"N'
To !*yBe the effect" of Subp#ime C#i"i" o! the ;o#*d'
To !*yBe the impct of Subp#ime c#i"i" o! I!di'
To u!de#"t!d the #i")" !d cu"e" of Subp#ime c#i"i"'
20
S/ope o1 %5e S%-,6@
The "tudy i" to cove# the impct of the "ubp#ime c#i"i" tht "t#ted i! U!ited
Stte" of (me#ic ;hich *ed to hu$e *o"" i! it" eco!omy' The "tudy *"o
co!ce!t#te" o! impct of "ubp#ime c#i"i" o! 9*ob* eco!omic" i! $e!e#* !d
I!di! eco!omy i! p#ticu*#.
L&.&%a%&on+:
The "tudy i" ve#y much *imited to u!de#"t!d the #e"o!" behi!d the c#i"i"
t o#i$i! !d it" impct o! I!di! eco!omy'
Due to the "ho#t pe#iod of time it ;" !ot po""ib*e to $the# ** the dt'
Si!ce the c#i"i" i" Guite #ece!t the#e i" !o pub*i"hed m!u* vi*b*e
21
C1(2T&R II
Subp#ime C#i"i"
22
SUBPRIME MORT#A#E CRISIS
&ve#yo!e h" bee! co!"t!t*y #edi!$ i! *mo"t ** !e;"ppe#" bout the US
"ubp#ime mo#t$$e c#i"i" ;hich h" bee! "id to hve the pote!ti* to b#i!$ the
US eco!omy to b#i!) of #ece""io!' It h" *ed to the ou"te# of top e=ecutive" of
-e##i** Ly!ch> Citib!) etc to !me fe; becu"e of e=po"u#e to the "ubp#ime
mo#t$$e tu#moi*' I#o!ic**y> the "me c#i"i" h" *ed to ! I!di! bo#! b!)e#-
Li)#m S 2u!dit bei!$ put t the he*m of the ;o#*dO" *#$e"t b!) K Citi$#oup' So
;ht i" e=ct*y the "ubp#ime c#i"i" ** boutP
The fo**o;i!$ e=t#ct "ee)" to e=p*i! ;ht ;e me! by the te#m M"ubp#ime
*e!di!$N' The! ;e deciphe# ;ht i" the "ubp#ime mo#t$$e *e!di!$ c#i"i" **
bout !d ;ht *ed to it" hppe!i!$' L"t*y> ;e "ee) to fi!d it" pote!ti* impct
o! the US !d I!di! eco!omy'
Sub p#ime *e!di!$ #efe#" to the cte$o#y of bo##o;e#" ;ith ;e) c#edit hi"to#y'
The"e bo##o;e#" u"u**y fi!d it tou$h to *!d mo#t$$e-bc)ed *o!"' Sub p#ime
*e!di!$ i" $e!e#* te#m tht #efe#" to the p#ctice of m)i!$ *o!" to bo##o;e#"
;ho do !ot Gu*ify fo# *o!" t m#)et
I!te#e"t #te" becu"e of p#ob*em" ;ith thei# c#edit hi"to#y o# the *c)i!$ of thei#
bi*ity to p#ove tht they hve e!ou$h i!come to "uppo#t the mo!th*y pyme!t o!
the *o! fo# ;hich they #e pp*yi!$' Thu"> "ub p#ime *o! i" o!e tht i" offe#ed
t ! i!te#e"t #te hi$he# th! (-ppe# 82#ime: *o!" due to the i!c#e"ed #i")'
23
E11e/% o1 S-(p*&.e C*&+&+ on U.S.A
Ba/0g*o-n, %o %5e /*&+&+
The +-(p*&.e .o*%gage /*&+&+ ;" "h#p #i"e i! home fo#ec*o"u#e" ;hich
"t#ted i! the U!ited Stte" i! *te 255% !d becme $*ob* fi!!ci* c#i"i"
du#i!$ 2557 !d 255.'
The c#i"i" be$! ;ith the bu#"ti!$ of the hou"i!$ bubb*e i! the US !d hi$h
defu*t #te" o! H"ubp#imeH !d othe# dju"tb*e #te mo#t$$e" 8(R-: mde to
hi$he#-#i") bo##o;e#" ;ith *o;e# i!come o# *e""e# c#edit hi"to#y th! Hp#imeH
bo##o;e#"' Lo! i!ce!tive" !d *o!$-te#m t#e!d of #i"i!$ hou"i!$ p#ice"
e!cou#$ed bo##o;e#" to ""ume mo#t$$e"> be*ievi!$ they ;ou*d be b*e to
#efi!!ce t mo#e fvo#b*e te#m" *te#' 1o;eve#> o!ce hou"i!$ p#ice" "t#ted to
d#op mode#te*y i! 255%-2557 i! m!y p#t" of the U'S'> #efi!!ci!$ becme
mo#e difficu*t' Defu*t" !d fo#ec*o"u#e ctivity i!c#e"ed d#mtic**y " (R-
i!te#e"t #te" #e"et hi$he#' Du#i!$ 2557> !e#*y 4'3 mi**io! U'S' hou"i!$
p#ope#tie" ;e#e "ubject to fo#ec*o"u#e ctivity> up 7,F ve#"u" 255%' (" of
Decembe# 22> 2557> *edi!$ bu"i!e"" pe#iodic* e"timted "ubp#ime defu*t"
;ou*d #ech *eve* bet;ee! U'S' <255-355 bi**io!'
The mo#t$$e *e!de#" tht #eti!ed c#edit #i") 8the #i") of pyme!t defu*t: ;e#e
the fi#"t to be ffected> " bo##o;e#" becme u!b*e o# u!;i**i!$ to m)e
pyme!t"' -jo# 0!)" !d othe# fi!!ci* i!"titutio!" #ou!d the ;o#*d hve
#epo#ted *o""e" of pp#o=imte*y U'S' <4+5 bi**io! " of ?eb#u#y 255.> " cited
be*o;' Due to fo#m of fi!!ci* e!$i!ee#i!$ c**ed "ecu#itiBtio!> m!y
mo#t$$e *e!de#" hd p""ed the #i$ht" to the mo#t$$e pyme!t" !d #e*ted
c#editJdefu*t #i") to thi#d-p#ty i!ve"to#" vi mo#t$$e-bc)ed "ecu#itie" 8-0S:
24
!d co**te#*iBed debt ob*i$tio!" 8CDO:' Co#po#te> i!dividu* !d i!"titutio!*
i!ve"to#" ho*di!$ -0S o# CDO fced "i$!ific!t *o""e"> " the v*ue of the
u!de#*yi!$ mo#t$$e ""et" dec*i!ed' Stoc) m#)et" i! m!y cou!t#ie" dec*i!ed
"i$!ific!t*y'
The ;ide"p#ed di"pe#"io! of c#edit #i") !d the u!c*e# impct o! fi!!ci*
i!"titutio!" cu"ed *e!de#" to #educe *e!di!$ ctivity o# to m)e *o!" t hi$he#
i!te#e"t #te"' Simi*#*y> the bi*ity of co#po#tio!" to obti! fu!d" th#ou$h the
i""u!ce of comme#ci* ppe# ;" impcted' Thi" "pect of the c#i"i" i"
co!"i"te!t ;ith c#edit c#u!ch' The *iGuidity co!ce#!" d#ove ce!t#* b!)"
#ou!d the ;o#*d to t)e ctio! to p#ovide fu!d" to membe# b!)" to e!cou#$e
the *e!di!$ of fu!d" to ;o#thy bo##o;e#" !d to #e-i!vi$o#te the comme#ci*
ppe# m#)et".
The "ubp#ime c#i"i" *"o p*ce" do;!;#d p#e""u#e o! eco!omic $#o;th>
becu"e fe;e# o# mo#e e=pe!"ive *o!" dec#e"e i!ve"tme!t by bu"i!e""e" !d
co!"ume# "pe!di!$> ;hich d#ive the eco!omy' ( "ep#te but #e*ted dy!mic i"
the do;!tu#! i! the hou"i!$ m#)et> ;he#e "u#p*u" i!ve!to#y of home" h"
#e"u*ted i! "i$!ific!t dec*i!e i! !e; home co!"t#uctio! !d hou"i!$ p#ice" i!
m!y #e"' Thi" *"o p*ce" do;!;#d p#e""u#e o! $#o;th' Cith i!te#e"t #te"
o! *#$e !umbe# of "ubp#ime !d othe# (R- due to dju"t up;#d du#i!$ the
255. pe#iod> U'S' *e$i"*to#" !d the U'S' T#e"u#y Dep#tme!t #e t)i!$ ctio!'
( "y"temtic p#o$#m to *imit o# defe# i!te#e"t #te dju"tme!t" ;" imp*eme!ted
to #educe the impct' I! dditio!> *e!de#" !d bo##o;e#" fci!$ defu*t" hve
bee! e!cou#$ed to coope#te to e!b*e bo##o;e#" to "ty i! thei# home"' The
#i")" to the b#ode# eco!omy c#eted by the fi!!ci* m#)et c#i"i" !d hou"i!$
m#)et do;!tu#! ;e#e p#im#y fcto#" i! the E!u#y 22> 255. deci"io! by the
U'S' ?ede#* #e"e#ve to cut i!te#e"t #te" !d the eco!omic "timu*u" pc)$e
"i$!ed by 2#e"ide!t 0u"h o! ?eb#u#y 43> 255.' 0oth ctio!" #e de"i$!ed to
"timu*te eco!omic $#o;th !d i!"pi#e co!fide!ce i! the fi!!ci* m#)et"'
25
Ba/0g*o-n, &n1o*.a%&on:
( "ubp#ime *o! i" o!e tht i" offe#ed t ! i!te#e"t #te hi$he# th! (-ppe#
*o!" due to the i!c#e"ed #i")' Subp#ime> the#efo#e> i" !ot the "me " H(*t-(H>
becu"e (*t-( *o!" Gu*ify fo# the H(-#ti!$H by -oody3" o# othe# #ti!$ fi#m">
*beit fo# ! H*te#!tiveH me!"'
The v*ue of U'S' "ubp#ime mo#t$$e" ;" e"timted t <4'3 t#i**io! " of -#ch
2557> ;ith ove# 7'+ mi**io! fi#"t-*ie! "ubp#ime mo#t$$e" out"t!di!$'
(pp#o=imte*y 4%F of "ubp#ime *o!" ;ith dju"tb*e #te mo#t$$e" 8(R-:
;e#e ,5-dy" de*i!Gue!t o# i! fo#ec*o"u#e p#oceedi!$" " of Octobe# 2557>
#ou$h*y t#ip*e the #te of 255+' 0y E!u#y of 255.> the de*i!Gue!cy #te hd
#i"e! to 24F'

Subp#ime (R-" o!*y #ep#e"e!t %'.F of the *o!" out"t!di!$ i! the US> yet they
#ep#e"e!t 43'5F of the fo#ec*o"u#e" "t#ted du#i!$ the thi#d Gu#te# of 2557'
6
(
tot* of !e#*y 44%>72% U'S' hou"eho*d p#ope#tie" ;e#e "ubject to "ome "o#t of
fo#ec*o"u#e ctio! f#om Eu*y to Septembe# 2557> i!c*udi!$ tho"e ;ith p#ime> *t-(
!d "ubp#ime *o!"' Thi" i" !e#*y doub*e the 223>555 p#ope#tie" i! the ye#-$o
pe#iod !d 34F hi$he# th! the 333>%27 i! the p#io# Gu#te#' Thi" i!c#e"ed to
+27>745 du#i!$ the fou#th Gu#te# of 2557> ! 4.F i!c#e"e ve#"u" the p#io#
Gu#te#' ?o# ** of 2557> !e#*y 4'3 mi**io! p#ope#tie" ;e#e "ubject to 2'2 mi**io!
fo#ec*o"u#e fi*i!$"> up 7,F !d 7+F #e"pective*y ve#"u" 255%' ?o#ec*o"u#e fi*i!$"
i!c*udi!$ defu*t !otice"> uctio! "*e !otice" !d b!) #epo""e""io!" c!
i!c*ude mu*tip*e !otice" o! the "me p#ope#ty'
The e"timted v*ue of "ubp#ime dju"tb*e-#te mo#t$$e" 8(R-: #e"etti!$ t
hi$he# i!te#e"t #te" i" U'S' <455 bi**io! fo# 2557 !d <+55 bi**io! fo# 255.' Re"et
ctivity i" e=pected to i!c#e"e to mo!th*y pe) i! -#ch 255. of !e#*y <455
26
bi**io!> befo#e dec*i!i!$' (! ve#$e of 4+5>555 "ubp#ime (R- #e "chedu*ed to
u!de#$o thei# fi#"t #te i!c#e"e ech Gu#te# i! 255.'
Un,e*+%an,&ng %5e /a-+e+ an, *&+0+ o1 %5e +-(p*&.e /*&+&+
The #e"o!" fo# thi" c#i"i" #e v#ied !d comp*e=' U!de#"t!di!$ !d m!$i!$
the #ipp*e effect th#ou$h the ;o#*d-;ide eco!omy po"e" c#itic* ch**e!$e fo#
$ove#!me!t"> bu"i!e""e"> !d i!ve"to#"' Due to i!!ovtio!" i! "ecu#iBtio! the
#i")" #e*ted to the i!bi*ity of homeo;!e#" to meet mo#t$$e pyme!t" hve
bee! di"t#ibuted b#od*y> ;ith "e#ie" of co!"eGue!ti* impct"' The c#i"i" c!
be tt#ibuted to !umbe# of fcto#"> "uch " the i!bi*ity of homeo;!e#" to m)e
thei# mo#t$$e pyme!t"D poo# jud$me!t by eithe# the bo##o;e# o# the *e!de#D
i!pp#op#ite mo#t$$e i!ce!tive"> !d #i"i!$ dju"tb*e mo#t$$e #te"' ?u#the#>
dec*i!i!$ home p#ice" hve mde #e-fi!!ci!$ mo#e difficu*t' The#e #e th#ee
p#im#y #i") cte$o#ie" i!vo*ved@
C*e,&% R&+0: T#ditio!**y> the #i") of defu*t 8c**ed c#edit #i"): ;ou*d be
""umed by the b!) o#i$i!ti!$ the *o!' 1o;eve#> due to i!!ovtio!" i!
"ecu#itiBtio!> c#edit #i") i" !o; "h#ed mo#e b#od*y ;ith i!ve"to#">
becu"e the #i$ht" to the"e mo#t$$e pyme!t" hve bee! #epc)$ed
i!to v#iety of comp*e= i!ve"tme!t vehic*e"> $e!e#**y cte$o#iBed "
mo#t$$e-bc)ed "ecu#itie" 8-0S: o# co**te#*iBed debt ob*i$tio!"
8CDO:' ( CDO> e""e!ti**y> i" #epc)i!$ of e=i"ti!$ debt> !d i! #ece!t
ye#" -0S co**te#* h" mde up *#$e p#opo#tio! of i""u!ce' I!
e=ch!$e fo# pu#ch"i!$ the -0S> thi#d-p#ty i!ve"to#" #eceive c*im o!
the mo#t$$e ""et"> ;hich become co**te#* i! the eve!t of defu*t'
?u#the#> the -0S i!ve"to# h" the #i$ht to c"h f*o;" #e*ted to the
mo#t$$e pyme!t"' To m!$e thei# #i")> mo#t$$e o#i$i!to#" 8e'$'>
b!)" o# mo#t$$e *e!de#": my *"o c#ete "ep#te *e$* e!titie"> c**ed
"peci*-pu#po"e e!titie" 8S2&:> to both ""ume the #i") of defu*t !d
27
i""ue the -0S' The b!)" effective*y "e** the mo#t$$e ""et" 8i'e'>
b!)i!$ ccou!t" #eceivb*e> ;hich #e the #i$ht" to #eceive the mo#t$$e
pyme!t": to the"e S2&' I! tu#!> the S2& the! "e**" the -0S to the
i!ve"to#"' The mo#t$$e ""et" i! the S2& become the co**te#*'
A++e% P*&/e R&+0: CDO v*utio! i" comp*e= !d #e*ted Hfi# v*ueH
ccou!ti!$ fo# "uch HLeve* 3H ""et" i" "ubject to ;ide i!te#p#ettio!' Thi"
v*utio! fu!dme!t**y de#ive" f#om the co**ectib*e" of "ubp#ime
mo#t$$e pyme!t"> ;hich i" difficu*t to p#edict due to *c) of p#ecede!t
!d #i"i!$ de*i!Gue!cy #te"' 0!)" !d i!"titutio!* i!ve"to#" hve
#eco$!iBed "ub"t!ti* *o""e" " they #ev*ue thei# CDO ""et"
do;!;#d' -o"t CDO" #eGui#e tht !umbe# of te"t" be "ti"fied o!
pe#iodic b"i"> "uch " te"t" of i!te#e"t c"h f*o;"> co**te#* #ti!$"> o#
m#)et v*ue"' ?o# de*" ;ith m#)et v*ue te"t"> if the v*utio! f**"
be*o; ce#ti! *eve*"> the CDO my be #eGui#ed by it" te#m" to "e**
co**te#* i! "ho#t pe#iod of time> ofte! t "teep *o""> much *i)e "toc)
b#o)e#$e ccou!t m#$i! c**' If the #i") i" !ot *e$**y co!ti!ed ;ithi! !
S2& o# othe#;i"e> the e!tity o;!i!$ the mo#t$$e co**te#* my be fo#ced
to "e** othe# type" of ""et"> " ;e**> to "ti"fy the te#m" of the de*' I!
dditio!> c#edit #ti!$ $e!cie" hve do;!$#ded ove# U'S' <+5 bi**io! i!
hi$h*y-#ted CDO !d mo#e "uch do;!$#de" #e po""ib*e' Si!ce ce#ti!
type" of i!"titutio!* i!ve"to#" #e **o;ed to o!*y c##y hi$he#-Gu*ity
8e'$'> H(((H: ""et"> the#e i" ! i!c#e"ed #i") of fo#ced ""et "*e">
;hich cou*d cu"e fu#the# dev*utio!'
L&7-&,&%6 R&+0: ( #e*ted #i") i!vo*ve" the comme#ci* ppe# m#)et> )ey
"ou#ce of fu!d" 8i'e'> *iGuidity: fo# m!y comp!ie"' Comp!ie" !d S2&
c**ed "t#uctu#ed i!ve"tme!t vehic*e" 8SIL: ofte! obti! "ho#t-te#m *o!"
by i""ui!$ comme#ci* ppe#> p*ed$i!$ mo#t$$e ""et" o# CDO "
co**te#*' I!ve"to#" p#ovide c"h i! e=ch!$e fo# the comme#ci* ppe#>
#eceivi!$ mo!ey-m#)et i!te#e"t #te"' 1o;eve#> becu"e of co!ce#!"
#e$#di!$ the v*ue of the mo#t$$e ""et co**te#* *i!)ed to "ubp#ime
28
!d (*t-( *o!"> the bi*ity of m!y comp!ie" to i""ue "uch ppe# h"
bee! "i$!ific!t*y ffected' The mou!t of comme#ci* ppe# i""ued " of
Octobe# 4.> 2557 d#opped by 2+F> to <... bi**io!> f#om the (u$u"t .
*eve*' I! dditio!> the i!te#e"t #te ch#$ed by i!ve"to#" to p#ovide *o!"
fo# comme#ci* ppe# h" i!c#e"ed "ub"t!ti**y bove hi"to#ic* *eve*"'
Un,e*+%an,&ng %5e &.pa/% on /o*po*a%&on+ an, &n4e+%o*+
(ve#$e i!ve"to#" !d co#po#tio!" fce v#iety of #i")" due to the i!bi*ity of
mo#t$$e ho*de#" to py' The"e v#y by *e$* e!tity' Some $e!e#* e=po"u#e" by
e!tity type i!c*ude@
0!) co#po#tio!"@ The e#!i!$" #epo#ted by mjo# b!)" #e dve#"e*y
ffected by defu*t" o! mo#t$$e" they i""ue !d #eti!' Comp!ie" v*ue
thei# mo#t$$e ""et" 8#eceivb*e": b"ed o! e"timte" of co**ectio!" f#om
homeo;!e#"' Comp!ie" #eco#d e=pe!"e" i! the cu##e!t pe#iod to dju"t
thi" v*utio!> i!c#e"i!$ thei# bd debt #e"e#ve" !d #educi!$ e#!i!$"'
Rpid o# u!e=pected ch!$e" i! mo#t$$e ""et v*utio! c! *ed to
vo*ti*ity i! e#!i!$" !d "toc) p#ice"' The bi*ity of *e!de#" to p#edict
futu#e co**ectio!" i" comp*e= t") "ubject to mu*titude of v#ib*e"'
-o#t$$e *e!de#" !d Re* &"tte I!ve"tme!t T#u"t"@ The"e e!titie" fce
"imi*# #i")" to b!)"' I! dditio!> they hve bu"i!e"" mode*" ;ith
"i$!ific!t #e*i!ce o! the bi*ity to #e$u*#*y "ecu#e !e; fi!!ci!$ th#ou$h
CDO o# comme#ci* ppe# i""u!ce "ecu#ed by mo#t$$e"' I!ve"to#"
hve become #e*uct!t to fu!d "uch i!ve"tme!t" !d #e dem!di!$
hi$he# i!te#e"t #te"' Such *e!de#" #e t i!c#e"ed #i") of "i$!ific!t
#eductio!" i! boo) v*ue due to ""et "*e" t u!fvo#b*e p#ice" !d
"eve#* hve fi*ed b!)#uptcy'
29
Speci* pu#po"e e!titie" 8S2&:@ Li)e co#po#tio!"> S2& #e #eGui#ed to
#ev*ue thei# mo#t$$e ""et" b"ed o! e"timte" of co**ectio! of
mo#t$$e pyme!t"' If thi" v*utio! f**" be*o; ce#ti! *eve*> o# if c"h
f*o; f**" be*o; co!t#ctu* *eve*"> i!ve"to#" my hve immedite #i$ht" to
the mo#t$$e ""et co**te#*' Thi" c! *"o cu"e the #pid "*e of ""et"
t u!fvo#b*e p#ice"' Othe# S2& c**ed "t#uctu#ed i!ve"tme!t vehic*e"
8SIL: i""ue comme#ci* ppe# !d u"e the p#oceed" to pu#ch"e
"ecu#itiBed ""et" "uch " CDO' The"e e!titie" hve bee! ffected by
mo#t$$e ""et dev*utio!' Seve#* mjo# SIL #e ""ocited ;ith *#$e
b!)"'
I!ve"to#"@ Stoc)" o# bo!d" of the e!titie" bove #e ffected by the *o;e#
e#!i!$" !d u!ce#ti!ty #e$#di!$ the v*utio! of mo#t$$e ""et" !d
#e*ted pyme!t co**ectio!' -!y i!ve"to#" !d co#po#tio!" pu#ch"ed
-0S o# CDO " i!ve"tme!t" !d i!cu##ed #e*ted *o""e"'
30
Ca-+e+ o1 %5e /*&+&+
T5e 5o-+&ng ,o2n%-*n
Subp#ime bo##o;i!$ ;" mjo# co!t#ibuto# to ! i!c#e"e i! home o;!e#"hip
#te" !d the dem!d fo# hou"i!$' The ove#** U'S' homeo;!e#"hip #te
i!c#e"ed f#om %4 pe#ce!t i! 4,,4 8bout ;he#e it ;" "i!ce 4,.5: to pe) i!
2554 ;ith ! ** time hi$h of %,'2 pe#ce!t'
Thi" dem!d he*ped fue* hou"i!$ p#ice i!c#e"e" !d co!"ume# "pe!di!$'
0et;ee! 4,,7 !d 255%> (me#ic! home p#ice" i!c#e"ed by 424F' Some
homeo;!e#" u"ed the i!c#e"ed p#ope#ty v*ue e=pe#ie!ced i! the hou"i!$
bubb*e to #efi!!ce thei# home" ;ith *o;e# i!te#e"t #te" !d t)e out "eco!d
mo#t$$e" $i!"t the dded v*ue to u"e the fu!d" fo# co!"ume# "pe!di!$' U'S'
hou"eho*d debt " pe#ce!t$e of i!come #o"e to 435F du#i!$ 2557> ve#"u"
455F e#*ie# i! the decde' ( cu*tu#e of co!"ume#i"m i" fcto#' I! the e#*y
2555" #ece""io! tht be$! i! e#*y 2554 !d ;hich ;" e=ce#bted by the
Septembe# 44> 2554 te##o#i"t ttc)"> (me#ic!" ;e#e ")ed to "pe!d thei# ;y
out of eco!omic dec*i!e ;ith Hco!"ume#i"m''' c"t " the !e; pt#ioti"mH' Thi"
c** *i!)i!$ pt#ioti"m to "hoppi!$ echoed the u#$i!$ of fo#me# 2#e"ide!t 0i**
C*i!to! to H$et out !d "hopH !d co#po#tio!" *i)e 9e!e#* -oto#" p#oduced
comme#ci*" ;ith the "me theme'
Ove#bui*di!$ du#i!$ the boom pe#iod> i!c#e"i!$ fo#ec*o"u#e #te" !d
u!;i**i!$!e"" of m!y homeo;!e#" to "e** thei# home" t #educed m#)et p#ice"
hve "i$!ific!t*y i!c#e"ed the "upp*y of hou"i!$ i!ve!to#y vi*b*e' S*e"
vo*ume 8u!it": of !e; home" d#opped by 2%'4F i! 2557 ve#"u" the p#io# ye#' 0y
E!u#y 255.> the i!ve!to#y of u!"o*d !e; home" "tood t ,'. mo!th" b"ed o!
Decembe# 2557 "*e" vo*ume> the hi$he"t *eve* "i!ce 4,.4' ?u#the#> #eco#d of
!e#*y fou# mi**io! u!"o*d e=i"ti!$ home" ;" vi*b*e'
31
Thi" e=ce"" "upp*y of home i!ve!to#y p*ce" "i$!ific!t do;!;#d p#e""u#e o!
p#ice"' (" p#ice" dec*i!e> mo#e homeo;!e#" #e t #i") of defu*t !d
fo#ec*o"u#e' (cco#di!$ to the SQ2JC"e-Shi**e# hou"i!$ p#ice i!de=> by
Novembe# 2557> ve#$e U'S' hou"i!$ p#ice" hd f**e! pp#o=imte*y .F f#om
thei# 255% pe)' 1o;eve#> the#e ;" "i$!ific!t v#itio! i! p#ice ch!$e" c#o""
U'S' m#)et"> ;ith m!y pp#eciti!$ !d othe#" dep#eciti!$' The p#ice dec*i!e
i! Decembe# 2557 ve#"u" the ye#-$o pe#iod ;" 45'4F' (" of ?eb#u#y 255.>
hou"i!$ p#ice" #e e=pected to co!ti!ue dec*i!i!$ u!ti* thi" i!ve!to#y of "u#p*u"
home" 8e=ce"" "upp*y: i" #educed to mo#e typic* *eve*"'
Ro'e o1 (o**o2e*+
( v#iety of fcto#" hve co!t#ibuted to ! i!c#e"e i! the pyme!t de*i!Gue!cy
#te fo# "ubp#ime (R- bo##o;e#"> ;hich #ece!t*y #eched 24F> #ou$h*y fou#
time" it" hi"to#ic* *eve*'
&"y c#edit> combi!ed ;ith the ""umptio! tht hou"i!$ p#ice" ;ou*d co!ti!ue to
pp#ecite> *"o e!cou#$ed m!y "ubp#ime bo##o;e#" to obti! (R-" they
cou*d !ot ffo#d fte# the i!iti* i!ce!tive pe#iod' O!ce hou"i!$ p#ice" "t#ted
dep#eciti!$ mode#te*y i! m!y p#t" of the U'S> #efi!!ci!$ becme mo#e
difficu*t' Some homeo;!e#" ;e#e u!b*e to #e-fi!!ce !d be$! to defu*t o!
*o!" " thei# *o!" #e"et to hi$he# i!te#e"t #te" !d pyme!t mou!t"' Othe#
homeo;!e#"> fci!$ dec*i!e" i! home m#)et v*ue o# ;ith *imited ccumu*ted
eGuity> #e choo"i!$ to "top pyi!$ thei# mo#t$$e' They #e e""e!ti**y H;*)i!$
;yH f#om the p#ope#ty !d **o;i!$ fo#ec*o"u#e> de"pite the impct to thei#
c#edit #ti!$'
32
-i"#ep#e"e!ttio! of *o! pp*ictio! dt i" !othe# co!t#ibuti!$ fcto#' I!
E!u#y 43> 255. co*um! i! the Ne; /o#) Time"> 9eo#$e -"o! U!ive#"ity
eco!omic" p#ofe""o# Ty*e# Co;e! ;#ote> HThe#e h" bee! p*e!ty of t*) bout
3p#edto#y *e!di!$>3 but 3p#edto#y bo##o;i!$3 my hve bee! the bi$$e# p#ob*em'
(" much " 75 pe#ce!t of #ece!t e#*y pyme!t defu*t" hd f#udu*e!t
mi"#ep#e"e!ttio!" o! thei# o#i$i!* *o! pp*ictio!"> cco#di!$ to o!e #ece!t
"tudy' The #e"e#ch ;" do!e by 0"e2oi!t (!*ytic"> ;hich he*p" b!)" !d
*e!de#" ide!tify f#udu*e!t t#!"ctio!"D the "tudy *oo)ed t mo#e th! th#ee
mi**io! *o!" f#om 4,,7 to 255%> ;ith mjo#ity f#om 255+ to 255%' (pp*ictio!"
;ith mi"#ep#e"e!ttio!" ;e#e *"o five time" " *i)e*y to $o i!to defu*t' -!y of
the f#ud" ;e#e "imp*e #the# th! i!$e!iou"' I! "ome c"e"> bo##o;e#" ;ho
;e#e ")ed to "tte thei# i!come" ju"t *ied> "ometime" #epo#ti!$ five time" ctu*
i!comeD othe# bo##o;e#" f*"ified i!come docume!t" by u"i!$ compute#"'H
US Dep#tme!t of the T#e"u#y "u"piciou" ctivity #epo#t of mo#t$$e f#ud
i!c#e"ed by 4>444 pe#ce!t bet;ee! 4,,7 !d 255+'
33
Ro'e o1 1&nan/&a' &n+%&%-%&on+
( v#iety of fcto#" hve cu"ed *e!de#" to offe# ! i!c#e"i!$ ##y of hi$he#-#i")
*o!" to hi$he#-#i") bo##o;e#"' The "h#e of "ubp#ime mo#t$$e" to tot*
o#i$i!tio!" ;" +F 8<3+ bi**io!: i! 4,,4> ,F i! 4,,%> 43F 8<4%5 bi**io!: i! 4,,,>
!d 25F i! 255%' ( "tudy by the ?ede#* Re"e#ve i!dicted tht the ve#$e
diffe#e!ce i! mo#t$$e i!te#e"t #te" bet;ee! "ubp#ime !d p#ime mo#t$$e"
8the H"ubp#ime m#)upH o# H#i") p#emiumH: dec*i!ed f#om 2'. pe#ce!t$e poi!t"
82.5 b"i" poi!t": i! 2554> to 4'3 pe#ce!t$e poi!t" i! 2557' I! othe# ;o#d"> the
#i") p#emium #eGui#ed by *e!de#" to offe# "ubp#ime *o! dec*i!ed' Thi" occu##ed
eve! thou$h "ubp#ime bo##o;e# !d *o! ch#cte#i"tic" dec*i!ed ove#** du#i!$
the 2554-255% pe#iod> ;hich "hou*d hve hd the oppo"ite effect' The
combi!tio! i" commo! to c*""ic boom !d bu"t c#edit cyc*e"'
I! dditio! to co!"ide#i!$ hi$he#-#i") bo##o;e#"> *e!de#" hve offe#ed
i!c#e"i!$*y hi$h-#i") *o! optio!" !d i!ce!tive"' O!e e=mp*e i" the i!te#e"t-
o!*y dju"tb*e-#te mo#t$$e 8(R-:> ;hich **o;" the homeo;!e# to py ju"t
the i!te#e"t 8!ot p#i!cip*: du#i!$ ! i!iti* pe#iod' (!othe# e=mp*e i" Hpyme!t
optio!H *o!> i! ;hich the homeo;!e# c! py v#ib*e mou!t> but !y i!te#e"t
!ot pid i" dded to the p#i!cip*' ?u#the#> ! e"timted o!e-thi#d of (R-
o#i$i!ted bet;ee! 2554-255% hd Hte"e#H #te" be*o; 4F> ;hich the!
i!c#e"ed "i$!ific!t*y fte# "ome i!iti* pe#iod> " much " doub*i!$ the mo!th*y
pyme!t'
Some be*ieve tht mo#t$$e "t!d#d" becme *= becu"e of mo#* hB#d>
;he#e ech *i!) i! the mo#t$$e chi! co**ected p#ofit" ;hi*e be*ievi!$ it ;"
p""i!$ o! #i")'
34
Ro'e o1 +e/-*&%&8a%&on
Secu#itiBtio! i" "t#uctu#ed fi!!ce p#oce"" i! ;hich ""et"> #eceivb*e" o#
fi!!ci* i!"t#ume!t" #e cGui#ed> c*""ified i!to poo*"> !d offe#ed " co**te#*
fo# thi#d-p#ty i!ve"tme!t' The#e #e m!y p#tie" i!vo*ved' Due to "ecu#itiBtio!>
i!ve"to# ppetite fo# mo#t$$e-bc)ed "ecu#itie" 8-0S:> !d the te!de!cy of
#ti!$ $e!cie" to ""i$! i!ve"tme!t-$#de #ti!$" to -0S> *o!" ;ith hi$h #i")
of defu*t cou*d be o#i$i!ted> pc)$ed !d the #i") #edi*y t#!"fe##ed to othe#"'
(""et "ecu#itiBtio! be$! ;ith the "t#uctu#ed fi!!ci!$ of mo#t$$e poo*" i! the
4,75"' The "ecu#itiBed "h#e of "ubp#ime mo#t$$e" 8i'e'> tho"e p""ed to thi#d-
p#ty i!ve"to#": i!c#e"ed f#om +4F i! 2554> to 7+F i! 255%' (*! 9#ee!"p!
"tted tht the "ecu#itiBtio! of home *o!" fo# peop*e ;ith poo# c#edit A !ot the
*o!" them"e*ve" A ;e#e to b*me fo# the cu##e!t $*ob* c#edit c#i"i"'
Ro'e o1 .o*%gage (*o0e*+
-o#t$$e b#o)e#" do!3t *e!d thei# o;! mo!ey' The#e i" !ot di#ect co##e*tio!
bet;ee! *o! pe#fo#m!ce !d compe!"tio!' They hve bi$ fi!!ci* i!ce!tive"
fo# "e**i!$ comp*e=> dju"tb*e #te mo#t$$e" 8(R-3":> "i!ce they e#! hi$he#
commi""io!"'
(cco#di!$ to "tudy by Cho*e"*e (cce"" -o#t$$e Re"e#ch Q Co!"u*ti!$ I!c'>
i! 2554 -o#t$$e b#o)e#" o#i$i!ted %.F of ** #e"ide!ti* *o!" i! the U'S'> ;ith
"ubp#ime !d (*t-( *o!" ccou!ti!$ fo# 42'7F of b#o)e#$e"3 tot* p#oductio!
vo*ume'
The chi#m! of the -o#t$$e 0!)e#" (""ocitio! c*imed b#o)e#" p#ofited f#om
home *o! boom but did!3t do e!ou$h to e=mi!e ;hethe# bo##o;e#" cou*d
#epy'
35
Ro'e o1 .o*%gage -n,e*2*&%e*+
U!de#;#ite#" dete#mi!e if the #i") of *e!di!$ to p#ticu*# bo##o;e# u!de# ce#ti!
p#mete#" i" cceptb*e' -o"t of the #i")" !d te#m" tht u!de#;#ite#" co!"ide#
f** u!de# the th#ee CO" of u!de#;#iti!$@ c#edit> cpcity !d co**te#*' See
mo#t$$e u!de#;#iti!$'
I! 2557> 45 pe#ce!t of ** "ubp#ime *o!" ;e#e $e!e#ted by utomted
u!de#;#iti!$' (! &=ecutive vice p#e"ide!t of Cou!t#y;ide 1ome Lo!" I!c'
"tted i! 2554 H2#io# to utomti!$ the p#oce""> $etti!$ ! !";e# f#om !
u!de#;#ite# too) up to ;ee)' HCe #e b*e to p#oduce deci"io! i!"ide of 35
"eco!d" tody' ''' (!d p#eviou"*y> eve#y mo#t$$e #eGui#ed "t!d#d "et of fu**
docume!ttio!'H Some thi!) tht u"e#" ;ho"e *= co!t#o*" !d ;i**i!$!e"" to #e*y
o! "ho#tcut" *ed them to pp#ove bo##o;e#" tht u!de# *e""-utomted "y"tem
;ou*d !eve# hve mde the cut #e t fu*t fo# the "ubp#ime me*tdo;!'
Ro'e o1 go4e*n.en% an, *eg-'a%o*+
Some eco!omi"t" c*im tht $ove#!me!t po*icy ctu**y e!cou#$ed the
deve*opme!t of the "ubp#ime debc*e th#ou$h *e$i"*tio! *i)e the Commu!ity
Rei!ve"tme!t (ct> ;hich they "y fo#ce" b!)" to *e!d to othe#;i"e u!-
c#edit;o#thy co!"ume#"' &co!omi"t Robe#t Iutt!e# h" c#iticiBed the #epe* of
the 9*""-Ste$** (ct " co!t#ibuti!$ to the "ubp#ime me*tdo;!' ( t=pye#-
fu!ded $ove#!me!t bi*out #e*ted to mo#t$$e" du#i!$ the Svi!$" !d Lo!
c#i"i" my hve c#eted mo#* hB#d !d cted " e!cou#$eme!t to *e!de#"
to m)e "imi*# hi$he# #i") *o!"'
Some hve #$ued tht> de"pite ttempt" by v#iou" U'S' "tte" to p#eve!t the
$#o;th of "eco!d#y m#)et i! #epc)$ed p#edto#y *o!"> the T#e"u#y
Dep#tme!t3" Office of the Compt#o**e# of the Cu##e!cy> t the i!"i"te!ce of
!tio!* b!)"> "t#uc) do;! "uch ttempt" " vio*tio!" of ?ede#* b!)i!$ *;"'
36
I! #e"po!"e to co!ce#! tht *e!di!$ ;" !ot p#ope#*y #e$u*ted> the 1ou"e !d
Se!te #e both co!"ide#i!$ bi**" to #e$u*te *e!di!$ p#ctice"'
Ro'e o1 /*e,&% *a%&ng agen/&e+
C#edit #ti!$ $e!cie" #e !o; u!de# "c#uti!y fo# $ivi!$ i!ve"tme!t-$#de #ti!$"
to "ecu#itiBtio! t#!"ctio!" ho*di!$ "ubp#ime mo#t$$e"' 1i$he# #ti!$" #e
theo#etic**y due to the mu*tip*e> i!depe!de!t mo#t$$e" he*d i! the -0S pe# the
$e!cie"> but c#itic" c*im tht co!f*ict" of i!te#e"t ;e#e i! p*y'
Ro'e o1 /en%*a' (an0+
Ce!t#* b!)" #e p#im#i*y co!ce#!ed ;ith m!$i!$ the #te of i!f*tio! !d
voidi!$ #ece""io!"' They #e *"o the M*e!de#" of *"t #e"o#tN to e!"u#e *iGuidity'
They #e *e"" co!ce#!ed ;ith voidi!$ ""et bubb*e"> "uch " the hou"i!$
bubb*e !d dotcom bubb*e' Ce!t#* b!)" hve $e!e#**y cho"e! to #ect fte#
"uch bubb*e" bu#"t to mi!imiBe co**te#* impct o! the eco!omy> #the# th!
t#yi!$ to void the bubb*e it"e*f' Thi" i" becu"e ide!tifyi!$ ! ""et bubb*e !d
dete#mi!i!$ the p#ope# mo!et#y po*icy to p#ope#*y def*te it #e !ot p#ove!
co!cept"' The#e i" "i$!ific!t debte mo!$ eco!omi"t" #e$#di!$ ;hethe# thi"
i" the optim* "t#te$y'
?ede#* Re"e#ve ctio!" #i"ed co!ce#!" mo!$ "ome m#)et ob"e#ve#" tht it
cou*d c#ete mo#* hB#d' Some i!du"t#y offici*" "id tht ?ede#* Re"e#ve
0!) of Ne; /o#) i!vo*veme!t i! the #e"cue of Lo!$-Te#m Cpit* -!$eme!t
i! 4,,. ;ou*d e!cou#$e *#$e fi!!ci* i!"titutio!" to ""ume mo#e #i")> i! the
be*ief tht the ?ede#* Re"e#ve ;ou*d i!te#ve!e o! thei# beh*f'
( pote!ti* co!t#ibuti!$ fcto# to the #i"e i! home p#ice" ;" the *o;e#i!$ of
i!te#e"t #te" e#*ie# i! the decde by the ?ede#* Re"e#ve> to dimi!i"h the b*o;
of the co**p"e of the dot-com bubb*e !d combt the #i") of def*tio!'
37
IMPACT
I.pa/% on +%o/0 .a*0e%+
O! Eu*y 4,> 2557> the Do; Eo!e" I!du"t#i* (ve#$e hit #eco#d hi$h> c*o"i!$
bove 44>555 fo# the fi#"t time' 0y (u$u"t 4+> the Do; hd d#opped be*o;
43>555 !d the SQ2 +558S9P :;; i" ! i!de= co!ti!i!$ the "toc)" of +55
L#$e-Cp co#po#tio!"> mo"t of ;hich #e (me#ic!> thi" i!de= i" deve*oped by
"t!d#d !d poo#: hd c#o""ed i!to !e$tive te##ito#y ye#-to-dte' Simi*# d#op"
occu##ed i! vi#tu**y eve#y m#)et i! the ;o#*d> ;ith 0#Bi* !d Io#e bei!$ h#d-
hit' L#$e di*y d#op" becme commo!> ;ith> fo# e=mp*e> the <o*ea Co.po+&%e
S%o/0 P*&/e In,e) 8IOS2I: d#oppi!$ bout 7F i! o!e dy> *thou$h 25573"
*#$e"t di*y d#op by the SQ2 +55 i! the U'S' ;" i! ?eb#u#y> #e"u*t of the
"ubp#ime c#i"i"'
-o#t$$e *e!de#" !d home bui*de#" f#ed te##ib*y> but *o""e" cut c#o"" "ecto#">
;ith "ome of the ;o#"t-hit i!du"t#ie"> "uch " met*" Q mi!i!$ comp!ie"> hvi!$
o!*y the v$ue"t co!!ectio! ;ith *e!di!$ o# mo#t$$e"'
I.pa/% on 1&nan/&a' &n+%&%-%&on+
-!y b!)"> mo#t$$e *e!de#"> #e* e"tte i!ve"tme!t t#u"t" 8R&IT:> !d hed$e
fu!d" "uffe#ed "i$!ific!t *o""e" " #e"u*t of mo#t$$e pyme!t defu*t" o#
mo#t$$e ""et dev*utio!' (" of ?eb#u#y 4,> 255. fi!!ci* i!"titutio!" hd
#eco$!iBed "ubp#ime-#e*ted *o""e" o# ;#ite-do;!" e=ceedi!$ U'S' <4+5 bi**io!'
2#ofit" t the .>+33 U'S' b!)" i!"u#ed by the ?ede#* Depo"it I!"u#!ce
Co#po#tio! 8?DIC: dec*i!ed f#om <3+'2 bi**io! to <+'. bi**io! 8.3'+ pe#ce!t:
du#i!$ the fou#th Gu#te# of 2557 ve#"u" the p#io# ye#> due to "o#i!$ *o!
defu*t" !d p#ovi"io!" fo# *o! *o""e"' It ;" the ;o#"t b!) !d th#ift
pe#fo#m!ce "i!ce the fou#th Gu#te# of 4,,4' ?o# ** of 2557> the"e b!)"
38
e#!ed <45+'+ bi**io!> do;! 27'4 pe#ce!t f#om #eco#d p#ofit of <44+'2 bi**io! i!
255%'
Othe# comp!ie" f#om #ou!d the ;o#*d> "uch " II0 Deut"che I!du"t#ieb!)>
hve *"o "uffe#ed "i$!ific!t *o""e" !d "co#e" of mo#t$$e *e!de#" hve fi*ed
fo# b!)#uptcy' Top m!$eme!t h" !ot e"cped u!"cthed> " the C&O" of
-e##i** Ly!ch !d Citi$#oup ;e#e fo#ced to #e"i$! ;ithi! ;ee) of ech othe#'
L#iou" i!"titutio!" fo**o;ed-up ;ith me#$e# de*"'
I.pa/% on &n+-*an/e /o.pan&e+
The#e i" co!ce#! tht "ome homeo;!e#" #e tu#!i!$ to #"o! " ;y to e"cpe
f#om mo#t$$e" they c!3t o# #efu"e to py' The ?0I #epo#t" tht #"o! $#e; 4F
i! "ubu#b" !d 2'2F i! citie" f#om 255+ to 255%' (" of E! 255.> the 2557
!umbe#" ;e#e !ot yet vi*b*e'
I.pa/% on .-n&/&pa' (on, =.ono'&ne= &n+-*e*+
( "eco!d#y cu"e !d effect of the c#i"i" #e*te" to the #o*e of mu!icip* bo!d
Hmo!o*i!eH i!"u#!ce co#po#tio!"' 0y i!"u#i!$ mu!icip* bo!d i""ue"> tho"e
bo!d" chieve hi$he# debt #ti!$"' 1o;eve#> the"e i!"u#e#" u"ed p#emium" to
pu#ch"e CDO i!ve"tme!t" !d hve "uffe#ed "i$!ific!t *o""> ;hich b#i!$"
thei# bi*ity to i!"u#e bo!d" i!to Gue"tio!' U!*e"" the"e i!"u#e#" obti! dditio!*
cpit*> #ti!$ $e!cie" my do;!$#de the bo!d" they i!"u#ed o# $u#!teed' I!
tu#!> thi" my #eGui#e fi!!ci* i!"titutio!" ho*di!$ the bo!d" to *o;e# thei#
v*utio! o# to "e** them> " "ome e!titie" 8"uch " pe!"io! fu!d": #e o!*y
**o;ed to ho*d the hi$he"t-$#de bo!d"' The impct of "uch dev*utio! o!
i!"titutio!* i!ve"to#" !d co#po#tio!" ho*di!$ the bo!d" 8i!c*udi!$ mjo# b!)":
h" bee! e"timted " hi$h " <255 bi**io!' Re$u*to#" #e t)i!$ ctio! to
39
e!cou#$e b!)" to *e!d the #eGui#ed cpit* to ce#ti! mo!o*i!e i!"u#e#"> to
void "uch ! impct'
I.pa/% on 5o.e o2ne*+
(cco#di!$ to the SQ2JC"e-Shi**e# hou"i!$ p#ice i!de=> by Novembe# 2557>
ve#$e U'S' hou"i!$ p#ice" hd f**e! pp#o=imte*y .F f#om thei# 255% pe)
1o;eve#> the#e ;" "i$!ific!t v#itio! i! p#ice ch!$e" c#o"" U'S' m#)et">
;ith m!y pp#eciti!$ !d othe#" dep#eciti!$' The p#ice dec*i!e i! Decembe#
2557 ve#"u" the ye#-$o pe#iod ;" 45'4F' S*e" vo*ume 8u!it": of !e; home"
d#opped by 2%'4F i! 2557 ve#"u" the p#io# ye#' 0y E!u#y 255.> the i!ve!to#y
of u!"o*d !e; home" "tood t ,'. mo!th" b"ed o! Decembe# 2557 "*e"
vo*ume> the hi$he"t *eve* "i!ce 4,.4'
1ou"i!$ p#ice" #e e=pected to co!ti!ue dec*i!i!$ u!ti* thi" i!ve!to#y of "u#p*u"
home" 8e=ce"" "upp*y: i" #educed to mo#e typic* *eve*"' (" -0S !d CDO
v*utio! i" #e*ted to the v*ue of the u!de#*yi!$ hou"i!$ co**te#*> -0S !d
CDO *o""e" ;i** co!ti!ue u!ti* hou"i!$ p#ice" "tbi*iBe' (" home p#ice" hve
dec*i!ed fo**o;i!$ the #i"e of home p#ice" cu"ed by "pecu*tio! !d " #e-
fi!!ci!$ "t!d#d" hve ti$hte!ed> !umbe# of home" hve bee! fo#ec*o"ed
!d "it vc!t' The"e vc!t home" #e ofte! poo#*y mi!ti!ed !d "ometime"
tt#ct "Gutte#" !dJo# c#imi!* ctivity ;ith the #e"u*t tht i!c#e"i!$
fo#ec*o"u#e" i! !ei$hbo#hood ofte! "e#ve to fu#the# cce*e#te home p#ice
dec*i!e" i! the #e' Re!t" hve !ot f**e! " much " home p#ice" ;ith the
#e"u*t tht i! "ome ff*ue!t !ei$hbo#hood" home" tht ;e#e fo#me#*y o;!e#
occupied #e !o; occupied by #e!te#"' I! "e*ect #e" f**i!$ home p#ice" *o!$
;ith dec*i!e i! the U'S' do**# hve e!cou#$ed fo#ei$!e#" to buy home" fo#
eithe# occ"io!* u"e !dJo# *o!$ te#m i!ve"tme!t"' (dditio!* p#ob*em" #e
!ticipted i! the futu#e f#om the impe!di!$ #eti#eme!t of the bby boome#
$e!e#tio!' It i" be*ieved tht "i$!ific!t p#opo#tio! of bby boome#" #e !ot
"vi!$ deGute*y fo# #eti#eme!t !d ;e#e p*!!i!$ o! u"i!$ thei# i!c#e"ed
40
p#ope#ty v*ue " Hpi$$y b!)H o# #ep*ceme!t fo# #eti#eme!t-"vi!$"
ccou!t' Thi" i" dep#tu#e f#om the t#ditio!* (me#ic! pp#och to home"
;he#e Hpeop*e ;o#)ed to;#d pyi!$ off the fmi*y hou"e "o they cou*d h!d it
do;! to thei# chi*d#e!H'
I.pa/% on .&no*&%&e+
The#e i" di"p#opo#tio!te *eve* of fo#ec*o"u#e" i! "ome mi!o#ity !ei$hbo#hood"'
(bout 4%F of 1i"p!ic" !d ++F of b*c)" ;ho obti!ed mo#t$$e" i! 255+ $ot
hi$he#-co"t *o!" comp#ed ;ith bout 47F of ;hite" !d ("i!"> cco#di!$ to
?ede#* Re"e#ve dt' Othe# "tudie" i!dicte they ;ou*d hve Gu*ified fo# *o;e#-
#te *o!"'
0u"i!e""e" fi*i!$ fo# b!)#uptcy
B-+&ne++ T6pe Da%e
Ne; Ce!tu#y
?i!!ci*
"ubp#ime *e!de# (p#i* 2> 2557
(me#ic! 1ome
-o#t$$e
mo#t$$e *e!de# (u$u"t %> 2557
Se!ti!e*
-!$eme!t 9#oup
i!ve"tme!t fu!d (u$u"t 47> 2557
(me#iGue"t "ubp#ime *e!de# (u$u"t 34> 2557
Net0!) o!-*i!e b!) Septembe# 35> 2557
Te## Secu#itie" "ecu#itie" Novembe# 2.> 2557
(me#ic!
?#eedom -o#t$$e>
I!c'
"ubp#ime *e!de# E!u#y 35> 2557
41
$*&%e,o2n+ on %5e 4a'-e o1 'oan+> MBS an, CDO+
Co.pan6 B-+&ne++ T6pe Lo++ ?B&''&on @A
Citi$#oup In4e+%.en% (an0 @2B.1 ('n
Me**&'' L6n/5 In4e+%.en% (an0 @22.: ('n
UBS A# In4e+%.en% (an0 @1C.D ('n
Mo*gan S%an'e6 In4e+%.en% (an0 @1;.E ('n
C*e,&% Ag*&/o'e In4e+%.en% (an0 @B.C ('n
HSBC Ban0 @E.B ('n
Ban0 o1 A.e*&/a Ban0 @:.2C ('n
CIBC Ban0 @E.2 ('n
De-%+/5e Ban0 Ban0 @E.1 ('n
Ba*/'a6+ Cap&%a' In4e+%.en% (an0 @E.1 ('n
Bea* S%ea*n+ In4e+%.en% (an0 @2.F ('n
RBS In4e+%.en% (an0 @E.: ('n
$a+5&ng%on M-%-a' Ban0 @2.B ('n
S2&++ Re Sa4&ng+ an, 'oan @1.;D ('n
Le5.an B*o%5e*+ Re&n+-*an/e @2.1 ('n
LBB$ In4e+%.en% (an0 @1.1 ('n
GP Mo*gan C5a+e Ban0 @2.H ('n
#o',.an Sa/5+ In4e+%.en% (an0 @1.: ('n
F*e,,&e Ma/ Mo*%gage #SE @E.F ('n
42
C*e,&% S-&++e Ban0 @E.D ('n
$e''+ Fa*go Ban0 @1.B ('n
$a/5o4&a Ban0 @E.; ('n
RBC Ban0 @;.EF; ('n
Fann&e Mae Mo*%gage #SE @;.CHF ('n
MBIA Bon, &n+-*an/e @E.E ('n
H6po Rea' E+%a%e Ban0 @;.:C; ('n
A.(a/ F&nan/&a' #*o-p Bon, &n+-*an/e @E.: ('n
Co..e*8(an0 Ban0 @1.1 ('n
So/&I%I #InI*a'e In4e+%.en% (an0 @E.; ('n
BNP Pa*&(a+ Ban0 @;.CD; ('n
$e+% LB Ban0 @1.ED ('n
A.e*&/an In%e*na%&ona'
#*o-p
In+-*an/e @B.C ('n
Ba6e*n LB Ban0 @2.C ('n
Na%&)&+ Ban0 @1.D: ('n
Co-n%*62&,e Mo*%gage (an0 @1.; ('n
D" Ban0 Ban0 @2.1 ('n
A/%&on+ %o .anage %5e /*&+&+
43
B-+5 A,.&n&+%*a%&on p'an
2#e"ide!t 9eo#$e C' 0u"h !!ou!ced p*! to vo*u!t#i*y !d tempo##i*y
f#eeBe the mo#t$$e" of *imited !umbe# of mo#t$$e debto#" ho*di!$ (R-">
dec*#i!$ HI hve me""$e fo# eve#y homeo;!e# ;o##ied bout #i"i!$ mo#t$$e
pyme!t"@ The be"t you c! do fo# you# fmi*y i" to c** 4-.55-,,+-1O2& 8"ic:H '
The co##ect !umbe# i" 4-...-,,+-1O2&' ( #efi!!ci!$ fci*ity c**ed ?ede#*
1ou"i!$ (dmi!i"t#tio!- ?1(-Secu#e ;" *"o c#eted' Thi" i" p#t of ! o!$oi!$
co**bo#tive effo#t bet;ee! the US 9ove#!me!t !d p#ivte i!du"t#y to he*p
"ome "ub-p#ime bo##o;e#" c**ed the 1ope No; (**i!ce'
The 1ope No; (**i!ce #e*e"ed #epo#t i! ?eb#u#y> 255. i!dicti!$ it he*ped
+4+>555 "ubp#ime bo##o;e#" ;ith "h)y c#edit i! the "eco!d h*f of 2557> o# 7'7
pe#ce!t of 7'4 mi**io! "ubp#ime *o!" out"t!di!$ i! Septembe# 2557' (
"po)e"pe#"o! c)!o;*ed$ed tht much mo#e mu"t be do!e'
Du#i!$ ?eb#u#y 255.> p#o$#m c**ed H2#oject Life*i!eH ;" !!ou!ced' Si= of
the *#$e"t U'S' *e!de#"> i! p#t!e#"hip ;ith the 1ope No; (**i!ce> $#eed to
defe# fo#ec*o"u#e ctio!" fo# 35 dy" fo# homeo;!e#" ,5 o# mo#e dy"
de*i!Gue!t o! pyme!t"' The i!te!t of the p#o$#m ;" to e!cou#$e mo#e *o!
dju"tme!t"> to void fo#ec*o"u#e"'
The U'S' T#e"u#y Dep#tme!t i" ;o#)i!$ di#ect*y ;ith mjo# b!)" to deve*op
"y"temtic me!" of modifyi!$ *o!" fo# "i$!ific!t po#tio! of bo##o;e#" fci!$
(R- i!c#e"e"> #the# th! ;o#)i!$ th#ou$h *o!" o! c"e-by-c"e b"i"'
2#e"ide!t 0u"h *"o "i$!ed i!to *; o! ?eb#u#y 43> 255. ! eco!omic "timu*u"
pc)$e of <4%. bi**io!> mi!*y i! the fo#m of i!come t= #ebte"> to he*p
"timu*te eco!omic $#o;th'
O%5e* a/%&on+
44
Le!de#" !d homeo;!e#" both my be!efit f#om voidi!$ fo#ec*o"u#e>
;hich i" co"t*y !d *e!$thy p#oce""' Some *e!de#" hve t)e! ctio! to
#ech out to homeo;!e#" to p#ovide mo#e fvo#b*e mo#t$$e te#m" 8i'e'>
*o! modifictio! o# #efi!!ci!$:' 1omeo;!e#" hve *"o bee!
e!cou#$ed to co!tct thei# *e!de#" to di"cu"" *te#!tive"' Co#po#tio!">
t#de $#oup"> !d co!"ume# dvocte" hve be$u! to cite "tti"tic" o! the
!umbe#" !d type" of homeo;!e#" ""i"ted by *o! modifictio!
p#o$#m"' The#e i" "ome di"pute #e$#di!$ the pp#op#ite me"u#e">
"ou#ce" of dt> !d deGucy of p#o$#e""' ( #epo#t i""ued i! E!u#y
255. "ho;ed tht mo#t$$e *e!de#" modified +4>555 *o!" !d
e"tb*i"hed 4.3>555 #epyme!t p*!" i! the thi#d Gu#te# of 2557> pe#iod
i! ;hich the#e ;e#e 3.4>555 !e; fo#ec*o"u#e"' Co!"ume# $#oup" c*imed
the modifictio!" ffected *e"" th! 4 pe#ce!t of the 3 mi**io! "ubp#ime
*o!" ;ith dju"tb*e #te" tht ;e#e out"t!di!$ i! the thi#d Gu#te#'
C#edit #ti!$ $e!cie" he*p ev*ute !d #epo#t o! the #i") i!vo*ved ;ith
v#iou" i!ve"tme!t *te#!tive"' The #ti!$ p#oce""e" c! be #e-e=mi!ed
!d imp#oved to e!cou#$e $#ete# t#!"p#e!cy to the #i")" i!vo*ved ;ith
comp*e= mo#t$$e-bc)ed "ecu#itie" !d the e!titie" tht p#ovide them'
Rti!$ $e!cie" hve #ece!t*y be$u! to $$#e""ive*y do;!$#de *#$e
mou!t" of mo#t$$e-bc)ed debt'
Re$u*to#" !d *e$i"*to#" c! t)e ctio! #e$#di!$ *e!di!$ p#ctice">
b!)#uptcy p#otectio!> t= po*icie"> ffo#db*e hou"i!$> c#edit cou!"e*i!$>
eductio!> !d the *ice!"i!$ !d Gu*ifictio!" of *e!de#"' Re$u*tio!" o#
$uide*i!e" c! *"o i!f*ue!ce the !tu#e> t#!"p#e!cy !d #e$u*to#y
#epo#ti!$ #eGui#ed fo# the comp*e= *e$* e!titie" !d "ecu#itie" i!vo*ved i!
the"e t#!"ctio!"' Co!$#e"" *"o i" co!ducti!$ he#i!$" he*p ide!tify
"o*utio!" !d pp*y p#e""u#e to the v#iou" p#tie" i!vo*ved'
45
The medi c! he*p educte the pub*ic !d p#tie" i!vo*ved' It c! *"o
e!"u#e the top "ubject mte#i* e=pe#t" #e e!$$ed !d hve voice to
e!"u#e #e"o!ed debte bout the p#o" !d co!" of v#iou" "o*utio!"'
0!)" hve "ou$ht !d #eceived dditio!* cpit* 8i'e'> c"h i!ve"tme!t":
f#om "ove#ei$! ;e*th fu!d"> ;hich #e e!titie" tht co!t#o* the "u#p*u"
"vi!$" of deve*opi!$ cou!t#ie"' (! e"timted U'S' <%, bi**io! h" bee!
i!ve"ted by the"e e!titie" i! *#$e fi!!ci* i!"titutio!" ove# the p"t ye#'
O! E!u#y 4+> 255.> "ove#ei$! ;e*th fu!d" p#ovided tot* of <24
bi**io! to t;o mjo# U'S' fi!!ci* i!"titutio!"' Such cpit* i" u"ed to he*p
b!)" mi!ti! #eGui#ed cpit* #tio" 8! impo#t!t me"u#e of fi!!ci*
he*th:> ;hich hve dec*i!ed "i$!ific!t*y due to "ubp#ime *o! o# CDO
*o""e"' Sove#ei$! ;e*th fu!d" #e e"timted to co!t#o* !e#*y <2', t#i**io!'
-uch of thi" ;e*th i" oi* !d $" #e*ted' (" they #ep#e"e!t the "u#p*u"
fu!d" of $ove#!me!t"> the"e e!titie" c##y t *e"t the pe#ceptio! tht thei#
i!ve"tme!t" hve u!de#*yi!$ po*itic* motive"'
Liti$tio! #e*ted to the "ubp#ime c#i"i" i" u!de#;y' ( "tudy #e*e"ed i!
?eb#u#y 255. i!dicted tht 27. civi* *;"uit" ;e#e fi*ed i! fede#* cou#t"
du#i!$ 2557 #e*ted to the "ubp#ime c#i"i"' The !umbe# of fi*i!$" i! "tte
cou#t" ;e#e !ot Gu!tified by #e *"o be*ieved to be "i$!ific!t' The "tudy
fou!d tht 43 pe#ce!t of the c"e" ;e#e c*"" ctio!" b#ou$ht by
bo##o;e#"> "uch " tho"e tht co!te!ded they ;e#e victim" of
di"c#imi!to#y *e!di!$ p#ctice"' Othe# c"e" i!c*ude "ecu#itie" *;"uit"
fi*ed by i!ve"to#"> comme#ci* co!t#ct di"pute"> emp*oyme!t c*""
ctio!"> !d b!)#uptcy-#e*ted c"e"' Defe!d!t" i!c*uded mo#t$$e
b!)e#"> b#o)e#"> *e!de#"> pp#i"e#"> tit*e comp!ie"> home bui*de#">
"e#vice#"> i""ue#"> u!de#;#ite#"> bo!d i!"u#e#"> mo!ey m!$e#"> pub*ic
ccou!ti!$ fi#m"> !d comp!y bo#d" !d office#"'
46
T5e Fe,e*a' Re+e*4e
Cithi! the ?ede#* Re"e#ve> Chi#m! 0e! 0e#!!)e "i$!*" to;#d" m)i!$
i!te#e"t #te cut"' I! e#*y 255.> 0e! 0e#!!)e "id@ H0#od*y> the ?ede#*
Re"e#veO" #e"po!"e h" fo**o;ed t;o t#c)"@ effo#t" to "uppo#t m#)et *iGuidity
!d fu!ctio!i!$ !d the pu#"uit of ou# mc#oeco!omic objective" th#ou$h
mo!et#y po*icy'H Tou$he# #e$u*to#y "t!d#d" #e p#opo"ed' (dditio!**y>
f#eeBe of i!te#e"t pyme!t" o! ce#ti! "ub-p#ime *o!" i" !!ou!ced' O!
E!u#y 22> 255.> the ?ed *"o "*"hed )ey i!te#e"t #te 8the fede#* fu!d"
#te: by 7+ b"i" poi!t" to 3'+F> the bi$$e"t cut "i!ce 4,.4> fo**o;ed by !othe#
cut of +5 b"i" poi!t" o! E!u#y 35th'
Ce!t#* b!)" hve co!ducted ope! m#)et ope#tio!" to e!"u#e membe# b!)"
hve cce"" to fu!d" 8i'e'> *iGuidity:' The"e #e effective*y "ho#t-te#m *o!" to
membe# b!)" co**te#*iBed by $ove#!me!t "ecu#itie"' Ce!t#* b!)" hve *"o
*o;e#ed the i!te#e"t #te" ch#$ed to membe# b!)" 8c**ed the di"cou!t #te i!
the U'S': fo# "ho#t-te#m *o!"' 0oth me"u#e" effective*y *ub#icte the fi!!ci*
"y"tem> i! t;o )ey ;y"' ?i#"t> they he*p p#ovide cce"" to fu!d" fo# tho"e
e!titie" ;ith i**iGuid mo#t$$e-bc)ed ""et"' Thi" he*p" *e!de#"> S2&> !d SIL
void "e**i!$ mo#t$$e-bc)ed ""et" t "teep *o""' Seco!d> the vi*b*e
fu!d" "timu*te the comme#ci* ppe# m#)et !d $e!e#* eco!omic ctivity'
E)pe/%a%&on+ an, 1o*e/a+%+
(" e#*y " the 2553 (!!u* Repo#t i""ued by ?i#f= ?i!!ci* 1o*di!$" Limited>
2#em Ct" ;" #i"i!$ co!ce#!" bout "ecu#itiBed p#oduct"@
HCe hve bee! co!ce#!ed fo# "ome time bout the #i")" i! ""et-bc)ed
bo!d"> p#ticu*#*y bo!d" tht #e bc)ed by home eGuity *o!">
utomobi*e *o!" o# c#edit c#d debt 8;e o;! !o ""et-bc)ed bo!d":' It
"eem" to u" tht "ecu#itiBtio! 8o# the c#etio! of the"e ""et-bc)ed
47
bo!d": e*imi!te" the i!ce!tive fo# the o#i$i!to# of the *o! to be c#edit
"e!"itive' T)e the c"e of ! utomobi*e de*e#' 2#io# to "ecu#itiBtio!>
the de*e# ;ou*d be ve#y co!ce#!ed bout ;ho ;" $ive! c#edit to buy !
utomobi*e' Cith "ecu#itiBtio!> the de*e# 8*mo"t: doe" !ot c#e " the"e
*o!" c! be *id off th#ou$h "ecu#itiBtio!' Thu"> the *o"" e=pe#ie!ced o!
the"e *o!" fte# "ecu#itiBtio! ;i** !o *o!$e# be comp#b*e to tht
e=pe#ie!ced p#io# to "ecu#itiBtio! 8c**ed RRmo#*OO hB#d:''' Thi" i" !ot
"m** p#ob*em' The#e i" <4'5 t#i**io! i! ""et-bc)ed bo!d" out"t!di!$ "
of Decembe# 34> 2553 i! the U'S'''' Cho i" buyi!$ the"e bo!d"P
I!"u#!ce comp!ie"> mo!ey m!$e#" !d b!)" K i! the mi! K **
#echi!$ fo# yie*d $ive! the e=ce**e!t #ti!$" fo# the"e bo!d"' Cht
hppe!" if ;e hit ! i# poc)etP U!*i)e'''H
The *e$cy of (*! 9#ee!"p! h" bee! c"t i!to doubt ;ith Se!to# Ch#i" Dodd
c*imi!$ he c#eted the Hpe#fect "to#mH' (*! 9#ee!"p! h" #em#)ed tht the#e
i" o!e-i!-th#ee ch!ce of #ece""io! f#om the f**out' Nou#ie* Roubi!i>
p#ofe""o# t Ne; /o#) U!ive#"ity !d hed of Roubi!i 9*ob* &co!omic"> h"
"id tht if the eco!omy "*ip" i!to #ece""io! Hthe! you hve "y"temic b!)i!$
c#i"i" *i)e ;e hve!3t hd "i!ce the 4,35"H'
O! Septembe# 7> 2557> the C** St#eet Eou#!* #epo#ted tht (*! 9#ee!"p!
h" "id tht the cu##e!t tu#moi* i! the fi!!ci* m#)et" i" i! m!y ;y"
Hide!tic*H to the p#ob*em" i! 4,.7 !d 4,,.'
The (""ocited 2#e"" de"c#ibed the cu##e!t c*imte of the m#)et o! (u$u"t 43>
2557> " o!e ;he#e i!ve"to#" ;e#e ;iti!$ fo# Hthe !e=t "hoe to d#opH "
p#ob*em" f#om H! ove#heted hou"i!$ m#)et !d ! ove#e=te!ded co!"ume#H
#e Hju"t be$i!!i!$ to eme#$e' H -#)et Ctch h" cited "eve#* eco!omic
!*y"t" ;ith Stife* Nico*u" c*imi!$ tht the p#ob*em mo#t$$e" #e !ot *imited
to the "ubp#ime !iche "yi!$ Hthe #pid*y i!c#e"i!$ "cope !d depth of the
p#ob*em" i! the mo#t$$e m#)et "u$$e"t tht the e!ti#e "ecto# h" p*u!$ed i!to
do;!;#d "pi#* "imi*# to the "ubp#ime ;oe" ;he#eby ech !e$tive
48
deve*opme!t feed" fu#the# dete#io#tio!H> c**i!$ it Hviciou" cyc*eH !d ddi!$
tht they Hco!ti!ue to be*ieve co!ditio!" ;i** $et ;o#"eH '
(" of Novembe# 22> 2557> !*y"t" t *edi!$ i!ve"tme!t b!) e"timted
*o""e" o! "ubp#ime CDO ;ou*d be pp#o=imte*y U'S' <44. bi**io!' (" of
Decembe# 22> 2557> *edi!$ bu"i!e"" pe#iodic* e"timted "ubp#ime defu*t"
bet;ee! U'S' <255-355 bi**io!' (" of -#ch 4> 255. !*y"t" f#om th#ee *#$e
fi!!ci* i!"titutio!" e"timted the impct ;ou*d be bet;ee! U'S' <3+5-%55
bi**io!'
Alan Greenspan, the former Chairman of the Federal Resere, stated! "#he $%rrent $redit
$risis &ill $ome to an end &hen the oerhan' of inentories of ne&l( )%ilt homes is
lar'el( li*%idated, and home pri$e deflation $omes to an end+ #hat &ill sta)ili,e the no&-
%n$ertain al%e of the home e*%it( that a$ts as a )%ffer for all home mort'a'es, )%t most
importantl( for those held as $ollateral for residential mort'a'e-)a$.ed se$%rities+ /er(
lar'e losses &ill, no do%)t, )e ta.en as a $onse*%en$e of the $risis+ 0%t after a period of
protra$ted ad1%stment, the 2+3+ e$onom(, and the &orld e$onom( more 'enerall(, &ill )e
a)le to 'et )a$. to )%siness+"
The "nited States subprime crisis in 'raphics
49
50
51
52
Bo**o2&ng Un,e* a Se/-*&%&8a%&on S%*-/%-*e
53
54
55
I.p'&/a%&on+ o1 +-(p*&.e /*&+&+ on 4a*&o-+ /o-n%*&e+:
Thou$h the "ubp#ime c#i"i" h" hd it" effect" o! the eco!omie" of v#iou"
cou!t#ie" c#o"" the ;o#*d> fo# u" it i" of "i$!ific!ce to )!o; the mou!t of
impct it h" hd o! the mjo# eco!omie" tht "h#e "t#o!$ po*itic*>
$eo$#phic* !d eco!omic tie" ;ith the U!ited Stte"'
I.pa/% on Cana,a:
The "ubp#ime c#i"i" ;" "uppo"ed to be *oc*iBed to the U'S' (" ;e "ee the ;#ite
do;!" i! C!di! b!)" o!e ;o!de#" ;he! the p#ob*em ;i** tip ove# to
C!d' The U'S' "ub-p#ime mo#t$$e fi"co i" *#edy "GueeBi!$ bo##o;e#" i!
C!d " b!)e#" "t#u$$*e to dete#mi!e ;hich *e!de#" #e e=po"ed to the
$#ete"t #i")> "y" C#i$ C#i$ht R0C chief eco!omi"t'
The U'S' i" movi!$ i!to #ece""io!' The impct o! the C!di! eco!omy ;i**
be "i$!ific!t " the U'S' eco!omy "*o;" do;!' 2#ope**ed by the d#mtic
"*o;do;! i! the U'S' hou"i!$ m#)et i" bei!$ off"et by "t#o!$ $#o;th i!
(me#ic! t#de " #e"u*t of the ;e)e!i!$ $#ee!bc)' The *eve* of fo#ec*o"u#e"
h" !ot hit the m#)et yet' O!ce the impct i" fe*t both fi!!ci* !d f#om the
pe#"pective of co!"ume# co!fide!ce the eco!omy i! the U'S' ;i** deepe! the
move i!to #ece""io!' The eco!omie" of C!d !d 0'C' #e bei!$ he*ped by
*o!$ pe#iod of "t#o!$ $*ob* $#o;th but cou*d be hit by Mf#ie!d*y fi#eN if the U'S'
#e"o#t" to p#otectio!i"t me"u#e" " #e"u*t of ;e) do**# !d ;e)
eco!omy i! ! e*ectio! ye#' O!e o!*y !eed" to #evie; the #ece!t fo#e"t#y "ecto#
difficu*tie" *"t ye#'
The #ece!t #i"e i! the C!di! do**# h" d#ive! p#ofitbi*ity out of the i!du"t#y'
If the (me#ic!O" choo"e to #ei$!ite the "oft;ood *umbe# di"pute it ;i** c#ipp*e o!e
of the chief #e"ou#ce "ecto#" i! ;e"te#! C!d' The impct of the *o"" of e=po#t
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vo*ume" due to the "t#o!$ C!di! do**# " ;e** " U'S' p#otectio!i"tO"
me"u#e" cou*d "timu*te #ece""io! i! C!d' The impct of both ;i**
ce#ti!*y pop the #e* e"tte bubb*e i! ;e"te#! C!d' Ce #e *#edy "eei!$
co##ectio!" i! the C*$#y m#)et"' It i" o!*y mtte# of time befo#e ;e "ee
co##ectio! i! the L!couve# #e* e"tte m#)et"' The impct of hi$h #tio
fi!!ci!$ !d hi$he# debt *od" o! co!"ume#" ;i** "ee ! impct o! the *eve* of
b!)#uptcie" !d debt co!"o*idtio!"'
I.pa/% on E-*ope:
The impct of US "ubp#ime c#i"i" o! &u#ope i" $i!i!$ p#omi!e!ce ;ith eve#y
p""i!$ dy. &#*ie# #e* e"tte $e!t" cou*d Guote the p#ice" of thei# choice
;hi*e "e**i!$ p#ope#tie"' 1o;eve#> thi!$" hve ch!$ed *ot do;! the *i!e'
Cu##e!t*y> the p#ice" of home" #e d#oppi!$ !d the#e i" p#obb*e fe# tht the
#ece""io! my be #ei$!i!$ "up#eme i! Lo!do! !e=t ye#' It i" *"o bei!$ fe#ed
tht the US Subp#ime c#i"i" my be f**i!$ upo! " $#i!d' O;i!$ to thi" "tte of
ffi#"> *e!de#" #ou!d the $*obe #e bit pp#ehe!"ive i! e=te!di!$ !e; *o!"
to debto#"'
Impct of US Subp#ime c#i"i" o! &u#ope c!!ot be i$!o#ed' Tht thi" p#t of the
;o#*d ;i** be impcted " ;e**> c! be co!c*uded f#om the fct tht "i$!" of the
"me hve *#edy "t#ted "ho;i!$ 8*i)e f**i!$ p#ice" of home": i! Lo!do!'
No#the#! Roc)> ;hich ;" ! emi!e!t mo#t$$e *e!de#> too) #efu$e i! the
0!) of &!$*!d fo# pu#po"e" of eme#$e!cy fi!!ci!$ i! the mo!th of
Septembe#> 2557' 2#o"pective pu#ch"e#" fo# the mo#t$$e *e!de# #e "ti** bei!$
*oo)ed fo#'
(!othe# i!"t!ce i! 9e#m!y> ;hich imp*ie" the impct of US "ubp#ime c#i"i"
o! &u#ope> i" ;he! 9e#m!yO" II0 Deut"che I!du"t#ieb!) ccepted USD<44'4
bi**io! f#om the 9ove#!me!t " bi*out pe#ti!i!$ to it" v#iou" U!ited Stte"
mo#t$$e i!ve"tme!t"'
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0N2 2#ib"> the ?#e!ch 0!) ;" compe**ed to t)e "ome d#"tic "tep"' It
"topped ** ;ithd#;*" f#om fu!d of USD<2'2 bi**io! pe#ti!i!$ to i!ve"tme!t
fu!d" " the t#ue v*ue of the i!ve"tme!t po#tfo*io" cou*d !ot be "ce#ti!ed'
I.pa/% on A1*&/a:
(f#ic ;" the *e"t ffected ;ith South (f#ic !d &$ypt bei!$ the o!*y cou!t#ie"
to #eco#d "ome mi!o# di"tu#b!ce"'
Chy h" (f#ic #emi!ed "o detched f#om the "ub p#ime c#i"i"P
The mi! #e"o! ;hy (f#ic h" !ot fe*t the fu** effect of the "ub-p#ime c#i"i"
;hich h" "i!ce cu*mi!ted i! the "*o;do;! of the US eco!omy i" tht mo"t
(f#ic! fi!!ci* m#)et" "ti** *$ behi!d i! te#m" of fi!!ci* m#)et
"ophi"tictio! i! te#m" of p#oduct" o! offe# " ;e** " i!fo#mtio! "ymmet#y'
Thi" i" evide!t i! the fct tht mo"t of the cpit* m#)et" i! (f#ic #e "ti** bei!$
deve*oped ;ith the e=ceptio! of the t;o dv!ced o!e" ;hich #e South (f#ic
!d &$ypt'
Some (f#ic! cou!t#ie" "ti** hve e=ch!$e co!t#o*" ;hich #e"t#ict the f*o; of
i!te#!tio!* cpit* thu" *imiti!$ the co!t$io! effect f#om fo#ei$! fi!!ci*
m#)et"'
Some (f#ic! cou!t#ie" hve ju"t e"tb*i"hed Stoc) &=ch!$e" ;hich by !d
*#$e *c) *iGuidity !d m#)et depth ;ith c"e i! poi!t bei!$ S;Bi*!d ;hich
h" "i= *i"ted cou!te#" !d ! i!ctive bo!d m#)et'
Othe# e"tb*i"hed e=ch!$e" #e i**iGuid !d i! ;y *imit (f#ic3" e=po"u#e to
the $*ob* vi**$e'
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(cco#di!$ to the (f#ic! Deve*opme!t 0!)> the (f#ic! eco!omy i" e=pected to
$#o; by %>+F i! 255. d#ive! by i!c#e"ed dem!d fo# #e"ou#ce" f#om the
boomi!$ Chi!e"e !d I!di! &co!omie" ;hich ;i** off"et the dec*i!e i! dem!d
f#om the US !d &u#ope'
The Chi!e"e eco!omy i" e=pected to $#o; by ,> %F i! 255. ;hich i" "ti** hi$h
e!ou$h to be!efit (f#ic! eco!omie" de"pite the th#et of US #ece""io!' The
i!di#ect effect o! (f#ic! eco!omie" of $*ob* "*o;do;! em!ti!$ f#om the
"ub-p#ime c#i"i" ;i** be fe*t !eve#the*e"" th#ou$h #educed dem!d fo# (f#ic!
$ood" !d "e#vice"'
The Chi!e"e eco!omy ;hich i" e=pected to $#o; by ,>%F do;! f#om the i!iti*
fo#ec"t 44>7F ;i** i!"u*te (f#ic !d e!"u#e "ome $#o;th $oi!$ fo#;#d de"pite
"*o;do;! i! the US'
I.pa/% on +o-%5 A.e*&/a
So f#> the "ub-p#ime c#i"i" h" hd *imited di#ect impct o! Lti! (me#icO"
mo#t$$e m#)et"' I! -e=ico> the m#)et fo# !e; *o;-!d midd*e-i!come
hou"i!$ h" $#o;! #pid*y> th!)" to the c#etio! of m#)et fo# #e"ide!ti*
mo#t$$e "ecu#itie" i! 2553' I! the *"t Gu#te# of 2557 *o!e> -e=ic! i""ue#"
"o*d <4'+ bi**io! i! !e; mo#t$$e-bc)ed "ecu#itie"D "i$!ific!t po#tio! of <4'4
bi**io! out"t!di!$> ;ith o!*y "*i$ht d#op i! p#ice" to #ef*ect $*ob**y i!duced #i")>
cco#di!$ to the pub*ictio! (""et Secu#itiBtio! Repo#t' Chi*e! m#)et" *"o
hve "tyed #e*tive*y c*m'
The"e m#)et" hve bee! i!"u*ted i! p#t becu"e mo"t i!ve"tme!t i! #e*
e"tte-bc)ed "ecu#itie" h" come f#om *oc* i!ve"to#" ;ho ofte! !eed to i!ve"t
i! *oc*-cu##e!cy m#)et"' -o"t impo#t!t> Lti! (me#icO" mo#t$$e m#)et" !d
homeo;!e#" #e ve#y diffe#e!t f#om tho"e i! the US' MItO" !tu#* tht the "tte of
$*ob* m#)et" ;i** hve "ome )i!d of #ipp*e effect>N "y" 9#e$ Ib!ce>
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m!$i!$ di#ecto# fo# Lti! (me#ic! "t#uctu#ed fi!!ce t ?itch Rti!$"> the
i!te#!tio!* c#edit #ti!$" $e!cy' M0ut Lti! (me#ic! cou!t#ie"> f#om c#edit
"t!dpoi!t> #e *ot bette# off th! they hve eve# bee! to ;ith"t!d tu#bu*e!ce
!d ;ethe# $*ob* m#)et p#ob*em"'N
To thei# be!efit> Lti! (me#ic! $ove#!me!t" hve pp*ied the *e""o!" of the
p"t' -e=icoO" MteGui* c#i"i"N of 4,,4-4,,+ fo#ced m!y homeo;!e#" i!to defu*t
;he! the pe"o fe** by 75 pe#ce!t !d i!te#e"t #te" "o#ed' I! -e=ico> **
mo#t$$e" c##y fi=ed i!te#e"t #te"> u!*i)e the i!fmou" Me=p*odi!$ (R-"N tht
*eft US homeo;!e#" #ui!$ thei# choice of dju"tb*e-#te mo#t$$e" ;he!
i!te#e"t #te" #o"e' -e=ic! mo#t$$e" #e i!de=ed to i!f*tio!> but the "tte
mo#t$$e $e!cy *i!)" tht i!de= to the mi!imum ;$e !d m)e" up the
diffe#e!ce if mo#t$$e i!te#e"t dju"tme!t" fo# i!f*tio! outpce ;$e $#o;th'
Thi" p#otect" both bo##o;e#" !d *e!de#"'
The "i*ve# *i!i!$ of p"t fi!!ci* c#i"e" i! Lti! (me#ic i" tht mo"t i!dividu*"
c##y f# *e"" debt th! do (me#ic!"' I! -e=ico> fo# e=mp*e> mo#t$$e debt
#ep#e"e!t" *e"" th! 45 pe#ce!t of 9D2> comp#ed to bout +5 pe#ce!t of 9D2 i!
&u#ope !d .2 pe#ce!t of 9D2 i! the US K #tio tht h" i!c#e"ed mo#e th!
fou#fo*d i! the *"t t;o decde"'
I.pa/% on So-%5 A+&a
HThe cu##e!t "ubp#ime mo#t$$e c#i"i" i! the U!ited Stte" ;i** !ot "e#iou"*y
impct South ("i! cou!t#ie"H> "id Sh!t Dev#j!> Co#*d 0!) Chief
&co!omi"t fo# the South ("i Re$io!' MThe impct ;i** be mi*d becu"e of the
"t#uctu#e of the #e$io!O" t#de !d fi!!ci* f*o;"> !d p#t*y becu"e of
compe!"ti!$ effect"'N
Dev#j! tt#ibuted th#ee fcto#" tht ;o#) ;e** fo# the South ("i! cou!t#ie"@ 4:
Lc) of e=po"u#e to U'S' mo#t$$e "ecu#itie"D 2: vi*bi*ity of *iGuidity i!
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dome"tic m#)et"D !d 3: the po""ibi*ity tht *o;e# cpit* i!f*o;" cou*d he*p
cou!t#ie" "uch " I!di ;ith mc#oeco!omic m!$eme!t'
1i$h*i$hti!$ tht I!di! comp!ie" do !ot hve bi$ e=po"u#e to U'S' mo#t$$e
"ecu#itie"> Dev#j! "id> M&ve! if the "ubp#ime c#i"i" *ed" to $*ob* c#edit
c#u!ch> it "ti** my !ot hve bi$ effect becu"e the#e i" Guite *ot of *iGuidity i!
dome"tic m#)et" i! cou!t#ie" *i)e I!di'N
1e be*ieve" tht if $*ob* c#edit c#u!ch *ed" to dec*i!e i! cpit* f*o;"> it my
"ti** !ot be bd thi!$ fo# I!di' 1e poi!ted out tht I!di! po*icym)e#" #ece!t*y
;e#e hvi!$ difficu*tie" i! m!$i!$ the "udde! "u#$e i! cpit* i!f*o;" ;hi*e
t#yi!$ to m!$e I!di3" e=ch!$e !d i!f*tio! #te"'
Spe)i!$ o! po""ib*e "*o;i!$ do;! of the U!ited Stte" eco!omy> Dev#j!
"id> MThe impct o! South ("i! cou!t#ie" ;i** "ti** be #e*tive*y mi*dN' 1e d#e;
tte!tio! to the fct tht the "h#e of South ("iO" t#de ;ith the U!ited Stte"
h" bee! dec*i!i!$ !d tht the U'S' i" !o *o!$e# I!di3" *edi!$ "upp*ie#' S#i
L!)> ;hich u"ed to #e*y o! the U!ited Stte" fo# it" $#me!t e=po#t"> h" !o;
i!c#e"ed them to &u#ope !d othe# #e$io!" "ub"t!ti**y'
O! the othe# h!d> Dev#j! e=pect" tht Ma slowdown of the United States
economic growth will moderate the increase in prices of oil and other commodity
prices, which will have a favorable impact on South sia'N Si!ce ** South ("i!
cou!t#ie" #e !et impo#te#" of the"e commoditie"> "uch "*o;do;! ;i** p#ovide
"ome #e*ief i! thei# b*!ce-of-pyme!t"'
MThe dec*i!i!$ v*ue of US do**# ;i** ce#ti!*y ffect I!diO" IT comp!ie" tht "e**
"e#vice" to the U!ited Stte"> !d *#edy m!y IT comp!ie" #e fee*i!$ the
effect>N Dev#j! "id' The I!di! comp!ie" e!$$ed i! bu"i!e"" p#oce""e"
"uch " mo#t$$e docume!ttio! hve "ee! dec*i!e i! ;o#) o#de#" !d *o"" of
#eve!ue" " U'S' *e!de#" hve ti$hte!ed thei# e=po"u#e to c#edit m#)et' The
61
I!di! IT i!du"t#y> ;hich de#ive" bout %+F of it" #eve!ue" f#om the U'S' m#)et>
;i** *"o be dve#"e*y ffected if the "ubp#ime c#i"i" *ed" to #ece""io! i! the
U!ited Stte"'
1o;eve#> Dev#j! **yed the fe#" of "i$!ific!t !e$tive impct o! I!diO"
ove#** eco!omy !d "id> MThe "h#e of IT "e#vice" e=po#t" i! tot* e=po#t" of
I!di i" !ot $#o;i!$ ve#y f"t becu"e I!di h" "t#ted e=po#ti!$ mo#e
m!ufctu#ed $ood" !d othe# "e#vice"'N (*"o> he "id tht e=po#t" #e !ot the
o!*y dete#mi!!t of eco!omic $#o;th i! I!di' 1e e=pect" tht dome"tic dem!d
i! I!di ;i** co!ti!ue to fue* eco!omic $#o;th eve! ;he! the#e i" dmpe!i!$ of
IT e=po#t" to the U!ited Stte"'
62
63
C1(2T&R III
Impct o! I!di
64
I.p'&/a%&on+ on In,&a:
&ve! thou$h the I!di! m#)et" #e e=pe#ie!ci!$ the echo> the I!di! b!)i!$
"y"tem h" #emi!ed fi#*y i!"u*ted f#om !y di#ect impct of the "ubp#ime
c#i"i" i! the US' Thi" i" becu"e the I!di! b!)" did !ot hve "i$!ific!t
e=po"u#e to "ubp#ime *o!" i! the US' 1o;eve#> the#e ;" mjo# impct o! the
eGuity -#)et" " m!y fo#ei$! i!"titutio!* i!ve"to#" 8?II": "o*d off thei#
i!ve"tme!t" i!to I!di! Comp!ie" to cove# thei# hu$e *o""e"' The ?II" hve
!d> " of dte> #e co!ti!ui!$ to ;ithd#;! f#om the eGuity -#)et"' 9oi!$
fo#;#d> !y "ubp#ime #e*ted t#emo#" i! the $*ob* -#)et" #e *i)e*y to cu"e
fu#the# cho" i! the I!di! eGuity -#)et" " ;e**'
(*"o> "ubp#ime *i)e "ce!#io i! I!di "eem" u!*i)e*y $ive! the cu##e!t "tte of
ffi#"' ?i#"t !d fo#emo"t> de"pite #pid $#o;th i! #ece!t ye#"> the mo#t$$e
m#)et i! I!di i" !o;he#e !e# the *eve*" of deve*oped cou!t#ie"> "uch " the
US o# the UI' -o#t$$e" " pe#ce!t$e of 9D2 i! I!di #e "ti** t "m**
pe#ce!t$e " comp#ed ;ith the US !d the UI' Seco!d*y> the pp#och of the
I!di! #e$u*to#" h" bee! b*!ced !d fo#;#d-*oo)i!$' It" co!ti!uou" do"e"
of mo!et#y ti$hte!i!$ im" to e!"u#e tht the mo!ey "upp*y 8!d he!ce
i!f*tio!: i" )ept ;ithi! m!$eb*e *imit"' (dmitted*y hou"i!$ p#ice" i! I!di #e
ffected but thi" h" $ot mo#e to do ;ith the dem!d-"upp*y fcto#"'
'
65
Mea+-*e+ %5a% /an (e %a0en:
Neve#the*e""> the eve!t" ;hich hve u!fo*ded i! the #ece!t mo!th" offe#
v*ub*e *e#!i!$ fo# ! eme#$i!$ cou!t#y *i)e I!di' O! the fu!dme!t* *eve*>
the#e i" ! utmo"t !eed to "t#e!$the! the "y"tem fo# ""e""me!t of the
bo##o;e#O" c#edit ;o#thi!e""' The #oot cu"e of the "ub p#ime mo#t$$e c#i"i" i"
the u!"ou!d c#edit p#ctice" tht eme#$ed i! the US m#)et' ?)e ce#tifictio!>
;hich he*p" ! i!e*i$ib*e pe#"o! to #i"e home *o!> c!!ot be #u*ed out i!
I!di' 1ou"i!$ *o! f#ud" #e !ot u!commo! i! the citie" of I!di !d the
$$#e""ive!e"" ;ith ;hich hou"i!$ *o!" #e bei!$ "o*d by b!)" !d fi!!ci*
comp!ie" i! vio*tio! of "ou!d c#edit p#ctice" c!!ot be i$!o#ed' 2e#"o!*
*o!" !d ove#due c#edit c#d" #e the othe# "ecto#" ;hich the #e$u*to#" !d
b!)e#" "hou*d h!d*e c#efu**y becu"e they hve the pote!ti* to p*u!$e the
I!di! b!)i!$ "ecto# i!to c#i"i"' Ove#"i$ht t thi" "t$e i" bou!d to cu"e
#epe#cu""io!" i! futu#e> !o mtte# ho; #obu"t the "ub"eGue!t p#oce""e" #e'
The #e$u*to# ;i** hve to e!"u#e tht b!)" do !ot fo**o; imp#ude!t !d
p#edto#y *e!di!$ p#ctice" by offe#i!$ f# too *e!ie!t *e!di!$ te#m" th! #e
;##!ted fo#' O! the othe# h!d> b!)" !eed to m)e "u#e tht they "h#e the
c#edit hi"to#y of bo##o;e#" to bette# ""e"" the c#edit ;o#thi!e"" of bo##o;e#"'
O!e "uch i!ititive cou*d be to e!cou#$e ;ide# u"e of the "e#vice" of the c#edit
i!fo#mtio! bu#eu 8CI0:' -embe#"hip " ;e** " "h#i!$ of c#edit i!fo#mtio!
;ith CI0 my be mde m!dto#y fo# ** fi!!ci* i!"titutio!" "o tht the
comp#ehe!"ive c#edit i!fo#mtio! pe#ti!i!$ to i!dividu* bo##o;e#" c! be mde
vi*b*e to ** the fi!!ci* i!"titutio!"'
( fu!dme!t* *imittio! h" bee! tht the #ti!$ mode*" *#$e*y #e*y o! the
hi"to#ic* pe#fo#m!ce #eco#d> ;hich h" bee! e=ce**e!t i! c"e of mo#t$$e
bc)ed "ecu#itie"' 0ut the"e mode*" do !ot t)e i!to ccou!t !e;e# #i")
imp*ictio!" #i"i!$ f#om !e;e# mo#t$$e "t#uctu#e"> "uch " the optio!
66
dju"tb*e #te mo#t$$e> ;hich i" p#o!e to pyme!t "hoc)"' C#edit mode*" t
the o#i$i!to#" !d #ti!$ $e!cie" mu"t ti*o#ed to dd#e"" the pote!ti* #i")" i!
"uch i!!ovtio!" !d e!"u#e tht they #e deGute*y fcto#ed i! thei# #ti!$
mech!i"m"' Not o!*y tht> they mu"t *"o e!"u#e co!ti!uou" mo!ito#i!$ "o tht
the ch!$i!$ co!ditio!" of the &co!omy #e #ef*ected i! thei# p#oce""e"' C#edit
#ti!$ $e!cie" "hou*d u"e *e#!i!$ f#om thi" epi"ode to modify thei# #ti!$
methodo*o$ie" - i!co#po#te ce#ti! p#edictive e*eme!t"> !d dd $#ete# #i$o# i!
thei# time*y "u#vei**!ce of #ti!$ "ecu#itie"' ( ";ift move by c#edit #ti!$
$e!cie" i! ide!tifyi!$ "tic)y mo#t$$e bc)ed "ecu#itie" ;i** o!*y he*p i!"ti**
co!fide!ce i! the efficie!cy of the e!ti#e #ti!$ "y"tem'
?i!!ci* i!"titutio!" ;i** *"o p*y *#$e# #o*e i! voidi!$ !y "hoc)" by
c##yi!$ out p#ope# due di*i$e!ce of "ecu#itie" !d bo##o;e#"> be"ide" #e*yi!$ o!
c#edit #ti!$"' They !eed to "t#e!$the! thei# #i") m!$eme!t f#me;o#) i! vie;
of i!c#e"i!$ comp*e=itie" i! p#oduct"J"e#vice"> !d cu"tome#"O #eGui#eme!t"'
(*thou$h it ;ou*d be compe**i!$ i! "uch "itutio!"> o!e of the fo#emo"t thi!$" to
!ote i" tht the #e$u*to# "hou*d !ot $et c##ied ;y by the eve!t" i! the $*ob*
-#)et" to impo"e f# too m!y "t#i!$e!t #e$u*tio!" to #e"t#ict c#edit $#o;th'
Thi" my *ed to "tif*i!$ of eco!omic $#o;th i! the p#oce""' Rthe#> the pp#och
"hou*d be to put i! p*ce #i$ht )i!d of e!b*e#" to ide!tify the pote!t #i")" !d
de* ;ith them pp#op#ite*y i! the I!di! co!te=t'
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CHAPTER I!
SUMMARY
68
SUMMARY AND CONCLUSION
MDe#ivtive" #e fi!!ci* ;epo!" of m"" de"t#uctio!> c##yi!$ d!$e#" tht>
;hi*e !o; *te!t> #e pote!ti**y *eth*>N "o "id C##e! 0uffett> #epo#ted*y the
thi#d #iche"t pe#"o! i! the ;o#*d> i! 2552' 1i" p#ophetic ;o#d" #e becomi!$ t#ue
;ith the u!#ve*i!$ of the fi!!ci* me"" c#eted by the "ub-p#ime *e!di!$ "p#ee
i! the U'S' The deve*opme!t" ;i** *"o ffect eme#$i!$ m#)et cou!t#ie" "uch "
I!di' The deve*opme!t" tht *ed to the e=p*o"ive "itutio! #e t#ced he#e'
Sub-p#ime *o!" #e tho"e $ive! to bo##o;e#" ;ho"e c#edit;o#thi!e"" i" be*o;
p#ime !d he!ce #e of *o; Gu*ity' I! I!di> "ub-p#ime *e!di!$ #efe#" to *o!"
c##yi!$ #te" be*o; the p#ime *e!di!$ #te !o#m**y offe#ed to hi$h Gu*ity
bo##o;e#"'
Sub-p#ime o# *o; Gu*ity *o!" #e mi!*y of th#ee )i!d"@ c# *o!"> c#edit c#d
*o!" !d hou"e mo#t$$e *o!"' Of the"e> the bi$$e"t !d the o!e" tht c!
e!d!$e# the e!ti#e fi!!ci* "y"tem #e the hou"e mo#t$$e *o!"' The"e
fo#med !e#*y o!e fifth of ** U'S' mo#t$$e *o!" i! 255%> $oi!$ up f#om , pe#
ce!t ti** 2554'
The "ub-p#ime *o!" ;e#e $ive! to bo##o;e#" ;ho did !ot hve the cpcity to
"e#vice them 8py i!te#e"t !d #epy p#i!cip*:' (t the hei$ht of "uch *e!di!$> it
;" "id> the bo##o;e#" ;e#e i! the NINE( 8!o i!come> !o job" *"o: cte$o#y' To
*u#e "uch bo##o;e#"> "ome *e!de#" dopted Rp#edto#yO p#ctice"' They *e!t
de*ibe#te*y )!o;i!$ tht the#e ;i** be defu*t !d> ;he! it occu##ed> "eiBed the
hou"e" mo#t$$ed !d "o*d them off to m)e p#ofit'
The b"ic Gue"tio! i" ;hy !y *e!de# 8p#t f#om the p#edto#y o!e": ;ou*d $ive
*o!" tht c##ied the hi$he"t #i")' O!e #e"o! i" tht the"e c##ied hi$he#
i!te#e"t #te"' 0ut> the mi! #e"o!" "eem to be t;o@ *#$e "u#p*u" fu!d" ;ith
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b!)" !d the i!t#oductio! of e"ote#ic fi!!ci* i!"t#ume!t" tht p""ed o! the
#i") to u!"u"pecti!$ i!ve"to#"'
Soo! fte# the dotcom bubb*e bu#"t i! 2552> the ?ede#* Re"e#ve 8ce!t#* b!):
of the U'S' pumped i! mo!ey i!to the "y"tem' Too much mo!ey i! the "y"tem *ed
i!evitb*y to *o;e# Gu*ity of *e!di!$' The vi*bi*ity of c#edit de#ivtive
i!"t#ume!t"> ;hich b"ic**y t#!"fe##ed the #i") to !othe# p#ty> cce*e#ted the
pce of "ub-p#ime *e!di!$'
Typic**y> b!) o# mo#t$$e fi!!ce comp!y 8m!y of them o;!ed by b!)":
*e!t to "ub-p#ime bo##o;e# to fi!!ce pu#ch"e of hou"e' Si!ce the bo##o;e#
did !ot hve the me!" to eve! py i!te#e"t i! the be$i!!i!$> the *e!de# "u$#-
coted the *o! th#ou$h ! dju"ted #te mo#t$$e 8(R-:' O!e type of "uch
*o! ;" c**ed 2-2.' Du#i!$ the fi#"t t;o ye#" of 35-ye# mo#t$$e *o!>
i!te#e"t ;" pe$$ed t *o; fi=ed #te of 4 pe# ce!t' I! the "ub"eGue!t 2. ye#">
the #te ;" f*oti!$ 8v#ib*e: t #ou!d + pe# ce!t ove# be!chm#) #te "uch
" LI0OR 8Lo!do! I!te#-0!) Offe#ed Rte:'
The *e!de# hoped tht eve! if the bo##o;e# cou*d !ot "e#vice the *o! fte# t;o
ye#"> heJ"he cou*d *;y" t)e #efi!!ce 8#i"e f#e"h *o! $i!"t the "me
hou"e: fo# *#$e# mou!t' Imp*icit i! thi" ;" the ""umptio! tht hou"e p#ice"
;i** $o o! i!c#e"i!$' Thi" p#emi"e $ot jo*t ;he! hou"e p#ice" "t#ted c*imbi!$
do;! fte# pe)i!$ i! 255+-5%' Che! the fi#"t t;o ye#" e=pi#ed> the i!te#e"t #te
*"o moved up to ve#y hi$h *eve*"' Cith LI0OR #u*i!$ t ove# + pe# ce!t> the
mo#t$$e #te "hot up to 45 pe# ce!t' Sudde!*y> the &-I 8eGuted mo!th*y
i!"t**me!t: of "uch *o! !e#*y doub*ed@ fo# R"' + *)h *o!> it i" R"' 4>475
mo!th fo# 2.-ye#> 45 pe# ce!t *o!> $i!"t R"' 2>455 fo# 35- ye# 4 pe# ce!t
*o!'
The p#im#y *e!de#" 8o#i$i!to#": of the "ub - p#ime *o!" ;!ted to "e** the *o!"
to i!ve"to#"' To m)e them tt#ctive> they poo*ed "uch *o!" i!to b")et" !d
70
c#eted ;ht #e )!o;! " CDO" 8co**te#*iBed debt ob*i$tio!":' The b")et"
;e#e "*iced !d "p*iced to m)e *ye#" of CDO" 8de#ivtive": c##yi!$ diffe#e!t
#i")"' The u!de#*yi!$ ""umptio! ;" tht ** bo##o;e#" ;ou*d !ot defu*t t the
"me time !d pe#ce!t$e of them ;ou*d be p#ompt i! pyme!t' The R"feO
po#tio! ;" "o*d to i!ve"to#" ve#"e to hi$h #i") !d the b*!ce to othe#"' The
c#edit #ti!$ $e!cie" put i! thei# mi$ht behi!d the m!euve# by $ivi!$ the be"t
#ti!$ to the po#tio! deemed *o; #i")' Some eve! **e$ed tht the $e!cie"
he*ped i! the "p*ici!$ $me'
The"e CDO" ;e#e bou$ht by "ome bi$ i!ve"tme!t b!)" !d hed$e fu!d" i!
;hich the "upe# #ich i!ve"ted fo# hi$h #etu#!"' They> i! tu#!> fi!!ced the"e
i!ve"tme!t" by bo##o;i!$ f#om b!)" $i!"t the "ecu#ity of CDO"' The b!)"O
ctio! i! p""i!$ o! the #i") to othe#" boome#!$ed> ;ith the "me "ub - p#ime
*o!" comi!$ bc) to them " "ecu#ity fo# *o!"'
The ;ho*e ##!$eme!t c#umb*ed ;he! thi!$" tu#!ed dve#"e ;ith f**i!$ home
p#ice" !d #i"i!$ i!te#e"t #te"' I! e#*y 2557> ;he! Ne; Ce!tu#y ?i!!ci*>
*#$e "ub-p#ime *e!de#> co**p"ed> it #e"u*ted i! 0#c*y" 0!) t)i!$ ove# "ub-
p#ime *o!" of bout <,55 mi**io!' I! ?eb#u#y> 1S0C> !othe# bi$ 0#iti"h b!)>
#epo#ted "teep *o""e" i! "ub-p#ime *e!di!$ i! the U'S' -!y C!di!> 9e#m!
!d ?#e!ch b!)" fo**o;ed "uit' -!y of the bi$ i!ve"tme!t b!)" i! the U'S'
*"o #epo#ted *#$e *o""e"'
(" #e"u*t> co!fide!ce i! the b!)i!$ "y"tem ;" #ude*y "h)e!' (!d> !o b!)
cou*d be "u#e of the "o*ve!cy of !othe# b!) !d the i!te# b!) mo!ey m#)et>
;he#e "ho#t te#m *e!di!$ ;" commo!> *mo"t d#ied up'
(utho#itie" i! &u#ope !d the U'S' hd to pump i! mo!ey to p#eve!t the ;ho*e
"y"tem f#om co**p"i!$' The"e deve*opme!t" hd thei# impct o! I!di! "toc)
m#)et" i! ;hich m!y hed$e fu!d" !d i!ve"tme!t b!)" hd i!ve"ted' Che!
they fced *iGuidity p#ob*em" i! the U'S'> they "o*d p#t of thei# I!di! ho*di!$">
"e!di!$ the "h#e i!dice" do;!'
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Cith the "ub - p#ime *o!" t)i!$ diffe#e!t vt#" !d ch!$i!$ h!d"
f#eGue!t*y> !o o!e )!o;" fo# "u#e ;hich i!"titutio! ho*d" ho; much of the *o;
Gu*ity *o!"' (""e""i!$ the impct of thi" ;o#*d;ide fi!!ci* co!t$io! ;i** t)e
mo!th"> if !ot ye#"' 2e#hp"> it cou*d b#i!$ bout p#o*o!$ed #ece""io! o# ve#y
"*o; $#o;th i! the U'S'> " it hppe!ed i! Ep! i! the4,,5"' 2#t of the b*me
pe#hp" ttche" to the U'S' ?ede#* Re"e#ve ;hich detected the p#ob*em too
*te to t)e co##ective ctio!'
U*timte*y> b!)e#" ;i** hve to #etu#! to the time te"ted p#ctice of p#ude!ce i!
*e!di!$ if p#ob*em" ;it!e""ed i! "ub - p#ime *o!" #e !ot to #ecu#'
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BIBLIO#RAPHY
Ne2+pape*+:
The 1i!du
&e!du
0u"i!e"" Li!e
0u"i!e"" St!d#d
NET
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