WHAT IS SUBPRIME?

It is the mortgage for people with shaky credit, or specifically, people who is unlikely to be able to pay the mortgage.  Usually it s given to those who are seeking money to finance their houses. When ? The dotcom bubble of 00-01 and 9/11 attacks drove the US FEDERAL RESERVE to follow an ultra-easy monetary policy to curb RECESSION. ncrease in mortgage Y? Boom and bust in Housing market  Low interest rates due to gov t policies.  Rise in the housing price. 

SUBPRIME MORTGAGE

Y ? uCONTD
High risk mortgage loan and lending/borrowing practice  lending more and more loans to high risk borrowers and immigrants. ‡ Government policies. ‡ Policies of the central bank. Ultimately .Downturn & crash ‡ Interest rates started rising due to inflationary concern. ‡ The overbuilding of homes during the boom period eventually led to a surplus inventory of homes causing home prices to decline . Causes . ‡ Offering NINJA loans. ‡ Payment options.

MORTGAGE-BACKED SECURITIES(MBS) 
Which derive their value from mortgage payments and housing prices.  Had enabled financial institutions and investors around the world to invest
in the U.S. housing market. 

Major banks and financial institutions had borrowed and invested heavily in
MBS and reported losses of approximately US$435 billion as of 17 July 2008.

 Liquidity risk the risk that a business entity will be unable to obtain financing.THERE ARE FOUR PRIMARY TYPES OF RISKS.  Counterparty risk the risk that a party to a contract will be unable or unwilling to uphold their obligations.  Credit risk the risk that the homeowner or borrower will be unable or unwilling to pay back the loan..  Asset price risk the risk that assets will depreciate in value. . resulting in financial losses.

 Tourism sector was badly affected.equity and commodity markets.700 level in Nov 2008) Reason  The foreign banks and hedge funds started unloading their holding in INDIAN EQUITIES resulting in fall in the stock price and weakening the domestic currency.200 in Jan 2008 to 7.IMPACT ON INDIA  FOREX. since a majority of the Indian IT firms derive 75% of their revenues from US.  INDIAN BOURSES ( came down from 21. Now it is the time to promote the aggressive health tourism.  Hitting the IT enabled services. .  INDIAN RUPEE.

There will be several implications for the banking sectors. . A crash in the equity price is effecting more people than ever before.IMPACTS u. Indian banks have to follow stricter norms while disbursing loans. The near recession situation in the US has lead to a loss of demand for Indian exports hence loss of export earnings for India. Investment banks and other financial institutions are on a job slashing spree to cut costs. The subprime crisis has leg to near loss of confidence in the American stock market. The number of investor accounts at stock exchange has surged.CONTD  A recession in US has seen theloss of some      jobs in India.

INITIATIVES BY GOVT  The US gov t to stimulate the economic growth enacted a LAW on ECONOMIC STIMULUS PACKAGE of $168 billion mainly in the form of tax rebates.  was taken over by for $50 billion.  The US gov t announced a $700 billion bail-out package to stimulate the economy. .  was acquired by JP MORGAN CHASE with the support of US FEDERAL RESERVE.  The US FEDERAL RESERVE provided a loan of $85 billion to the troubled insurance giant resulting in the US gov t acquiring a 79.9% stake in the company.  Investment banks like and converted themselves as regular banks.

PICTORIAL.CRISIS .

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Loeb & Co. .HISTORY OF LEHMAN BROTHERS  Founded in 1850 as a commodities trading business.  Increase in the revenues and grew in employees.  Lehman Brothers Inc (Lehman Brothers) once the 4th largest Investment bank in the world filed for chapter 11 of bankruptcy on September 15th 2008.  In 1977. merged with Kuhn. an investment bank..

CONTuuBUSINESS OVERVIEW  Investment Banking Lehman's investment banking operations accounted for just 20% of the company's 2007 revenue. Investment Banking Mergers & Acquisitions Corporate Finance Ipo Debt Capital Restructuring .

CONTuuBUSINESS OVERVIEW  Capital Market Capital Market Research Division Sales Trading .

Fixed Income MBS(Mortgagebased Security) Business Derivatives & Structured Product Energy & Product .CONTuuBUSINESS OVERVIEW  Fixed Income Over the last 8 years. roughly 40% of Lehman's net revenues have come from fixed income sales and trading. Some of the different fixed income investments that Lehman deals with include derivative and swaps.

Investment Management Asset Management Private Investment Management .CONTuuBUSINESS OVERVIEW  Investment Management: The investment management business provides a stable earning base because its fee-based structure generates revenues based on assets under management rather than the total number of transactions.

BUSINESS OVERVIEW .

CONTuuBUSINESS OVERVIEW .

THE FALL OF LEHMAN BROTHERS .

Lehman's high degree of leverage . The Beginning of the End. Lehman acquired five mortgage lenders. housing boom well under way. with the U. including subprime lender BNC Mortgage and Aurora Loan Services. .REASON FOR COLLAPSE Boom in real estate. As the credit crisis erupted in August 2007 with the failure of two Bear Stearns hedge funds .S. Lehman's Colossal Miscalculation. In 2003 and 2004.500 mortgage related jobs and shut down its BNC unit. which specialized in Alt-A loans (made to borrowers without full documentation).the ratio of total assets to shareholders equity . Lehman's stock fell sharply. and its huge portfolio of mortgage securities made it increasingly vulnerable to deteriorating market conditions. the company eliminated 2. Hurtling Toward Failure. During that month.was 31 in 2007.

it made an offer to Barclay's and Bank of America for acquisition but both the banks turned down the offer because in the past. .  The bank raised the interest rates for the housing loans which made the repayment of loans very difficult for the borrowers. Lehman had failed to keep good relations with these top banks in the country. Lehman had to file for bankruptcy. bankruptcy. So in the end.  significant reduction in the prices of real estate due to the mortgage crisis in the US.REASON FOR COLLAPSE  The basic reason of Lehman going bankrupt is the amount of debt it had accumulated over a period of time. When Lehman had had a total debt of $639 billion in various areas.

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Merrill agreed to purchased by the bank of America on 14 September 2008 at heights of 2008 financial crises.MERRILL LYNCH  Merrill lynch was established in 1915 by Charles E Merrill and Edmund C Lynch  Merrill lynch is a wealth management division of bank of America with over 150000 financial advisor and $2.2trillion in client asset. it the world largest brokerage formally known as Merrill lynch & Company. . Prior to 2009 it was publicly owned and traded under new York stock exchange under the symbol MER . It ceased to work as a separate entity in 2009.

 In 1978 it buttressed its securities business by acquiring White weld and Co.8 trillion in client asset.  It went on public in 1971 and become the multinational corporation with over $1.that enabled it to place the securities it underwrote directly.  In 1977 it introduced its cash management account that enables its customer to sweep their cash into money market mutual fund and also includes check writings capabilities and credit card. Merrill lynch was well known for its global private client and strong sales force.  It operates in around more than 40 countries across the world.RISE TO PROMINENCE  It rose to prominence on the strengths of the brokerage network as 15000+ as on 2006. .

Its share prices had also come down significantly. .  In one year between July 2007 and 2008 the company had lost almost.  $19.4 billion in losses associates with national housing crises.  In December 2007 the firm announced to sell its commercial finance business to general electric and sell its major part of shares in stock to Temasek holding a Singapore government investment group.2 billion or $ 52 million daily.SUBPRIME MORTGAGE CRISES  In NOV 2007 Merrill lynch announced to write down $8. in order to raise capital.

 Temasek holding agreed to purchase the funds and raised its investment in the company by $ 3.  In August 2008 the company froze hiring and revealed they had charged almost $30 billion to their subsidiary in United Kingdom.  By September 2008 the company had lost 51. .4 billion.8 billion in mortgage backed securities as a part of subprime mortgage crises.SUBPRIME MORTGAGE CRISES  Two weeks later the company announced to sell its select hedge funds and securities in an effort to reduce the exposure to mortgage related investment. exempting them from taxes in the country.

Merrill first purchased the Franklin financial Corp.  Merrill Lynch.COLLATERALIZED DEBT OBLIGATION (CDO) CONTROVERSIES. like many other banks was heavily involved in mortgage based collateralized debt obligation market in early 2000s.  It was the NO. 1 global underwriter of the CDOs in 2004  To provide ready supply of mortgage for the CDOs. the largest subprime lender in the country in 2006 .

When the value lost. .COLLATERALIZED DEBT OBLIGATION (CDO) CONTROVERSIES.  In April 2009 a bond insurance company MBIA sued Merrill for fraud and five other violation related to CDOs.6 billion to Star lone funds at just $ 1. MBIA wound up owing to Merrill a large amount of money.These were.  In mid 2008 Merrill sold the group of CDOs which had once valued $ 30. creating a billion dollars loses to the company. And among the other things Merrill lynch had also defrauded MBIA about the qualities of these CDOs also. a) ML series CDOs b) Broderick CDOs 2 c) High bridge ABS CDO d) Broderick CDO 3 e) Newbury Street CDO. By the end of 2007 the value of these CDOs was start collapsing.1 billion loan.7 billion and $ 5.  In between 2006 and 2007 Merrill was lead underwriter on 136 CDOs worth around$ 93 billion.

25 billion in stock in order to avoid damages between banks and federals regulators.  On September 14 2008 Bank of America announced to purchase Merrill lynch for $ 38.  Trading partner s loss of confidence in Merrill lynch solvency and its ability to refinance short term debt ultimately leads to its sale.ACQUISITION BY BANK OF AMERICA  Significant losses were attributed to the drop in the value of large and unhedged mortgage portfolio in the form of the collateralized debt obligation. .

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 In 1970.  The name "Fannie Mae" and "Freddie Mac" is a creative pronunciation of the company's initialism that has been adopted officially for ease of identification. also known as Freddie Mac. the Federal Home Loan Mortgage Corporation (FHLMC) (NYSE: FRE). .OVERVIEW OF FANNIE MAE AND FREDDIE MAC  Founded in 1938. was the second GSE of the United States federal government to purchase mortgages on the secondary market. the Federal National Mortgage Association (FNMA) (NYSE: FNM).

CAUSES OF SUBPRIME CRISES ON FANNIE AND FRADDIE  Fannie and Freddie were government sponsored entities (GSE's).  Between 2005-2007. .  In 2005. the Senate sponsored a bill that sought to forbid them from holding mortgage-backed securities in their portfolio because it wanted to reduce the risk to the government. responsible for 90% of all mortgages. when banks began to constricting their lending.  By December 2007. they were really the only lender still operating. few of the mortgages acquired were conventional fixed-interest loans with 20% down.

. the 17% of subprime and Alt-A loans made up over half of the losses in 2007.  For Fannie and Freddie.CAUSES OF SUBPRIME CRISES ON FANNIE AND FRADDIE  by 2007 only 17% of their total portfolio was either subprime or Alt-A loans.

 In 2006.  Lower borrowing costs for banks typically increase the "spread" between the rate at which they borrow and which they lend.  Adjustable rate mortgage (ARM) rates are reduced .EFFECTS ON THE SUBPRIME MORTGAGE CRISIS  Banks can be assured that Fannie and Freddie have funds to purchase conforming loans. so they can increase such lending. Fannie and Freddie insured 24 percent of all subprime loans .

EFFECTS ON THE SUBPRIME MORTGAGE CRISIS  The government's role as the primary investor allows a systematic loan refinancing process.  With home prices more stabilized. the value of mortgage-backed securities receives some upward support .  The government can restructure mortgages so that the loan balance is reduced.

.GOVERNMENT SUPPORT FOR FANNIE MAE AND FREDDIE MAC  Federal Reserve purchases of $23 billion in GSE debt (out of a potential $100 billion) and $53 billion in GSE-held mortgage backed securities (out of a potential $500 billion).  Federal Reserve extension of primary credit rate for loans to the GSEs.  Treasury Department purchases of $14 billion in GSE stock (out of a potential $200 billion).  Treasury Department purchases of $71 billion in mortgage backed securities.  Federal Reserve purchases of $24 billion in GSE debt.

19 94 19 96 20 04 19 90 19 91 19 92 19 95 19 97 19 98 20 00 20 01 20 03 20 05 20 06 20 07 20 08 19 93 19 99 20 02 .FANNIE MAE/FREDDIE MAC SHARE  The share of all mortgages held by Fannie Mae and Freddie Mac rose from 25 percent in 1990 to 45 percent in 2001.  Their share has fluctuated modestly around 45 percent since 2001.ofheo. Freddie Mac/Fannie Mae Share of Outstanding Mortgages 50% 45% 40% 35% 30% 25% 20% Source: Office of Federal Housing Enterprise Oversight.gov. www.

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