Financial Crisis-2008
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Transcript of Financial Crisis-2008
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Created By:Parshwadeep Lahane
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PARTNERS IN CRIMECustomers FED Mortgage
Brokers
Investment Banks
Investors
Credit Rating Agencies
Insurers
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Modus Operandi• Bank would come out with schemes to give
loans to just anyone with the help of mortgage brokers
Principal + interest payable over long term
Loan Loan +Premium
Documents Documents
BANK(Lender)Mortgage
BrokerSubprime Customer
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MBS for loan• Bank would package the loan into a security
and pass on to Investment banks
Principal + interest payable over long term
Loan Loan +Premium
Documents Documents
BANK(Lender)Mortgage
BrokerSubprime Customer
SIVInvestment
Bank
Loan +Premium
Documents converted to
Securities(MBS/ABS)
Off balance sheet entity
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CDO• The investment banks will package these with
other securities and slice them into different categories of CDO
CDO
Securities(MBS)
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Certification• Credit Rating agencies(CRA) would certify
these securities
Principal + interest payable over long term
Loan Loan +Premium
Documents Documents
BANK(Lender)Mortgage
BrokerSubprime Customer
SIVInvestment
Bank
Loan +Premium
Documents converted to
Securities(MBS/ABS)
Off balance sheet entity
CDO
CRA
Rating
Premium
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Investors • Investment bank Structured Investment Vehicle(SIV)
will sell CDOs to the Investors across the globe
Principal + interest payable over long
term
Loan Loan +Premium
Documents Documents
BANK(Lender)Mortgage
BrokerSubprime Customer
SIVInvestment
Bank
Loan +Premium
Documents converted to
Securities(MBS/ABS)
Off balance sheet entity
CRA
Ratin
g
Prem
iumCDO
InvestorsLoan +
Premium
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Insured
Principal + interest
payable over long term
Loan Loan +Premium
Documents Documents
BANK(Lender)Mortgage
BrokerSubprime Customer
SIVInvestment
Bank
Loan +Premium
Documents converted to
Securities(MBS/ABS)
Off balance sheet entity
CRA
Ratin
g
Prem
iumCDO
InvestorsLoan +
Premium
Insurer
Insu
ranc
e
Prem
ium
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Other linkagesBank
MortgageBroker
Investment Bank
Insurer CRA
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Mistakes• Wrong belief of housing prices always going up
• FED overlooked warnings
• Past data reference illusion
• High leveraging
• Miscalculated ratings fooled investors
• Appetite beyond capacity
• Slicing and dicing spread the risk but did not eliminate it
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Result- Mortgage Market
Housing market nose dives
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Sub prime borrower
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Investors
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Investment Banks
Nationalized Bankrupt
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Credit Rating Agencies
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Insurers
Saved by governmentfunding
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Global Equity Markets
Lose 45% of wealth
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Money market
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Confidence in Market
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Someone got lucky!
Alternate investment saw a surge
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LEARNINGTHINK BEFORE YOU ACT
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THANK YOU