Sub Prime Trade Finance

8/14/2019 Sub Prime Trade Finance

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SUBPRIME CRISIS

Ayan Ray 03Mansi Bajpai 04Binu Joseph 06Divya Boddu 07Nailesh Jacob 12Jagdish Meena 14Rahul Kumar - 52Presented to :- Mr S.K Vaze


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What is sub-prime?What is sub-prime?

When banks lend money to people, they broadly classify them into prime and sub-prime debtors -the former are people who are consideredcreditworthy and the latter, less so .

Banks normally do not lend to subprime debtors but as regulations were lax they started lending athigh rates of interest .


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But, Do Sub-Prime Borrowers payBut, Do Sub-Prime Borrowers paya risk premium ?a risk premium ?

Yes ! They Do.Yes ! They Do.

But in some cases loans were even sanctioned to the

NINJA ( NO income + NO job+ NO assets ) borrowersas well .


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So how does one defineSo how does one definethe Sub-Prime crisis ?the Sub-Prime crisis ?

It actually refers to a credit problem among sub-prime borrowers in the US residential market andthey account for around 8 % of the total mortgageloans.

Like borrowers anywhere in the world, the interestpaid on residential mortgages in the US is linked tothe central bank's benchmark ( in this case- the US Federal Reserve's Fed Funds Rates )


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When Fed Rates increase, lendersWhen Fed Rates increase, lendersdefault . But shouldnt only Banksdefault . But shouldnt only Banksbe affected ????be affected ????

Banks slice the mortgaged & sell them as

RMBS Residential Mortgage Backed Securities

CDO Collateralized Debt Obligations

& Many other fancy financial products !!!!


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Now sit back and seeNow sit back and see..What some smart guys at WallStreet could do to the Main Street !!!!!!


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02/28/10FINANCIAL CRISIS & INDIA

Year 2000Year 2000Americans were rolling in dough.Americans were rolling in dough.


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Then They started practicallyThen They started practicallyflushing their money down the toilet.flushing their money down the toilet.


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. ,Govt spending

Corporate

,spending Like a Flood of Money


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Banks begin lending to people with BAD CREDIT(ARM) Adjustable Rate Mortgage

NO PROBLEM


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WHAT IS SUBPRIME LENDING

RATE?


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Sub-prime Lending

Sub-prime lending is to borrow money to people with poor

credit histories.

Sub-prime lending rater arehigher as compared to PLR


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Banks promised that housingprices will continue to rise.


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Banks start sellingMORTGAGE BACKED SECURITIES*

*Investments of packaged home loansThese are fine if the housing market goes up...bad if it doesn't.


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9/11 shocks US andworld economies


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Fed dropsinterest rate to

1


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Investors buylots of mortgagedbackedsecurities...with very high fees


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Real estate soars 10 20%

from 2002 - 2006


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Home ownersspend likecelebs usingHome Equity

Loans


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BUT.


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LIQUIDITY OVER


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Starting 2006 housing bubblebusted


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Credit Bubble Housing Bubble Credit Bubble

So this happened...


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Fed increasesinterest rate to

5.25


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Adjustable RateMortgages increase withinterest rates

HomeOwners can't paytheir mortgages


28/80Home owners are forced out of their homes

Wh SUB PRIME h ld bl t


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When SUB-PRIME holders were unable torepay their loan, major banks who haveshown losses in their balance sheet, file forBankruptancy or get nationalized.

I th i BALANCE SHEET


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In their BALANCE SHEET,

In left side (liability), NOTHING ISRIGHT,

In right side (assets), NOTHING IS LEFT.


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..So What were the ..consequences ?


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During 2007, nearly 1.3 million U.S.housing properties were subject toforeclosure activity, up 79% from 2006.

Major banks and other financialinstitutions around the world havereported losses of approximatelyUS$435 billion as of 17 July 2008.

During the week of September 14, 2008the crisis accelerated, developing into aglobal financial crisis.resulting in thebankrupcy of some of the worlds biggestfinancial institutes..


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%,market declined 22 the worst week in-the index's 118 year history

-of the largest companies traded on the.U S Stock

Since 1 January 2008 owners of stocks in U S


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Since 1 January, 2008, owners of stocks in U.S.corporations have suffered about $8 trillion inlosses, as their holdings declined in value from$20 trillion to $12 trillion. Losses in othercountries have averaged about 40%.


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BEAR STERNS was acquired BY J P MORGAN in


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BEAR STERNS was acquired BY J P MORGAN inMarch 2008 FOR 1.2$ BILLION AT PRICE OFJUST 10$ PER SHARE.


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:o u r c e B l o o m b e r g


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UnemploymentRate


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USGovernmentdigs deep tobailoutbailout the

large financialinstitutionsto the tune of...

$700B +$700B +


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Neither presidential candidate really has a clue what todo...

Lets hope this thing works! Canada :


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Credit Crisis: The Americas

Canada :reduced interest rates andincreasing liquidity

Mexico : falling Pesoanddwindlingeconomy

Brazil : Heavy credits, butstabilizing andrecouping

U.S. : ???still working outfinancial bail-outs; more bank failures to come

Argentina : Heavy job losses,higher import tariffsand weaker Peso

Borrow indefinitely: Only in America

2009 budget deficit estimatedto be close to $2 TRILLION,which is equal to 2.5% of GDP


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Whichimplies,national debtcan increase

beyond 70%of GDP, thehighest since

the end of World War IISource: Bloomberg.com


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When the United States sneezes, the rest of theworld may well catch a cold


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Some are most affected.

Europe - European banks have lost more money than American banks due to investments in the U.S.

mortgage market.

Government stepping in to bail out banks fromgoing under in Denmark and U.K.

Threat of recession in Irish Republic and SpainFrance, Germany, Italy and Portugal follow suitIceland is all but officially bankrupt


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Some are indirectly affected

Japan: Mizuho, second largest bank lost more than$6 bn

Singapore: Temasek and GIC have become the biggest shareholders of Merill Lynch and UBSIndia: facing economic slowdownChina: sitting on surplus goods


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Some are unaffected..

Australia, Malaysia, New Zealand, Singapore, SouthKorea and the Middle East have protected foreign

currency deposits.Hence a promising economy

Poland:


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BUT, the crisis is truly GLOBAL!

Ireland: First Eurozone country toslide into recession

Part of Eurozone,buthas a stable bankingsector

Russia: Fast growingeconomy with largeforeign reserves

Singapore: Prosperous,government guaranteefor deposits till 2010

China: ???Strained with economicsurplus and counterfeitgoods

India: Economic slowdownwith high inflation

and poverty

France: Sluggish economy headingfor recession

Hungary: -ve credit raing, heavydebts, huge current accountdeficit


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Credit Crunch

A di h i dd


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A credit crunch is a suddenreduction in the general availability

of loans (or credit), or a suddenincrease in the cost of obtainingloans from Banks.


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Effect on INDIA


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Mr. Smith in USA,

didn't paid his Loan

Mr. Sharma in India LostHis Investments


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Even after providing so manyhome loans to their citizens theAmerican banks still having the

excess liquidity problem sothey decided to invest indifferent stock markets of theworld, along with Indian stockmarket


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This Sudden Flow of Money in IndianMarkets Resulted inRise of Market


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On the other side, in India Afterlooking at Rise in Indian Stock Market& to make money double, Sharma ginvested his money in the StockMarket


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In this way Mr Smith didnt paid


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In this way Mr. Smith didn t paidhis loan & due to this, Sharma g

lost his investment


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Due to credit crunch, American

bank started pulling back theremoney from India

$ 6 illi fl f di i


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$16 Billion outflow from India in2008Inflation at 12%$291 Billion Indian FX reserves asof 03 Oct.Indian Oil Corp costs to rise 70% to$45 BillionIndustrial growth plummets to1.3% in AugustSensex down ~50% in 2008


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CRASHING STOCK INDICES


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Financial Crisis is in America.

Impact of the US Financial Crisis on


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Impact of the US Financial Crisis onIndia

Little impact on India.

Reasons -

Unlike in US where capitalism rules in India marketis closely regulated by the government.

Less exposure of Indian financial sector with the

global financial market


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I t I di t d


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Impact on Indias trade

Increasing Trade deficit.

Foreign exchange reserves depletion by around$57 billion to $253 billion for the week ended

October 31.

The current deficit is at around $10 billion

I t I di t


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Impact on Indias export

About 15 per cent of its total export in 2006-07 wasdirected toward USA.

Slump in the consumer demand in the US and Europe.

Indian exports fell by 9.9 per cent to $1.5 from $12.7 billion in November 2008.

Imports grew by $6.1billion to $21.5 billion.

Manufacturing sectors like leather, textile, gems and jewellery have been hit hard

Impact on Indias handloom sector,


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Impact on India s handloom sector, jewellery export and tourism

Reduction in demand in the OECD countries .

Around 50,000 artisans employed in jewellery industry have lost their jobs .

Volume of handloom exports dropped by 4.6 percent in 2007-08.

Indian tourism sector badly affected as thenumber of tourist flowing from Europe andUSA has decreased sharply


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Year Value Percentage Change

2000-01 Rs.2127.4crores +7.4%

2001-02 Rs.2064.9crores 2.9%

2002-03 Rs.2633.3crores +27.5%

2003-04 Rs.2481.3crores 5.8%

2004-05 Rs.2213.1crores 10.8%

2005-06 Rs.2619.7crores +18.3%

2006-07 Rs.3477.5crores +32.7%

2007-08 Rs.3353.7crores -4.6%

Source :- Ministry of Commerce

EXPORT VOLUMES : HANDLOOM

Exchange rate depreciation


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Exchange rate depreciation With the outflow of FIIs, Indias rupee

depreciated approximately by 20 per centagainst US dollar and stood at Rs. 49 per dollar

IT BPO sector


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IT-BPO sector

Indian IT employees use to be mainly outsourcedto US by various companies which drastically reduced.

The growth in employment in the IT sector 44 %dropped to about 28%.

Software exports dropped .


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Steps taken by Indian Govt.

Reduced into CRR to 5.5%Through cut into CRR, There is flow of 120+

thousand crore into Indian marketPlan to lift the Ban from PN (i.e. participatory notes)Reduced the Prime Landing Rate by all Public sector

BanksReduced into ATFs price (i.e. aircraft turbine fuel)

Planning for putting Ban on short selling.


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S hi k b f i b


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02/28/10

So think before you invest because

After all money doesn t grow


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, After all money doesn t grow on trees


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THANK YOU Any questions???

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