Presented by

Valliappan P (128939)
SOM NIT Warangal

Why the financial crisis of 2008 happened?

The answer is simple: The housing bubble
burst (U.S. subprime mortgage crisis )
What is subprime lending?
Subprime lending means giving loans to people who may have
difficulty in maintaining the repayment schedule. These loans are
characterized by higher interest rates, poor quality collateral, and
less favorable terms in order to compensate for higher credit risk.
Example: Student loans in India are considered to be subprime.

Lending decision
by Financial
Institutions

Housing
Bubble
formation
Borrowing
decisions by
individuals

Causes of crisis
1

Relaxation in lending regulations

Poor creditworthiness of borrowers

Rising EMI due to higher interest costs

Borrowers Unable to pay

Failure of Banks and Financial

Institutions

Prime
Mortgage

Sub Prime
Mortgage

Asset
backed
Securities

Lenders the biggest culprits

2006
2008

2009

Impacts of Subprime crisis

1) Major banks suffered from huge losses.

2) Lehman Brothers went out of business.

3) Merrill Lynch had to sell itself to Bank of America for a fraction of
its former value
4) Countrywide Financial Corporation, the biggest U.S. mortgage
lender, eventually gets taken over by Bank of America.
5) In Sept 2008, AIG collapses as it could not afford to pay for all of
these US mortgage defaults. The US government nationalises AIG
by becoming 80% shareholder.

Direct Impacts of the Crisis

Financial Institutions Bankruptcy

New Century Financial (USA) Apr. 2, 2007

American Home Mortgage (USA) Aug. 6, 2007
Sentinel management Group (USA) Aug. 17, 2007
Ameriquest (USA) Aug. 31, 2007
NetBank (USA) Sept. 30, 2007
Terra Securities (Norway) Nov. 28, 2007
American Freedom Mortgage Inc. (USA) Jan. 30, 2007

Financial Institutions Write-Downs

Citigroup (USA) - $24.1 bln

Merrill Lynch (USA) - $22.5 bln
UBS AG (Switzerland) - $16.7 bln
Morgan Stanley (USA) - $10.3
Credit Agricole (France) - $4.8 bln
HSBC (United Kingdom) - $3.4 bln
Bank of America (USA) - $5.28 bln
CIBC (Canada) 3.2 bln
Deutsche Bank (Germany) - $3.1 bln

Total Write downs and losses were around $300 - $350 billion
US dollars

1 Sub Prime Mortgage Crisis

2 Collapse of Financial System

3 Economic Crisis
4 Job Loss
5 Low consumer spending

6 Recession Low Economic activities

7 Very low GDP growth
8 Poor Prosperity of the countries

Global Impacts of the Crisis

Investors lost confidence in the stock market.
Consumer spending slowed down due to lack of cash/
unwillingness.
U.S.As economic condition affected the global economy.
World economy slipped into recession.

Exports from China, Korea, Taiwan and India decreased.

Impact on India
FIIs pulled out of money from the Indian stock market
Public Sector Banks, viz State Bank Of India, Bank Of Baroda,
Canara Bank, Punjab National Bank etc did not have major
exposure to credit derivatives market due to their limited
overseas operations.
Stock market Crashed and BSE sensex crashed from 24000
level to 8000 level.
ICICI Bank incurred a loss of close to Rs.1000 Crores because
of exposure to international securities market

If companies around the globe are unable to borrow, they'll

begin to cut jobs, cease investment, and default on their debt
in larger numbers. - Peter Coy BW, Oct 3, 2008

References:
1)www.worldbank.org
2)World Bank (2008), World Development Indicators 2008

3)Blanchard, Olivier (2009), Sustaining a Global Recovery,

Finance & Development, September, International Monetary Fund
4)Calvo, Guillermo (1998), Capital Flows and Capital-market Crises:
The SimpleEconomics of Sudden Stops, Journal of Applied Economics 1(1),
pp 35-54.

Thank You..!