THE SUBPRIME MORTGAGE CRISIS. INTRODUCTION I. Origins II. Transmission III. Contagion Conclusion & Impact of the crisis.

THE SUBPRIME MORTGAGE CRISIS

PLAN INTRODUCTION

I. OriginsII. TransmissionIII. Contagion

Conclusion & Impact of the crisis.

INTRODUCTION

Definitions and preview of the conjuncture.

The subprime mortgage crisis is a global and financial crisis.

This crisis is considered as the worst financial crisis since the 1929 crisis.

It started from 2006 with the Krach of the risky mortgage loans in the USA.

Revealed to the world in february 2007 by the HSBC bank, it turns into a global financial crisis at the beginning of summer 2007.

DEFINITION A Subprime loan is a loan offered to someone

with a bad credit record.

Subprime borrowers are turned away from traditional lenders.

The interest rate is lower than a standard loan from a bank.

Traditionnaly, they have a reasonable chance of defaulting on the debt repayment.

ORIGINS

How did it happened ?From where did it comes ?

Crisis Origins Decrease of technology values ( Nasdaq 2000) Terrorist attacks (2001)

Decrease of interest rates Huge liquidity Injection into the global banking system.

Investors take advantage of low interest rates (to 1%) in order to speculate on the real estate market (leverage). Rise of real estate prices.

Banks loans easily. The risk is hold up because loans are secured on the value of the property.

Low interest rates the first 2 years, then the loan is indexed on the market rates. The real estate market went down Interest rates went up.The home owners couldn’t afford their home.

EVENTS

SUBPRIMES

BANKS

FEDERALRESERVE

STOCK MARKET

TRANSMISSION

How did it work ?Where did it go ?

How does it work ? A family wants a house. The mortgage broker connects the family

with the lender (commission). Families are able to buy houses.

Then, the mortgage is put in a CDO (Collateralized Debt Obligation) with other mortgages.

The CDO is splitted into categories from the safiest to the riskiest. (Senior vs Junior).

Where did it go ? The CDO is rated by rating agencies.

Then it’s spread to investment banks, hedge funds and others financial institutions.

Mortgage refunds are transfered to the news acquisitor : So do risks.

CONTAGION

Contagion at the financial markets, the US economy and on a worldwide

scale

Strong contagion effect.

Banks have been heavily touched because they financed companies specialized in financing activities.

By November 2008, US stocks had lost 45% of their value compared with 2007 value.

In the second half of 2007, many mortgage companies shut down, suspended operations or were sold.

Several billions dollars were lost by banks because of assets depreciation related to the subprime mortgage crisis.

For example: ◦ 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

Strong fall of the market indexes:

- Dow Jones: 14.000 points to the 19/07/2007 against12.800 points to the 16/10/2007.Now: 9,712.7

- CAC 40: 6 125 points to the 16/07/2007 compared with 5.265 to the 16/08/2007. Now: 3600

Subprime crisis financial crisis asset price deflation liquidity/credit crunch

The most important impacts are made in developed countries especialy in US and europe.

The American banking crisis are transformed into a financial and economic crisis which affects the worldwide economy

Decrease of credits given to companies of householders Consumption, Investment and GDP slowed down Recession

Risky householders became more and more vulnerable (1.200.000 in August 2007) Devalorization of real estate patrimony. Same impact on GDP.

The decrease of real estate prices slows down the industry activity.

30

50

70

90

110

130

150

170

2000 2002 2004 2006 2008

Consumer confidence

IMPACT OF THE CRISIS

Bankruptcies & Unemployment.

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

3 of the 5 biggest wholesale banks in Wall Street are changes hands in few months.

In March2008, Wall St investment banks Bear Stearns dies purchase by JP Morgan Chase.

In Sept 2008, Lehman Brothers collapses, Merrill Lynch is purchased by Bank of America.

In Sept 2008, AIG collapses as it could not afford to pay for all of these US mortgage defaults. The US government nationalizes AIG by becoming 80% shareholder.

Government sponsored Fannie Mae and Freddie Mac either directly owed or guaranteed nearly $5 trillion in mortgage obligations.

Two million families will be evicted from their homes

Finance lost 325.000 employment since August 2007 1,6% of its world manpower rise of unemployment.

The International Monetary Fund (the IMF), estimate the cost of the world financial crisis at approximately 4.000 billion dollars 600 dollars/ Person

CONCLUSION

THANK YOU FOR YOUR ATTENTION

By ANGELIER Damien & SERRAT Léo

Video : explained by Damien & Léo.

Directed by George LUCAS

Staring : Steven SPIELBERG.