Presentation on theme: "THE SUBPRIME MORTGAGE CRISIS"— Presentation transcript:
1 THE SUBPRIME MORTGAGE CRISIS will notcalculateuntil anotherchapter.1
2 PLAN INTRODUCTION I. Origins II. Transmission III. Contagion Conclusion & Impact of the crisis.
3 Definitions and preview of the conjuncture. INTRODUCTIONDefinitions and preview of the conjuncture.
4 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.
5 DEFINITIONA 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.
7 How did it happened ? From where did it comes ? ORIGINSHow did it happened ?From where did it comes ?
8 Crisis Origins Decrease of technology values ( Nasdaq 2000) Terrorist attacks (2001)Decrease of interest ratesHuge 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.EVENTSSUBPRIMESBANKSFEDERAL RESERVESTOCK MARKET
10 How did it work ? Where did it go ? TRANSMISSIONHow did it work ?Where did it go ?
11 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).
12 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.
14 CONTAGIONContagion at the financial markets, the US economy and on a worldwide scale
15 Financial markets contagion I 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.
16 Financial markets contagion II Several billions dollars were lost by banks because of assets depreciation related to the subprime mortgage crisis.For example:Citigroup (USA) - $24.1 blnMerrill Lynch (USA) - $22.5 blnUBS AG (Switzerland) - $16.7 blnMorgan Stanley (USA) - $10.3Credit Agricole (France) - $4.8 blnHSBC (United Kingdom) - $3.4 blnBank of America (USA) - $5.28 blnCIBC (Canada) – 3.2 blnDeutsche Bank (Germany) - $3.1 bln16
17 Financial markets contagion III Strong fall of the market indexes:- Dow Jones: points to the 19/07/2007 againstpoints to the 16/10/2007.Now: 9,712.7- CAC 40:6 125 points to the 16/07/2007 compared with tothe 16/08/2007.Now: 3600
19 worldwide scale contagion: 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
20 Real economy contagion Decrease of credits given to companies of householders Consumption, Investment and GDP slowed down RecessionRisky householders became more and more vulnerable ( in August 2007) Devalorization of real estate patrimony. Same impact on GDP.The decrease of real estate prices slows down the industry activity.
23 Bankruptcies & Unemployment. IMPACT OF THE CRISISBankruptcies & Unemployment.
24 Impact of the crisis I Financial Institutions – Bankruptcy New Century Financial (USA)– Apr. 2, 2007American Home Mortgage (USA) – Aug. 6, 2007Sentinel management Group (USA) – Aug. 17, 2007Ameriquest (USA) – Aug. 31, 2007NetBank (USA) – Sept. 30, 2007Terra Securities (Norway) – Nov. 28, 2007American Freedom Mortgage Inc. (USA) – Jan. 30, 2007
25 Impact of the crisis II3 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.
26 CONCLUSION Two million families will be evicted from their homes Finance lost 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 billion dollars 600 dollars/ Person
27 THANK YOU FOR YOUR ATTENTION By ANGELIER Damien & SERRAT LéoVideo : explained by Damien & Léo.Directed by George LUCASStaring : Steven SPIELBERG.