Sub Prime Crisis Ver 2.0

7/30/2019 Sub Prime Crisis Ver 2.0

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Group:

Puneet Singh Putiani

Sneha Choodamani

Sachin Jain

Shraddha Master

Nikit Shah

Impact of

Sub-Prime Crisis on the World FinancialMarket and IndiaWith causes of Subprime, Economy, Stock Markets, Forex, Debt and Industries


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September 7, 2008:Federal takeover of Fannie

Mae and Freddie Mac

September 14, 2008:Merrill Lynch sold to Bank ofAmerica amidst fears of aliquidity crisis and Lehman

Brothers collapse September 15, 2008:Lehman Brothers files for

bankruptcy protection

September 16, 2008:Moody's and Standard andPoor's downgrade ratings

on AIG's credit on concernsover continuing losses to

mortgage-backed securities,sending the company into

fears of insolvency.

September 17, 2008:The US Federal Reserve

loans $85 billion toAmerican International

Group (AIG) to avoid

bankruptcy.

September 19, 2008:Paulson financial rescue

plan unveiled after a volatileweek in stock and debt

markets.

September 25, 2008:Washington Mutual wasseized by the Federal

Deposit InsuranceCorporation, and its banking

assets were sold to JPMorgan Chase for $1.9bn.

September 29, 2008:The House rejected bail-out

bill, DJIA down 7%October 3,2008: The

House pass the bail out bill

Sep-08 Sep-08 Sep-08 Sep-08 Sep-08 Oct-08

Subprime Mortgage Crisis - "Red September"


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Outline of the Presentation

About Subprime CrisisBy Puneet Singh Putiani

Impact of Subprime Crisis - Indian Economy & USA EconomyBy Sneha Choodamani

Impact of Subprime Crisis Indian IndustriesBy Sachin Jain

Impact of Subprime Crisis Equity Markets & LiquidityBy Shraddha Master

Impact of Subprime Crisis Indian & USA Forex MarketsBy Nikit Shah


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The mayhem caused by sub-prime primarily in U.S. then

the rest of the world in 2008 is named as Subprime Crisis.

This crisis brought the world to the doorstep of financial

doom.

It started in U.S. and spread within few days to the rest of

the world.

It was related to American housing loan.

The housing loans provided to people with low income andless creditworthiness which was the negative part of this

loan structure.

What is Subprime Crisis?? - Meaning


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The main reason for the financial crisis were sub-prime

loans.

Sub-prime or mortgage loans are the loans provided to

people with less creditworthiness or low income.

The loans were given so as to have their dream of their own

house fulfilled as everyone couldnt afford one.

The lending institutions took loan from bank dividing these

into small portions providing loans to people with abovecriteria at higher interest rates.

They had two advantages: firstly they hedged their bets,

secondly they securitized these loans which paid them a

fixed rate of interest.

Main reason for sub-prime crisis..


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The main investors which took interest in investing in this

sub-prime or mortgage loans were the leading investment

banks, lending and financial institutions like Lehman

brothers and Morgan Stanley.

Other culprit were lenders, central banks and financial

institutions which provided loans.

The list also includes credit rating agencies, underwriters of

CDOs and mortgage and asset backed securities.

Lastly the blame goes to hedge fund industry. Overall it was

a mix up fault of investors and participants.

Main Investors


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Sub Prime Mortgage Originations

Figure: 1Note: The data presented herein are believed to be reliable but have not been

independently verified. Any such information may be incomplete or condensed.


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Sub Prime Mortgage Originations

Figure: 1Image courtesy Hammond Associates. The data presented herein are believed to

be reliable but have not been independently verified. Any such information may

be incomplete or condensed.


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1. Increase in banking rates To control inflation they cut

their lending and policy rates.

2. FII pulled out their huge amount of money leaving investor

with bear market and stock fall.

3. Backing of FDI US has 17.08% of FDI in India in almost

every sector whereas in banking sector they have 49% of

FDI. When US lost their income they pulled out money.

4.

Exports to India from US reduced which included variousmetals also which affected many sectors.

5. Panicking environment Investors lost their faith and

hope in market.

Effect of sub-prime on Indian market


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Impact of Subprime Crisis - Indian Economy & USAEconomy

By Sneha Choodamani

Impact of Subprime Crisis

Indian IndustriesBy Sachin Jain




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ECONOMY United States v/s Indian GDP Growth Rate

It all started in 2007, US GDP has

shown negative growth rate starting

from start of Sep 2008 till date.


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ECONOMY United States v/s Indian GDP Per Capita(Purchasing Power Parity)


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ECONOMY United States v/s Indian Inflation Rate


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ECONOMY United States v/s Indian IIP Numbers


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ECONOMY United States v/s Indian MORE Indicators

Existing Housing Sales

Housing Sales & InventoriesHousing Structure

HomeOwner Vacancy Rate


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ECONOMY United States v/s Indian MORE Indicators

FED, PRIME & DISCOUNT

Vehicles Miles DrivenUS Vehicle Sales

Job Less Claims


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Impact of Subprime Crisis Indian Industries

By Sachin Jain




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Sub prime impact on Indian Industries

US sub-prime crisis started hitting Indian market like Banks, Financial services, Real Estate, Infrastructure, Information

Technology, Auto.

Banks in India

India largest private sector bankICICI Bank was the 1st bank to announce a loss of Rs 10.56 billion.

Public sector Banks like Punjab National Bank, Bank of India, State Bank of India, Bank of Baroda were the majorBank of India were having an exposure to the instruments issued by

Lehman Brothers and Merrill Lynch.

Punjab National Bank reported total exposure of $5 million,

expected loss of $2 million.

Bank of India reported total exposure of $11 million,


State Bank of India reported total exposure of $5 million,

expected loss of $3.5 million.

Bank of Baroda reported total exposure of $10 million,


Banking sector have to face tight liquidity condition a part form mark-to-market losses.


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Future growth prospects of Indian Banks

The Banks are expected slow and stable growth due to limited impact from exposures, the profitabilitymay see lower growth on account of rising cost of funds and lower credit growth.

Tight liquidity continuous, may impact bond portfolio of the banks.Banks need to avoid high NPA and low Capital Adequacy Ratio.

Financial servicesFinancial institution were most impacted on account ofglobal uncertainty.

Broking firms have been seeing low volumes with investorspooling hands to invest in stock market.

This effect on revenue streams of insurance companies and

AMCs, that would have limited impact based on their boundportfolios.

Financial institutions need to avoid less diversified businessfor some time.

Global banks and Brokerage firm, an estimated amount $512billion in Sub-prime losses. Where largest hits taken by,

Citigroup $55.1 bn and Merrill Lynch $ 52.2 bn.


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An sudden collapse of world leading financial houses, the Indian real estate players whowere already facing a problem like

RBI increased the interest rates to contain inflation. RBI put the restriction on Indian banks to finance real estate companies in the country. lack of funds due economic slowdown. correction in stock prices, would find it difficult to raise a funds.

Among the US financial houses - Lehman Brothers was very bullish on Indian Reality Sectorand had

an investment in excess of US $700 million (Maximum amongst peers).

Lehmans PE investments in India:Amt (US $ Mn) Year

Hyderabad IT park project of peninsula. 12.5 2008

Unitechs Mumbai Pune Expressway. 175 2008

Hotel project of Future Capital. 200 2007

Realty companies having direct exposure of sunked financial institution like Lehmanbrothers faced

selling pressure.

INDUSTRY REAL ESTATE


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Infrastructure companies were adversely impact, specially their financial positionswas disturbed which were in growth stage.

Companies who raised money through IPO many have gone in for QIP issues withthe financial majors across the world.

Growth declined from 5.2% June, 07 to 3.4% June, 08.

Information Technology

Subprime crisis had limited impact on IT companies, growth will happen but at 22 23 % it will be lower than in the last two three years.

IT - enabled services (ITES) such as (BPO) comprising voice and data processeshad an impact on their businesses.

Impact on revenue for two-three quarters from financial sector clients, conservativespending from clients on new projects and delay expansion.

INDUSTRY INFRASTRUCTURE


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IT companies with USA clients and Banking Financial Services and Insurance (BFSI) as biggestrevenue earners, yet in sub-prime crisis still these companies are the safest bet.

Companies having significant non USA focus eg: Educomp having 13% outside India revenue.This company is in safest bet.

IT companies are focused on profitability and growth and have continues revenue visibility.However this growth are for long term at least for 2 3 years.

Automobiles

Credit crunch event from US to India, auto sales were impact due to tougher credit availability,

higher interest rates and higher fuel prices.

Two wheelers had decent growth in last 2 months, over all 2% drop in tow wheelers sales,more due to low base effect.

Exports of top-line auto companies might not have significant impact, as the percentagecontribution of sales form export is less form Indian auto.

Over all auto industries sales fell 4% as compared to last years growth of 13.5%.

INDUSTRY GROWTH & PROFITABILITY


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By Sachin Jain




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Impact on USA

Dow Jones Industrial Average hit a record high, closing above 14,000 for the first

time. By August 15, the Dow had dropped below 13,000 and the S&P 500 had

crossed into negative territory year-to-date. Similar drops occurred in virtually every

market in the world, with Brazil and Korea being hard-hit. Large daily drops became

common, with, for example, the KOSPI dropping about 7% in one day, although

largest daily drop by the S&P 500 in the U.S. was in February, a result of the

subprime crisis.


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Domino Effect across the World

The world market capitalization had fallen by 20% since March 2007 and by 31%

since December 2007. Year to date, the Indian and Chinese markets have been the

worst performers amongst the larger indices


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Domino Effect in India

FII investments increased in most of

2007 in a booming Indian economy, as

the Sensex was on its way to a historic

peak of over 20,000 points

Since the inflow of dollars in the Indian

economy increased, the dollar

exchange rate decreased

In 2008, however, due to the effect of

the sub prime crisis, FIIs liquidated their

equity investments in a big way

leading to a crash in the stock markets

Simultaneously international commodity

prices, including oil prices, were on a

rise due increasing demand for these

commodities

The combined effect resulted in an

increase in the dollar exchange rate


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Journey of Sensex from 20,000 to 8,000


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By Sachin Jain




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FOREX - Introduction

Falling exchange rate directly impacts the real trade

flows and foreign currency capital flows and its

expectations

The RBI uses interest rate measure to control the

exchange rate, in times of extreme volatility in the

exchange rate


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FOREX United States v/s Indian Exports


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FOREX United States v/s Indian Imports


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FOREX United States v/s Indian Exchange Rate and Reserve

42.01

50

42.08

43.28

45.61

47.5348.27

45.83

44.8444.13

39.97

38.5

40.5

42.5

44.5

46.5

48.5

50.5

52.5

1998-

99

1999-

00

2000-

01

2001-

02

2002-

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2003-

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2004-

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2005-

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Mar-08 May-

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Feb-09

EXCHANGE RATE(against Dollar)

India

USA


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FOREX United States v/s Indian Fiscal Deficit


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CONCLUDINGREMARKS

Indeed, the worst of recession may be over but the U.S. economy is far from a

sustainable recovery. In fact, most of the improvement in consumption and housing

market has been coming from the government pumping money in the economy. For

example, consumers this quarter have benefited from the cash-for-clunkers plan

and extended jobless benefits aimed at stimulating spending, which accounts for 70

percent of the economy. Also, government stimulus efforts and low interest rates

have made homes more affordable to first-time buyers, spurring increases in sales inJuly.

But will the US economic recovery be sustainable when the effect of stimulus

package fades? Probably not. After all, we cant forget the fiscal stimulus comes with

a massive fiscal deficit. So the government needs to find money to finance the gap

and it may need to sell more government bonds to pay for interest of bonds sold inthe past to bailout major financial instructions which are now making billions of

dollars in profits. Moreover, the Obama administration may need to increase taxes or

not extend previous administration tax cuts engendering available income and

consumer spending.

Sub Prime Crisis Ver 2.0

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