Role of loans in the global financial crisis o

Role of loans in the global financial crisis of 2007-08Presented by:Hina YunusMoeed Sadiq

IntroductionIn this presentation we will talk about the global financial crises of 2007-08 and the role of loans in it.This financial crises started out from America and spread around the globe.It is considered the worst crisis after the Great Depression of 1930s.Its main cause is the combination of debt and mortgage-backed assets.HistorySince the end of WW2 the prices of houses have been increasing steadily in U.S.In the 1980s financial institutions and traders realized that US mortgages were a previously untapped asset. Traders at Salomon Brothers and Drexel Burnham Lambert were looking to expand the bond market and they discovered that the steady stream of payments from US mortgages could be restructured into bonds and then sold off to investors.HistoryIn the late 1990s and early 2000s, there was an explosion in the issuance of bonds backed by mortgages, also known as mortgage-backed securities (MBSs). The reason for this was the use of securitization. In brief, securitization is the pooling of debt and then issuing assets based upon that debt.Investment banks were buying mortgages from mortgage issuers, repackaging them and then selling off specific tranches of the debt to investors. As time went on, there were less and less new mortgages to securitize so the structured products groups at banks started repackingMBSs i.e. taking the unsellable tranches of lots ofMBSs, repackaging them and then selling the new product called collateralized debt obligations or CDOs.HistoryTaxpayers relief Act of 1997

Starting Point

The housing bubble burst. (U.S sub-prime mortgage crisis)

What is sub-prime lending?Subprime lending means giving loans to people who may have difficulty in maintaining the repayment schedule. Causes of crisisImpacts of Subprime crisisMajor banks suffered from huge losses.Lehman brothers went out of business.Merill Lynch had to sell itself to 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 nationalised AIG by becoming 80% shareholder.Financial Institutions---BankruptcyNew Century FinancialAmerican Home MortgageSentinel management GroupAmeriquestNetBankTerra SecuritiesAmerican Freedom Mortgage Inc.Financial Institutions---Write-downsCitigroupMerrill LynchUBS AGMorgan StanleyCredit AgricoleHSBCBank of AmericaCIBCDeutsche Bank

The total write downs and losses were around $300-$350 billion.Domino effect

Deflationary SpiralGlobal saving glut

Mexico in 1994, Asia in 19971998, Russia in 1998, Brazil in 1999, and Argentina in 2002 faced economic crisis. The result was a sharp decline in lending from the rest of the world, steep falls in the value of their currencies and stock markets, and significant recessions. After the crises, these countries increased their saving substantially and became large lenders to the rest of the world especially to the United States.Sub prime lending And increase in interest rates

Super Power StatusThis crisis made a question mark on the super power status of U.S.Global Impacts of the crisisInvestors lost confidence in the stock market.Consumer spending slowed down due to lack of cash.USAs economic condition affected the global economy.World economy slipped into recession.Exports decreased.