pictorial representation of sub prime crisis. How sub prime crisis happened. Simple and easily understood way. Investment banking,motgages,how it backfired,snapshot of subprime crisis 2008,explanation of subprime crisis,.Why real estate sector lost its boom in US.
Solution Manual for Financial Accounting, 11th Edition by Robert Libby, Patri...
Subprime Crisis 2008
1. SUB PRIME CRISIS 2008
P BHASKARRAKESH
INVESTORShave huge money => theywantto invest=> safe betwithAAA creditratingis US
FED treasurybills=> but FED isgivingonly1 % return=> sotheydidn’tinvested
Banks/Financial Institutions => borrowedmoneyfor1 % interestrate => gave house loans
to people asreal estate sectorisbooming.
NowInvestmentbanksthoughtof makingthe investorsbe partof thisby givinghigher
returns(4% - 10%)
Mortgage lendersthroughmortgage brokersIdentifiedPrimeMortgagersandgave loansto
them,bykeepinghouse documentsassecurity.Primemortgagerswill paymonthlyinterests
and principal amount.
Nowinvestmentbankersboughtthose mortgagesfrommortgage lenderandcreateda new
financial instrumentscalledCDO.
Investmentbankersmade 3typesof bondsbasingonrisk=> investorsboughtthose bonds
thinkingthattheyare gettinghighinterestrates.
2. Everythingwentfine and investorsasked formore bonds=>investmentbankersaskedfor
more mortgagesfrommortgage lenders.
TURNING POINT
Mortgage lendersgave loansto subprime mortgagers(those whohave bad credithistory)
thinkingthatevenif theydefault,theycansell theirhouse andmake money.
So the chaincontinued….
As expected subprimemortgagersdefaulted=>more and more defaulted=>suddenly
because of oversupplyhouse ratescame down=> supplyismore anddemandisless
Investorsdidn’twanttobuythese bondsasreal estate sectorcrashed.
But alreadyinvestmentbankersboughtthousands of these mortgages =>no one in the
marketreadyto buy this=> sothese investmentbankerscouldn’tpayinterestratesto
investorsforbondsthattheyissued.
Real estate sectorcrashed=> Investorsgothuge loss=> investingbankswentbankrupt =>
RESULTED IN SUBPRIME CRISIS