A Study on Subprime Mortgage Crisis

A Study on Subprime
Mortgage Crisis
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ACKNOWLEDGMENT
This research study has been an enlightening journey for me throughout. It would not
have been completed without the support of my mentor, family members, relatives and friends. A
big vote of thanks to all of them.
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Abstract
Subprime mortgage crisis has a huge impact on the global economic condition in the
year 2008-2009. Major countries such as U.S., UK, etc were affected by the crisis. There were
many banking and investment firms like Lehman Brothers, Merrill Lynch, Goldman Sachs and
Morgan Stanley which suffered with a huge loss and this has resulted in selling their physical
assets to repay the debt. However, many economists of the world blames credit rating agencies of
United States for emergence of subprime mortgage crisis as they highly rated Mortgage Backed
Securities without any proper evaluation that whether it is given to prime and sub-prime
customers or not. The major purpose of this research work is to examine whether it is fair and
justifiable to blame the credit rating agencies for the emergence of subprime mortgage crisis ?.
For that purpose primary data has been collected from 0different categories of people (50)
associated with the stock market. For data evaluation SPSS software has been used. The study
has concluded that credit rating agencies can be blamed equally along with other aspects for sub
prime mortgage crisis.
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Table of Contents
CHAPTER-1 INTRODUCTION.........................................................................................................2
CHAPTER-2 LITERATURE REVIEW...............................................................................................5
2.1 Introduction............................................................................................................................5
2.2 Evolution of Subprime mortgage crisis.................................................................................5
2.3 Types of financial crisis.........................................................................................................6
2.4 Impact of Subprime mortgage crisis on US, UK and overall on global economy................8
2.5 Decrease in Stock Market Index of US and other countries of the world.............................9
2.6 Factors responsible for subprime crisis...............................................................................10
2.7 Industries affected by the financial crisis.............................................................................12
CHAPTER- 3 RESEARCH METHODOLOGY................................................................................14
3.1 Introduction..........................................................................................................................14
3.2 Research philosophy............................................................................................................14
3.3 Research approach...............................................................................................................15
3.4 Research type.......................................................................................................................15
3.5 Research design...................................................................................................................15
3.6 Data collection.....................................................................................................................16
3.7 Accessibility issues..............................................................................................................16
3.8 Sampling and sample size....................................................................................................16
3.9 Data analysis........................................................................................................................17
3.10 Research limitations...........................................................................................................17
CHAPTER- 4 DATAANALYSIS......................................................................................................18
CHAPTER- 5 CONCLUSION...........................................................................................................37
REFERENCES...................................................................................................................................39
APPENDIX........................................................................................................................................42
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CHAPTER-1 INTRODUCTION
Subprime mortgage crisis which still has its impact on the global economic condition as
huge global capital market valuation was lost in the year 2008-2009 due to this crisis which
erupted from United States and led its impact on the economic conditions of all countries
(Crandall, 2008). Majorly, the subprime mortgage crisis has made significant negative impact on
the economy condition of United States, United Kingdom, European countries as well as in
Asian countries. The subprime mortgage crisis has taken its shape from the year 2006 when the
well known investing firms of United States ease their lending norms for providing loan to sub-
prime customer (low income group people) for buying real estate property.
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The particular decision was taken with the thought that prices of real estate property rises
continuously which will enable them to earn more revenues (Demyanyk and Hemert, 2008). Till
the year ending 2006, the housing and real estate market grew but eventually after the year 2006,
it started depleting because the interest rates of mortgages are increased which make the things
difficult for subprime customers to repay the loan installment amount and because of that reason,
they started selling homes. However, the increase in supply of homes decreased the prices of
homes severely which did not bring enough money to the subprime customer to repay the
mortgage loans and because of that reason, they made defaults in repayments loans. Now, as the
prices of homes already decreased in the market and demand was also depleted to the major
extent, banks could were not able to raise money from the auctioning process. This has resulted
in increasing the non-performing assets and debts of investment banks which they could not able
to recover from the market. This led investors and banks to bear huge financial loss which
ultimately wipe out 50% value in the capital market as investors started losing hopes from the
banking and financial institution. The particular crisis brought slowdown in the economic growth
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is such a way that many countries are still struggling in reviving the economic and financial
condition (Calomiris, 2011). The major effects which subprime mortgage crisis brought on
economic condition of US and UK are decreasing the purchasing power of consumers, high
unemployment, shortfall of money supply in the economy, high debts of banks, insolvency,
increase in non-performing assets, decrease in value of equity, fall in currency value in foreign
exchange currency market and falling of demand of real estate. In addition to this, banking
sectors, financial institutions and real estate firms suffered with a major loss (Gerardi and et.al.,
2007).
There were many banking and investment firms like Lehman Brothers, Merrill Lynch,
Goldman Sachs and Morgan Stanley which suffered with a huge loss and this has resulted in
selling their physical assets to repay the debt. Moreover, the financial service firm Lehman
Brother declared itself as bankrupt as it did not have money to repay its debts (Lehman Brother,
2008). Till the year 2008, the entity was known to be as 4th
largest investment banking firm in
United States but when the subprime mortgage crisis raised in United States, the firm filed the
Chapter 11 bankruptcy protection as most of its clients declared themselves as insolvent which
increased the assets' loss of firm (Lehman Brother, 2008). Many economist says, the main reason
for which subprime crisis emerged was because of blind financial practices of financial
institution and investment banking firms like Lehman Brothers and Merrill Lynch which gave
loans for housing to subprime customers who were not having good credit worthiness and
financial track record with regard to repayment of loan (Demyanyk and Hemert, 2008).
However, many economists of the world blames credit rating agencies of United States for
emergence of subprime mortgage crisis as they gave high ratings to Mortgage Backed Securities
without any proper evaluation that whether it is given to prime and sub-prime customers or not.
Due to inappropriate ratings, investment banks sold the Mortgage backed securities to the
investors who were not known about to whom the loan or mortgage had been provided by the
bank (Kulikowski, 2007). Critics said that the credit rating agencies who have the role to give
proper ratings to the firms and their MBS might have adopted faulty practices as they would
have got good commission from the investment banking firms. The author Michael Simkovic
stated in his research paper that credit rating agencies had proper knowledge about the process of
rating of subprime related securities which was inaccurate but they did it to gain monetary
benefits from the investment banking firms (Simkovic, 2011).
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Thus, in the view of this perspective, the present thesis is prepared to get more in-sight
knowledge and information about the happening of 2008 subprime mortgage crisis which led its
severe impact on US, UK and Global economic condition. The main purpose for conducting this
research on the particular topic is to examine whether it is fair and justifiable to blame the credit
rating agencies for the emergence of subprime mortgage crisis which ultimately led to the global
financial crisis . Apart from that, efforts would also be put forward to understand the different
causes for which subprime mortgage and the financial crisis occurred that brought a huge loss of
monetary for the financial institution as well as investors (Tong and Wei, 2008). In the study,
appropriate suggestions and recommendations is also provided with the help of which such type
of crisis or situation can be eliminated and dealt in effective manner. It is true that many studies
have been done in the past with respect to the related topic but the fact should not be ignored that
each study has brought new in-sight information and findings that were related to subprime
mortgage crisis (Crandall, 2008). Thus, in the present study also, considerable efforts are being
imparted to bring constructive information and findings that were related to the subprime
mortgage crisis. Furthermore, the study would provide information and knowledge about if there
is any requirement to revive the responsibilities and accountability of credit rating agencies so
that no such financial crisis would occur in future which has happened in the year 2008
(Demyanyk and Hemert, 2008).
Up to this point, it was detailed about the subprime mortgage crisis and contemporary
nature of the present study. Apart from that, the research objectives or questions which would be
addressed in the current study is also detailed. Now, in the next chapter, review of past literature
is done to understand the findings and conclusions that are related to the research topic which are
drawn by several authors in their studies. Further, review of literature is also done to carefully
examine the viewpoints and opinions of different authors with respect to subprime mortgage
crisis.
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CHAPTER-2 LITERATURE REVIEW
2.1 Introduction
Review of literature is considered to be as important part in a study. In the particular
section, a researcher list out all the past studies related to the topic in order to understand the
findings and conclusions which were drawn previously. In addition, to this a researcher also
undertakes review of literature to understand the view points and opinions of past authors who
had conducted studies related to the topic. Review of past literature helps researcher in
identifying the research gap in the past studies. The identification of research gap leads the action
of researcher towards setting of research objectives for its own study (Kuada, 2012). Thus, by
seeing this importance and significance of literature review in a research, the present study also
attempted a sound review of literature in order to develop comprehensive understanding related
to Subprime mortgage crisis which severely affected the economic condition of all the countries
of the world. In the underneath literature review, efforts has been put to understand the evolution,
causes, impacts of Subprime mortgage crisis (Kim and Kim, 2011). Apart from that it also has
been studied about the policies and practices which were adopted by US and other countries'
government to deal with the particular financial crisis.
2.2 Evolution of Subprime mortgage crisis
The evolution of Subprime mortgage crisis is complex to define as different economist
and authors had given their different statements and definition about the evolution of Subprime
crisis. However, it was understood by getting knowledge and information from the statement of
US President George W. Bush who had given on September 24, 2008 in which the crisis had
already surpassed in worsening the global economic condition in which US and UK economies
were highly affected (Chong, 2011). The US Presided said in his statement that “The problem of
financial crisis which US is witnessing today it is not emerged in a day or in a year but it has
developed over a long period may be more than a decade” (President's Address to the Nation,
2008). “The situation of financial crisis started emerging from the time when the foreign
investors started investing huge amount of money in US banks. In particular time period banks
lending interest rate was also low which made things easier for American to get loans with
utmost ease and convenience.” Mr. Bush further said in his statement that “Easy loan access
along with wrong assumption about increment in the values of mortgage home loan created the
situation of bad decision from the side of banks, investors, rating agencies and American citizen
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too (Chihi, Selmi and Boujelbene, 2012). Further, former US President George Bush also
admitted that there were many mortgage home lenders who sanctioned the loans to the customers
without doing any proper credit worthiness analysis and their abilities to repay the amount.
Several economists stated in their research papers on the topic Subprime mortgage crisis that
banks gave loans to Subprime American with a view that the value of mortgage home would
increase in the future (Record stock market falls in 2008, 2008). On the other hand the people
who took loan for buying of home with the assumption that they would sell the home in future on
higher price and repay the loan amount to the banks on which they would also earn a good
margin but all things went futile as the complete assumption and process of secularization of
securities backed by mortgage home loans were wrong or baseless from the side of lenders or
financial institutions who were involved in that (Goda and Lysandrou, 2014).
The author Demyanyk (2009) said in his study that there were also involvement of some
credit rating agencies in the happening of Subprime mortgage crisis as they gave high and safe
ratings to the mortgage backed securities which were being allotted to Subprime customers.
Thus, they didn't give high risky or negative grading to such securities due the assumption that
the prices of home would continue rising in future which was completely vague (Demyanyk,
2009). On the other hand, the Amadeo (2015) said in his study that the evolution of Subprime
crisis started after the year 1998 in which people were having high tends towards investing in
real estate over stock market as they were getting high returns (Amadeo, 2015). This tend or high
demand of people towards real estate or housing increased the prices of housing and real estate.
The author Shirai (2009) further said the particular trend continued till the year 2006 as during
the period the banks lending rate was also low. However, after the year 2006 banks increased
their lending with a view that the interest rate would be the same in coming future and the prices
of real estate would also grow as it has been increasing for last 8 to 9 years (Shirai, 2009).
However, things went in other way as Federal Reserve increased the lending rates to curb excess
credit money supply in the economy and then things started ruining as people couldn't repay the
increased loan installment amount which ultimately heighten-up the non performing assets of
banks and their debt obligation to investors (Tong and Wei, 2008).
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2.3 Types of financial crisis
Global financial system is the most integral component of the world. The capital markets
all over the globe are witnessing a high level of depression because of arising of bankruptcy
threats from highly capitalized stocks. Global financial crisis began initially is now regarded as
global economic crisis (Barangayrp, 2008). The destruction in the global demand leads to a
massive job crisis. Different types of financial crisis have become a sign of concern for country,
economists, political leaders, managers, companies etc.
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Many financial institutions are having the bad taste of it. Due to crisis all economies around the
globe have been affected adversely (Bulow, Geanakoplos, and Klemperer, 1985). It is also
affecting the purchasing power of individuals and life style patterns all over the world are
changing. Before taking the study further, it is imperative to identify what type of financial crisis
can have an impact on economy. So different types of financial crisis which can occur in the
economy are as follows:
Banking crises - When a bank faces a condition under which depositors performs the action of
withdrawal, this is called bank run (Chari and Kehoe 2004). Generally banks lends all the
money which they receive in deposits hence it is difficult for them to pay back all deposits on
immediate basis. Bank may come under the situation of bankruptcy, resulting in loose of money
for all depositors unless they are covered by deposit insurance. Condition under which bank runs
are widespread is regarded as systematic banking crisis (Eichengreen, 2004). Sometimes in the
absence of ban run also, banks are forced to lend because they concern that they have insufficient
funds available. This phenomenon is called credit crunch.
Speculative bubbles & crashes – Financial asset such as stock, displays a strategy or a bubble,
when its price exceeds the present value of the future income. Most of the market participants
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buys assets in the expectation that they will sell it later at higher price (Kindleberger and Aliber
2005). Instead of buying it for the income it will generate this could be confirmation that there is
a presence of bubble. There is also a risk of crash in asset prices in case if there is bubble. Market
participants will choose to buy only if they see others also buying and when they decide to sell
the price falls (Laeven and Valencia 2008). Although it is difficult to say that whether prices of
an asset actually equal its fundamental value, hence it is also difficult to identify reliable bubbles.
International financial crisis – The situation under which a nation who maintains fixed
exchange rate, is forced to decrease the value of its currency due to a speculative attack, it is
knows as currency crisis (Naija, 2009). Sovereign default is another type of international
financial crisis under which a country is incapable of paying its sovereign debt. Devaluation and
default could be identified as voluntary decisions of the government and often taken as
involuntary results of a change in investor sentiment. It leads to decrease in capital inflows and
increase in capital flight (Nwachukwu, 2009).
Wider economic crisis – There are wider economic crisis also such as recession, stagnation, etc.
When a country suffers from negative Gross Domestic Product for two or more quarters is
known as recession (Ryan, 2008). A very lengthy period of recession is called a depression and a
long period of negative growth is known as economic stagnation. These aspects impact much
more than the financial system, hence they are not usually regarded as financial crisis (Dooley
and Hutchison, 2009). Some of the economists have argued that many recessions have been
caused in large part because of financial crises.
2.4 Impact of Subprime mortgage crisis on US, UK and overall on global economy
The severe impact of Subprime mortgage crisis had upturned every aspect or elements of
US and global economy. There was no stones which were not turned by Subprime mortgage
crisis. The study of the author Simkovic (2011) reveals that Subprime mortgage crisis hugely
affected the stock market which demonstrates the economic condition of a country. The
particular crisis had steeply deepened down the market valuation of equity market of US, UK
and other countries like India. Further, in this regard the author stated that the Subprime crisis
affected the economies of those countries which were highly dependent or related to US. In other
words, the economies of that countries were highly affected which were having huge volume of
international trade with US (Simkovic, 2011).
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In the year 2007, a study was published in which the author Gerardi and et.al. stated that
Subprime mortgage crisis taken the jobs of millions of Americans and the people of other
nationals from the countries United Kingdom, Italy, Philippines and India (Gerardi and et.al.,
2007). The author Crandall (2008) said the people who were doing outsourcing work of US
companies became unemployed for long period. Nonetheless, the unemployment risen not only
with respect to outsourcing companies but also with all the companies. In the study, it was also
concluded that the Subprime mortgage crisis taken the inflation on surge in US which decreased
the purchasing power of consumers as the prices of products started increasing due to rise in
interest rate (Crandall, 2008). The author Calomiris (2011) said after the crisis, it was become
very difficult for the American to earn and live their livelihood.
The study of the author Goda and Lysandrou (2014) gives evidence that many cases
related to suicides and attempt of suicide by equity investors came in light due to Subprime
mortgage crisis. The suicide cases increased among the investors who lost major proportion of
their chunk amount in US (NASDAQ) and Indian (BSE and NSE) stock markets. Further, the
study also found that the people who invested large portion of their surplus fund in mutual funds
also incurred huge financial loss as they could not get any capitalization on their amount invested
(Goda and Lysandrou, 2014).
According to the author Chihi Selmi and Boujelbene (2012) the Subprime mortgage
crisis had increased the risks like credit risk, liquidity risk, systematic risk, counter party risk,
asset price risk which brought significant negative effect in the market as well as in the
sentiments of investors (Chihi Selmi and Boujelbene, 2012). This negative impact had left long
negative impression in the minds of investors and because of that reason investors becomes more
risk averse in investing their surplus fund in equity market. In the year 2009, the author Shirai
conducted a study on “ The impact of Us Subprime Mortgage Crisis on the World and Asia”. In
the particular study, the author identified number of impacts by analyzing the movements cross-
border capital market. The author stated in the study that the main reason for which the 2008
recession came and hit the global market was because of Subprime mortgage crisis in which the
banks like Lehman Brother become bankrupt (Shirai, 2009). The author further concluded in his
study that the particular crisis had severely hit the exchange rates, GDP and international trade
i.e. imports and exports of most of the countries. The study of author Kim and Kim (2011) gave
sound evidence that the Subprime mortgage crisis, decreased the world stock market by almost
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50%. According to the reports, the global economy approximately lost 30 trillion wealth due to
the recession which came due to Subprime mortgage crisis (Kim and Kim, 2011). On the
contrast, the study of the author Goodhart and Lim (2011). laid down the fact that the Subprime
mortgage crisis made very difficult situation for the large as well as small and medium
organization to borrow money on debt from banks or to take money from the investors or
shareholders or angel investors (Goodhart and Lim ,2011). Apart from this, the 2010 report of
Federal Reserve published the information that the figure foreclosure has not been decreasing
even after the passing of 2 years of happening of Subprime mortgage crisis. In the report, it was
included that people who got mortgage loan for buying of home are continuously losing their
homes since Subprime crisis. The report gave information that in the year 2.25 million
foreclosure occurred which would be the same in the year 2011 and 2012 (Calomiris, 2011).
Thus, the report concluded that it become serious concern for the American government as large
number of people has lost their homes which is their main asset to live their life (Independent
Foreclosure Review, 2015).
2.5 Decrease in Stock Market Index of US and other countries of the world
In the year end 2008, BBC News reported news that 2008 was the year in which record
stock market fall was seen due to recession which was backed by Subprime mortgage crisis. In
the published article it was reported that the 2008 was the year in which the all the countries saw
huge financial turmoil and economic slow down as stock markets were being hit severely due to
financial crisis. In the article, it was reported that the FTSE 100 Index of Britain recorded 31.3%
steep fall down and the same thing was seen in the stock index of Paris and Frankfurt. Further, it
was identified that the stock market of Shanghai was among the list of countries whose stock
market crashed in severe manner (BBC News, 2008). The published information revealed that
the Shanghai Stock Market of China deepen down by 65% which was the highest loss in
Shanghai Stock Market. The Shangai Stock Market lost almost $3 trillion due to 2007-08
financial crisis. In addition to this, the Dow Jones of New York fell by almost 34% in the year
2008 due to financial crisis that occurred due to Subprime mortgage crisis of US. Several
economists said that this was the highest fall in down in Dow Jones after the year 1931. The
Japan stock market index, Nikkei dropped by almost 42% that means 42% of the market
valuation of equity shares of Japanese companies erased due to recession which was backed by
Subprime mortgage crisis ((BBC News, 2008). From the secondary information available on
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Trading economic website, it was identified that the stock market of India i.e. BSE SENSEX and
NSE NIFTY also decreased by almost 50%. In the beginning of the year 2007, the SENSEX was
stand above 20000 points but in the mid of year 2008 the stock index slipped below 10000
points. Moreover, in the beginning of the year 2009 it touched 7500 points. Thus, the Indian
stock market also severely affected due to the impact of US Subprime mortgage crisis which
created recession in the global economy. Above the all, the NASDAQ stock market of US, was at
14000 points in the beginning of the year 2007 which slipped to 6400 points in the first quarter
of the year 2009 (Trading Economic, 2015). Thus, by seeing this data, it can be anticipated that
at what extreme level the Subprime mortgage crisis had affected the stock market of different
countries which ultimately reflected their worsen economic condition.
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2.6 Factors responsible for subprime crisis
If something bad like subprime crisis happens, it does not take too long to identify who is
to blame for it. In the above crisis, there was not any single individual or entity on which the
blame can be put on (Dick-Nielsen, Feldhütter and Lando 2012). So there can be many factors
responsible for such type of financial crisis, these can be explained as follows:
The lenders - Mortgage originators that are the lenders can be highly accused for creating such
type of issues. It was the lenders who granted money to people having poor credit and a high risk
of default. Interest’s rates became low, when central banks filled the market with high capital
liquidity (Eichengreen, Mody Nedeljkovic and Sarno 2012). It also broadly depressed risk
premiums as investors sought riskier opportunities to reinforce their investment returns. At that
moment lenders feel that they have got ample of capital to lend and there was an increased desire
to undertake additional risk to enhance their investment returns. For the protection of lenders,
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demand for mortgages was increased and further housing prices were increasing because there
was an substantial drop in interest rates (Gerardi, Lehnert, Sherlund and Willen, 2008). Hence
lenders identify subprime mortgages with low amount of risk. Under it, the rates were low, the
economy was healthy and people were making their payments.
Homebuyers – Along with the lenders, category of home buyers can also be accused for crisis.
Many of them were confronting with high amount of risks by purchasing expensive houses
which are not affordable (Santos, 2010). These purchase deals were happening on the basis of
non-traditional mortgages that rendered low introductory rates and minimum initial costs such as
“no down payment”. They were eagerly waiting for price appreciation which could have given
them the benefit of refinancing at lower rates and withdraw the equity from home for use in other
spending (Phillips and Yu ,2011). Although all happened completely opposite of that which was
expected. Despite of continued appreciation, the prices dropped rapidly damaging the bubble of
housing for home buyers. Leading to that, many homeowners prove to be incapable of
refinancing their mortgages to lower rates, when their mortgages reset.
This is because no equity was being created because of the price fall (Acharya and
Merrouche 2012). Hence they have to reset their mortgage ate higher rates in deliberate manner,
which was not affordable for many. Many homeowners were simple forces to default on their
mortgages. In the desire of catching more subprime borrowers, the mortgage brokers or lenders
may have given the indication that no risk was associated with these mortgages and the cost were
not that high (Hesse, Frank and González-Hermosillo, 2008). Although at the end of day many
subprime borrowers simple assumed that they could not simply afford mortgages. Intensifying
the situation, lenders and investors of securities backed by these defaulting mortgages suffered.
Lenders lost their funds on defaulted mortgages because they remained left with the property
whose values was less than the amount loaned originally (Blackburn, 2008). The losses were
large enough to drive in towards bankruptcy in some cases.
Investment banks – The increased use of secondary mortgage market by lenders increased the
number of subprime loans which lenders could originate. Lenders just simple sell off the
mortgages in the secondary market and collected the originating fees, despite of maintaining the
originated mortgages on their books (Davidson, 2008). This resulted in generation of more
capital for lending and this leads to increase in more liquidity. The snowball started creating
momentum. Creation of assets which combines the mortgages with security, resulted in lot of
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demand for these mortgages. The security was known as collateralized debt obligation
(Ackermann, 2008). In this process investment banks would buy the mortgages from lenders and
securitize these mortgages into bonds which were sold to investors through the mode of CDOs.
Rating agencies - Rating agencies were also held responsible for financial crisis. There was lot
of criticism about rating agencies, underwriters of the CDO and mortgage backed securities that
includes subprime loans in their mortgaged pools (Kregel, 2008). According to the experts these
rating agencies must have predicted the high default rates for subprime borrowers. It is expected
that they should have given lower ratings to these CDOs as compared to “AAA” rating given to
the higher quality tranches. If the rating was done better, less number of investors would have
bought into these securities and the losses would not have been so bad (Barangayrp, 2008).
However some thinks that conflict of interest between rating agencies is the cause behind the
crisis. The argument is that rating agencies were forced to offer better ratings so that they can
continue receive service fees or they run the risk of the underwriter going to a different rating
agency. Nevertheless it is difficult to sell a security in case if it nor rated (Bulow, Geanakoplos
and Klemperer, 1985). No matter what the criticism says about the relationship between
underwriters and rating agencies, the things is they were simply bringing bonds to market on the
basis of market demand.
2.7 Industries affected by the financial crisis
Not only individuals were affected by the subprime crisis but its also affected the firms in
different industries. There was a impact on sales, revenue, profits, productivity etc. Financial
crisis lead to a great impact on different types of business industries.
Automotive industry – The global crisis did not have an impact on automotive markets in
developing countries, except for automotive exporting nations like South Africa, Mexico,
Thailand etc. In the year 2009, automotive production and sales have declined across the board
in Global South (Chari and Kehoe, 2004). The key market turned around in the end of the year.
Firms in the automotive industry responded with traditional crisis management. Government also
launched traditional stimuli packages for that purpose. It affected the manufacturing of auto
mobiles as there was huge decline in number of cars, vehicles etc. It ended the purchasing power
of the consumers (Eichengreen, 2004).
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Impact on insurance sector – Global financial crisis has not had a major impact on the Life
Insurance sector. It is due to complex guidelines framed by IRDA on solvency margins. Further
industry companies have to follow the investment norms (Kindleberger and Aliber 2005).
Domestic life insurers are subjected to solvency needs which stipulate them to hold a minimum
solvency ratio of 150%. It reflects that life insurance companies remain well capitalized at all
point of time.
Aviation industry – There was a fall in demand in Aviation industry. Synergy can be seen
between global economy and demand for air transportation. It is believed that in any economic
downturn civil aviation is the one which will be most suffered (Laeven and Valencia 2008). The
demand for air transport in the industry is of pro-cyclic nature. Further there was reduced
capacity of the firms in the sector. Many of them deferred delivery of new aircraft, undermining
the outlook for production at makers (Naija Lo Wa, 2009).
There was a increase in price of fuel and operating costs. It has significantly impacted the
level of net profit. A fall in the profitability growth of the companies was also noticed. After
that a fall in employment level was also noticed. It was mainly due to factors like outsourcing,
increasing share of LCCs (Low Cost Carriers) etc and due to substitution of technology in labour
activities like ticketing, luggage processing etc (Nwachukwu, 2009). Low Cost Carriers are
described as the airlines which provide no-frills flights for which passengers pay low fares. It is
mainly characterized by low ticket distribution costs, increased aircraft utilization, common fleet
type, use of secondary airports etc (Ryan, 2008).
Information technology – There was a high impact on the information technology sector also.
The financial crisis affected the profits, growth, etc of the industry. There was a decrease in sale
of IT gadgets such as mobile phones, laptops, computers etc (Dooley and Hutchison 2009).
Financial crisis has emptied the pockets of people and people have no money to buy these sort of
things. IT companies which were listed on stock exchange encountered with decrease in the
prices of shares. It was a tough time of information technology sector. Hence it can be said that
subprime crisis hugely impacted the business sectors (Gerardi, Lehnert, Sherlund and Willen
2008).
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CHAPTER- 3 RESEARCH METHODOLOGY
3.1 Introduction
Research methodology gives understanding and knowledge to the user or readers about
the way or manner in which the researcher has conducted the study. In the research methodology
section, a researcher makes attempt to give significant amount of information about the methods
and techniques which he or she has adopted to complete the study in required manner which is
directed towards achievement of research objectives. In the past studies, several authors had said
that a research study would be conceived or seen half or incomplete if the researcher would not
mention or give detail about the research methodology which he or she has used in conducting
the research (Jonker and Pennink, 2010).
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The proper mentioning of research methodology shows the researcher has carried out the study
in proper and defined manner and on the basis of that the outcomes of the study are considered
effectual (Diment, 2012). Thus, by seeing this significance of research methodology in
conducting of a research, thus in the present study proper and accurate research methodology has
been followed to demonstrate the methods and techniques which are used for accomplishing of
the determined research objectives (Forzano, 2011).
3.2 Research philosophy
In the research methodology, the fundamental thing which demonstrated is about the
knowledge and understanding of the researcher about the research topic. This section comes in
research philosophy. Research philosophy depicts the thinking of researcher while carrying out
the study. A researcher adopts research philosophy on the basis of his understanding about the
chosen research topic (Mathur, 2005). If the research has sound knowledge and information
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about the chosen topic then he selects positivism research philosophy whereas when or she
doesn't have enough knowledge and information about the study then the researcher adopts
interpretivisim research philosophy. Several authors says, a researcher selects research
philosophy on the basis of nature and type of the study (Diment, 2012). For example if the study
is of objective in nature then positivism research philosophy is adopted by the researcher and if
the study is of subjective type then interpretivsim research philosophy is considered. The present
study is carried out by following positivism research philosophy as the study is objective in
nature and the researcher was having substantial amount of knowledge and understanding related
to the chosen topic (Kuada, 2012). Here, the knowledge and information about the topic was also
gained by studying past literature which were related to Subprime mortgage crisis. Here, as the
study was of objective type so numerical data was collected and evaluated.
3.3 Research approach
A research approach defines what the researcher wants to do from the study whether he or
she wants to make generalization or to make deduction from the generalization to address or to
apply set theories to the specific thing. There are basically two types of research approach i.e.
inductive and deductive from which a researcher adopts one on the basis of research philosophy
or objective of the study (Goodhart and Lim, 2011). The present is completed by using deductive
research approach. Here, with the help of particular research approach, constructive findings and
conclusion has drawn with respect to the determined research objective about the extent to which
whether it is fair to blame the credit rating agencies for the occurrence of Subprime mortgage
crisis which created severe financial crisis in the world. In the present study, deductive approach
is selected because the numerical data is collected and analysed by using qualitative analysis
technique (Kuada, 2012). Thus, by adopting the particular research approach it would be
concluded that whether it is justifiable to blame credit rating agencies of US for occurrence of
Subprime mortgage crisis. In addition to this, conclusion has also made with regard to whether or
not it is always advisable to blame for the nature of the global financial crisis as it exists today
3.4 Research type
In the above, it was mentioned that positivism and deductive approach has used in the
present study because of objective and quantitative nature of the study. Now, the research type
gives exact information about the type of research. The research types are categorized into two-
quantitative type and qualitative type. The present study can be expressed as quantitative type
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because numerical or quantitative data is collected and analyzed by adopting required techniques
and methods (Jonker and Pennink, 2010). With the help of information about research type in
research methodology chapter, a reader or user instantly gets an idea about the type of study the
researcher has conducted. Academic authors Forzano (2011) says that it is always good to do
quantitative research as it provides sound evidence and justifies the result. Thus, by keeping this
aspect in mind, the study is made by adopting quantitative research type (Forzano (2011).
3.5 Research design
Research design demonstrates the attempts or efforts the researcher has made in finding
of the results and outcomes in align with the research objectives. The selection of research design
for the study shows the structured plan the researcher has adopted in deriving prolific findings
and conclusion related to the study. In other words, through research design, a researcher gives
information about the kind of study it intended to do like exploration, evaluation, explanation,
prediction etc. The broad classification of research design is done into three: exploratory research
design, descriptive research design and casual relationship research design. The present study is
conducted by adopting exploratory research design (Mathur, 2005). The particular research
design is selected because in the study quantitative analysis of numerical data has been done. The
other reason of selecting exploratory research design is that here it would be determined whether
it is fair to blame credit rating agencies of US for the 2008 financial crisis. In addition, by using
the particular research design various factors and variables would be identified that led to the
creation of Subprime mortgage crisis which ultimately brought severe financial crisis or
recession in the economy.
3.6 Data collection
Data collection is the most imperative part of the dissertation. It is a very sensitive part
hence it has to be handled with care. It is very important that data is to be collected from valid
and authentic sources (Creswell, 2013). It is evident that there are two types of data primary data
and secondary data. Primary data is collected for the first time and is very fresh & new in nature.
This type of data becomes secondary on getting used once by someone (Diment, 2012).
For this research study, primary data has been collected from investors, bank employees,
credit rating agencies employees, insurance firms, investment bankers. It has been collected
through the method questionnaire (Mathur, 2005). Questionnaire approach is appropriate because
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it helps in gathering the data in appropriate manner with high level of accuracy. While secondary
data has been collected from sources such as books, journals, newspapers, articles, internet data
etc related to the subject of subprime mortgage crisis.
3.7 Accessibility issues
Researcher can face different types of accessibility issues while this research study. There
may be problem is accessing the participants. The primary data will be collected from different
categories of people such as investors, banks, insurance employees etc (Forzano, 2011). A lot of
time can be consumed in reaching to the participants. Further he can face issue of lack of
resources such as money, content, time etc.
3.8 Sampling and sample size
Sampling is an activity which aids in making the data collection work easier. It is related
with selection of appropriate respondents for the research who can provide valuable data.
Researcher has the option of selecting two types of sampling techniques probability and non-
probability (Goddard and Melville, 2004). For this study, purposive sampling has been applied
which is a part of non-probability techniques. This sampling approach has been applicable
because data is to be collected from people of a specific characteristics. For this study data is
required to be collected from people who have the knowledge of stock market or who shares a
connection with stock market. Hence this sampling approach is appropriate (Jonker and Pennink,
2010). Further it is also imperative to select an appropriate sample size for the study. Here
primary data has been gathered from 50 respondents.
3.9 Data analysis
Data analysis is another stringent section of the study. Evaluation of data helps in
producing meaningful outcomes for the research. Data can be analysed in qualitative as well as
quantitative manner (Kuada, 2012). For this research work, quantitative tool like SPSS has been
used for data analysis. SPSS is one the best tool for representing the data in quantitative manner.
3.10 Research limitations
There are certain limitations associated with every research. There may be a limitation
related to reaching the respondents who will provide the primary data. It is very important that
data is to be collected from valid and authentic sources. Researcher may not be able to discover
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ethical sources for the study (Merriam, 2009). Limitations may also arise during survey process.
It can be difficult to derive responses from every participant.
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CHAPTER- 4 DATAANALYSIS
Occupation
Occupation Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Investor 6 12.0 12.0 12.0
Employed in
Bank
2 4.0 4.0 16.0
Employed in
credit rating
agency
15 30.0 30.0 46.0
Employed in
insurance
company
11 22.0 22.0 68.0
Investment
Banker
16 32.0 32.0 100.0
Total 50 100.0 100.0
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In the quantitative analysis, it has been identified that most of the respondents who gave their
responses in the questionnaire were investment bankers. Around 32% respondents were the the
investment bankers. Following to this 30% respondents were the employees of credit rating
agencies of US and other countries like UK. From this data, it can be anticipated that results of
the study would achieve the research objective in the best possible manner.
Do you agree that Subprime mortgage crisis was the worst among all financial crises happened
till now?
Do you agree that Subprime mortgage
crisis was the worst among all financial
crises happened till now? Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Strongly Disagree 3 6.0 6.0 6.0
Disagree 4 8.0 8.0 14.0
Neutral 7 14.0 14.0 28.0
Agree 19 38.0 38.0 66.0
Strongly Agree 17 34.0 34.0 100.0
Total 50 100.0 100.0
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In the above bar graph, it can be seen that majority of respondents i.e. 19 out of 50 agreed that
the 2007-2008 Subprime mortgage crisis was the worst financial crisis that happened till now.
Following to this response, 17 out of 50 respondents strongly agreed that they considered
Subprime crisis as the biggest financial crisis of all time.
What triggered the US Subprime
mortgage crisis? Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Federal Reserve monetary policy 6 12.0 12.0 12.0
Credit rating agencies 11 22.0 22.0 34.0
Improper lending practices of
lenders
13 26.0 26.0 60.0
Inadequate assumption about
price hikes by home buyers
6 12.0 12.0 72.0
Improper securitization of asset
backed securities by Investment
banks
10 20.0 20.0 92.0
Excess flow of money from the
foreign investors in US banks
4 8.0 8.0 100.0
Total 50 100.0 100.0
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In the questionnaire, a question was being asked to the respondents to identify the major cause
that led to the creation of Subprime mortgage crisis. From the analysis, it has been discovered
that the Subprime crisis occurred because of three primary causes which were improper lending
practices of lenders, inappropriate assumptions and rating by credit rating agencies and improper
securitization of asset backed securities by the investment banks. The given fact was also
identified in the past studies which were penned down on the topic subprime mortgage crisis.
Apart from this respondents also stated that there were also other causes like Federal Reserve
monetary policy and inadequate assumption about price hikes which led to happening of
subprime mortgage crisis.
Do you agree that Federal Reserve has
active role in emergence of Subprime
mortgage crisis? Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Strongly Disagree 3 6.0 6.0 6.0
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Disagree 13 26.0 26.0 32.0
Neutral 14 28.0 28.0 60.0
Agree 17 34.0 34.0 94.0
Strongly Agree 3 6.0 6.0 100.0
Total 50 100.0 100.0
In the above table, it can be seen that most of the respondents (34%) agreed that agree
that Federal Reserve has active role in emergence of Subprime mortgage crisis. However, 28%
respondents said they neither agree nor disagree about the active role of Federal Reserve in
occurrence of Subprime mortgage crisis. Thus, on the basis of this findings and information it
can be said most of the professional and investors of finance industry has more or less neutral
response regarding the role of Federal Reserve in happening of Subprime mortgage crisis.
Do you think that the practices and
policies like quantitative easing
and reduction in discount rates that
Federal Reserve adopted to deal
with Subprime mortgage crisis
were effective? Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Strongly
Disagree e
3 6.0 6.0 6.0
Disagree 4 8.0 8.0 14.0
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Neutral 6 12.0 12.0 26.0
Agree 24 48.0 48.0 74.0
Strongly Agree 13 26.0 26.0 100.0
Total 50 100.0 100.0
From the analysis of collected information, it was discovered that 48% (highest) of
respondents agreed that the policies and practices which Federel Reserve has been adopted were
prove to be significant for US in overcoming from Subprime mortgage crisis that created
recession in global economy. Nonetheless, the information which were collected from secondary
source in that also it was studied that the Federel Reserve monetary policy like Quantitative
easing and cut in discount rates significantly help US economy in overcoming from the financial
turmoil.
How do you see the role of credit
rating agencies in the bursting out of
Subprime crisis that led to creation of
2008 financial crisis in the global
economy? Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Equally blamable
like lenders and
investment banks
31 62.0 62.0 62.0
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Completely
blamable
6 12.0 12.0 74.0
Not at all
blamable
13 26.0 26.0 100.0
Total 50 100.0 100.0
The above analysis tries to find out the role of credit rating agencies in the happening of
financial crisis. The survey results discovered that most of the participants are of the opinion that
credit rating agencies are equally blamable for subprime crisis. It is evident from the fact that if
rating was done better, less number of investors would have bought into these securities and the
losses would not have been so bad.
Is raising real estate prices could be
considered as one of the root cause
factors for subprime mortgage crisis? Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Yes 37 74.0 74.0 74.0
No 13 26.0 26.0 100.0
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Total 50 100.0 100.0
The survey results show that majority of the participants that is about 37% people, thinks
that real estate prices could be considered as one of the root cause for subprime mortgage crisis.
It can be observed from the fact that people were buying expensive homes in relation to the
expectation that prices for homes will increase later. Despite of continued appreciation, the prices
dropped rapidly damaging the bubble of housing for home buyers.
Do you think that the US economy as well as
economies of other countries has now
improved after the the subprime crisis which
hampered the economic growth and reduced
the 50% of market valuation of shares? Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Yes definitely 23 46.0 46.0 46.0
Yes at somewhat
extent
21 42.0 42.0 88.0
May be or may be not 3 6.0 6.0 94.0
Obviously Not 3 6.0 6.0 100.0
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Total 50 100.0 100.0
The survey results discovered that majority of the respondents definitely or to some
extent feel that US economy as well as other economies has now improved after subprime crisis.
About 46% of the people think that definitely there has been a improvement in the economies.
About 42% of the respondents think that to some extent the world economy has improved.
As per your viewpoint, what major
causes or consequences the subprime
mortgage crisis created in the
economy? Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Reduction in
equity market
valuation
9 18.0 18.0 18.0
Restricted
economy growth
10 20.0 20.0 38.0
Increased
unemployment all
over the world
13 26.0 26.0 64.0
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specially in US
Decrease in
purchasing power
of people
4 8.0 8.0 72.0
Increased in
foreclosure
10 20.0 20.0 92.0
Large number of
Americans
becomes homeless
2 4.0 4.0 96.0
Decrease in
manufacturing and
service industry
output
2 4.0 4.0 100.0
Total 50 100.0 100.0
The purpose of this question was to identify what were the major consequences of subprime
mortgage crisis. On getting the responses it was realized that majority of the people think that
reduction in equity market valuation, restricted economy growth, increased unemployment and
increase in foreclosure were the major consequences created in the economy. 9 of them voted for
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reduction in equity market valuation, 10 of them voted for restricted economy growth, 13 of
them voted for unemployment and 10 of them voted for increase in foreclosure.
Do the current global economic
condition is still affected due to 2008
financial crisis? Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Yes 7 14.0 14.3 14.3
No 16 32.0 32.7 46.9
To some extent 26 52.0 53.1 100.0
Total 49 98.0 100.0
Missing System 1 2.0
Total 50 100.0
The survey results shows that many of the participants thinks that current global economic
conditions is still affected due to 2008 financial crisis. About 14% of the participants responded
yes, 32% responded no and 52% of them responded to some extent.
Do you think that there is a requirement or need to make stringent rules or to improvise the
responsibility and accountability of Credit rating agencies?
Do you think that there is a
requirement or need to make stringent Frequency Percent
Valid
Percent
Cumulative
Percent
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rules or to improvise the
responsibility and accountability of
Credit rating agencies?
Valid Strongly Disagree
e
4 8.0 8.0 8.0
Disagree 4 8.0 8.0 16.0
Neutral 6 12.0 12.0 28.0
Agree 20 40.0 40.0 68.0
Strongly Agree 16 32.0 32.0 100.0
Total 50 100.0 100.0
The survey results shows that many of the participants thinks that current global economic
conditions is still affected due to 2008 financial crisis. About 14% of the participants responded
yes, 32% responded no and 52% of them responded to some extent.
Occupation
TotalInvestor
Employed
in Bank
Employ-
ed in
credit
rating
Employed
in
insurance
company
Invest
-ment
Bank
er
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agency
What
triggered
the US
Subprime
mortgage
crisis?
Federal Reserve
monetary policy
s
1 0 2 1 2 6
Credit rating
agencies
3 0 4 2 2 11
Improper
lending
practices of
lenders
2 1 3 2 5 13
Inadequate
assumption
about price
hikes by home
buyers
0 1 1 2 2 6
Improper
securitization of
asset backed
securities by
Investment
banks
0 0 4 3 3 10
Excess flow of
money from the
foreign
investors in US
banks
0 0 1 1 2 4
Total 6 2 15 11 16 50
From the above cross tabulation, it can be interpreted that the majority of people who are
employed in credit rating agencies are accepting that there was involvement of credit rating
agencies in the occurrence of Subprime mortgage crisis due to wrong assumption or high credit
ratings to risky CDO’s. On the other hand, investment bankers believe that the main factor that
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triggered the Subprime crisis was the improper lending practices of lenders. Thus, investment
bankers are blaming lenders.
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Cross Tabulation
Occupation
TotalInvestor
Employed
in Bank
Employed
in credit
rating
agency
Employ
ed in
insuran
ce
compan
y
Investme
nt
Banker
As per your
viewpoint,
what major
causes or
consequence
s the
subprime
mortgage
crisis created
in the
economy?
Reduction in equity
market valuation
1 2 1 1 4 9
Restricted economy
growth
4 0 3 1 2 10
Increased
unemployment all
over the world
specially in US
0 0 6 4 3 13
Decrease in
purchasing power
of people
0 0 1 0 3 4
Increased in
foreclosure
0 0 2 5 3 10
Large number of
Americans becomes
homeless
0 0 1 0 1 2
Decrease in
manufacturing and
service industry
output
1 0 1 0 0 2
Total 6 2 15 11 16 50
From the above cross tabulation several aspects can be discovered. It is seen that
employees in credit rating agencies think that unemployment was the major consequence of
financial crisis. Insurance employees think that unemployment and increased foreclosure were
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the major consequences after the crisis. Investors think that restricted economic growth was the
major outcome. Investment bankers rendered mixed responses.
Occupation
Total
Invest
or
Employe
d in Bank
Employed
in credit
rating
agency
Employed
in
insurance
company
Investm
ent
Banker
Do you think that
there is a
requirement or
need to make
stringent rules or
to improvise the
responsibility and
accountability of
Credit rating
agencies?
Strongly
Disagree
0 0 1 1 2 4
Disagree 0 0 0 2 2 4
Neutral 0 1 1 3 1 6
Agree 5 1 7 3 4 20
Strongly Agree 1 0 6 2 7 16
Total 6 2 15 11 16 50
From the above test of cross tabulation several aspects can be interpreted. It has been
discovered that majority of investors, credit rating agencies employees, investment bankers and
insurance employees, agrees that there is a need to regulate the functioning of credit rating
agencies. This is important because these rating agencies were being accused of providing
wrong ratings of stocks of the firms.
Do you think that the US economy as well as
economies of other countries has now improved after
the subprime crisis which hampered the economic
growth and reduced the 50% of market valuation of
shares?
TotalYes definitely
Yes at
somewhat
extent
May be
or may
be not
Obviously
Not
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Do you think
that the
practices and
policies like
quantitative
easing and
reduction in
discount rates
that Federal
Reserve
adopted to deal
with Subprime
mortgage crisis
were effective?
Strongly
Disagree
2 1 0 0 3
Disagree 2 2 0 0 4
Neutral 4 1 1 0 6
Agree 6 14 2 2 24
Strongly Agree 9 3 0 1 13
Total 23 21 3 3 50
On the basis of above cross tabulation analysis, the fact can be laid down that majority of
people agrees that the economy of US and other countries improved at certain extent when the
Federal Reserve taken the sound steps by related to quantitative easing and cut in discount rates
in the monetary policy after the occurrence of subprime crisis in the year 2008.
Do the current global economic condition
is still affected due to 2008 financial
crisis?
TotalYes No
To some
extent
Do you think that
the US economy
as well as
economies of
other countries
has now
improved after
the subprime
Yes definitely 5 6 11 22
Yes at somewhat
extent
2 9 10 21
May be or may be
not
0 0 3 3
Obviously Not 0 1 2 3
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crisis which
hampered the
economic growth
and reduced the
Total 7 16 26 49
From the above analysis, it can be said that majority of people strongly believes that the
economy of US and other countries have improved after the subprime crisis but only to certain
extent. In other words, the economy of US and other countries have not improved completely as
the sentiments of investors and people are still low towards investing in stock market as they lost
huge amount in the crisis.
Do the current global economic condition is
still affected due to 2008 financial crisis?
TotalYes No
To some
extent
As per your
viewpoint, what
major causes or
consequences the
subprime mortgage
crisis created in the
economy?
Reduction in equity
market valuation
2 5 2 9
Restricted
economy growth
0 2 8 10
Increased
unemployment all
over the world
specially in US
2 4 6 12
Decrease in
purchasing power
of people
1 0 3 4
Increased in
foreclosure
0 4 6 10
Large number of
Americans
becomes homeless
1 1 0 2
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Decrease in
manufacturing and
service industry
output
1 0 1 2
Total 7 16 26 49
From the above cross tabulation analysis, the information which can be derived is that the
people who accepted that current global economic condition is still affected because of still
continuing of foreclosures in US, slow growth of economy and considerable uncontrolled
unemployment in US and other countries.
As per your viewpoint, what major causes or consequences the subprime
mortgage crisis created in the economy?
Total
Reducti
on in
equity
market
valuatio
n
Restrict
ed
econom
y
growth
Increased
unemploy
ment all
over the
world
specially
in US
Decrease
in
purchasin
g power
of people
Increase
d in
foreclos
ure
Large
number
of
American
s
becomes
homeless
Decrease
in
manufactu
ring and
service
industry
output
Do you
think that
the US
economy
as well as
economies
of other
countries
has now
improved
after the
the
subprime
Yes
defini
tely
5 5 7 2 2 1 1 23
Yes
at
some
what
exten
t
4 5 4 2 4 1 1 21
May
be or
may
be
not
0 0 0 0 3 0 0 3
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crisis
which
hampered
the
economic
growth and
Obvi
ously
Not
0 0 2 0 1 0 0 3
Total 9 10 13 4 10 2 2 50
From the above cross tabulation of the variables several aspects can be interpreted. About
23 respondents definitely think that global economies have improved after the subprime crisis.
21 of them believe that global economy has improved to some extent. It is evident from the fact
that there are some improvements sign after the crisis. There is a increase in equity market
valuation, economic growth is seen, decrease in unemployment, increase in purchasing power of
people etc. Further there is a decrease in foreclosure and output from the manufacturing industry
has increased.
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CHAPTER- 5 CONCLUSION
In the study, many constructive information and facts were identified which were backed
by findings from past studies and also from the primary research. From the thorough review of
past literatures on subprime crisis it was identified that there were number of factors which
created the Subprime mortgage crisis. In the present study, it was discovered that the main causes
which triggered the subprime crisis were improper lending practices of lenders, wrong ratings of
CDO’s by credit rating agencies and improper securitization of asset backed securities by the
investment banks. Further, from the present study it was identified that the credit rating agencies
was equally responsible like lender and investment bankers for the emergence of Subprime
crisis.
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The particular finding has not been discovered in any past studied and thus here it is determined
that credit rating agencies has active role in triggering of subprime mortgage crisis that led to the
creation of 2008 financial crisis which brought high negative impact on the global economy with
respect to increase in unemployment, wiping out of market valuation of investors wealth,
increase in inflation, industrial break down, hampered economic growth and increase in
foreclosure. The other flooring information which was discovered from the present study is that
the current economic condition of US and other countries have been improved considerably as
now the stock index of all countries are moving up and economic growth of all the countries are
also steering up. Thus, on the basis of analysis and findings of the research, it can be finally
concluded that the credit rating agencies were the equally responsible like lender and investment
bankers for the occurrence of subprime crisis. In addition to that, the study also gives evidence
that the global economy has been improved at certain level after the passing of 7 years of
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subprime mortgage crisis. However, there are also some segments or areas like stock markets,
investor sentiments, real estate of US, US banking sector and employment which are still taking
time for the improvement as they were severely affected from the occurrence of subprime
mortgage crisis.
From the above study it can be concluded that If something bad like subprime crisis
happens, it does not take too long to identify who is to blame for it. There are lot many factors
which can be made responsible for the crisis. In case of subprime crisis, lenders, homebuyers,
investors, investing bank, rating agencies etc were blamed for the damage. Lenders granted
money to people in the context of poor credit and high risk of default. Lenders regarded
subprime mortgages with low amount of risk. Homebuyers were also responsible as they were
buying expensive homes at that moment in the expectation that prices will increase in future.
Rating agencies provided higher ratings to collateralized debt obligations which resulted in
losses for the investors.
Further it can be concluded that global crisis did not have an impact on automotive
markets in developing countries, except for automotive exporting nations like South Africa,
Mexico, and Thailand etc. Pharmaceuticals sector was also not affected by subprime crisis
because no matter what the situation is people will not compromise with their health. Industries
which were affected by the crisis were aviation, information technology, etc. There was a great
fall in demand in aviation sector and prices of fuel and operating costs got increased.
It can be said that credit rating agencies can be equally put blame able for subprime
mortgage crisis. It is evident from the fact there was a lot of criticism about rating agencies,
underwriters of the CDO and mortgage backed securities that includes subprime loans in their
mortgaged pools. It was expected from the agencies that they should have given lower ratings to
these CDOs as compared to “AAA” rating given to the higher quality tranches. If the rating was
performed appropriately, less number of investors would have bought into these securities and
the losses would not have been so bad. At last, from the report, it can be suggested that the cr
Thus from the report can be suggested that the crisis like subprime mortgage crisis can be
avoided by following stringent monetary policy and making improvisation in the provisions of
credit rating agencies.
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REFERENCES
Acharya, V. V. and Merrouche, O., 2012. Precautionary hoarding of liquidity and interbank
markets: Evidence from the subprime crisis. Review of Finance.
Ackermann, J., 2008. The subprime crisis and its consequences. Journal of Financial
Stability, 4(4), pp. 329-337.
Alicia, H., 2006. Market Research: Through the looking glass. Marketing Week.
Amadeo.K., 2015. The Subprime Mortgage Crisis. [Online]. Available through:
<http://useconomy.about.com/od/economicindicators/tp/Subprime-Mortgage-
Primer.htm>. [Accessed on 7th
April 2015].
Barangayrp, R. P., 2008. The Global Financial Crisis and its Implications for Workers of the
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APPENDIX
Questionnaire
Name
Gender
 Male
 Female
Age
 25 – 35 years
 35 - 45 years
 45 – 55 years
 55 and above 55 years
Occupation
 Investor
 Employed in Bank
 Employed in credit rating agency
 Employed in insurance company
 Investment banker
Do you agree that Subprime mortgage crisis was the worst among all financial crises
happened till now?
 Strongly Disagree
 Disagree
 Neutral
 Agree
 Strongly Agree
What triggered the US Subprime mortgage crisis?
 Federal Reserve monetary policy
 Credit rating agencies
 Improper lending practices of lenders
 Inadequate assumption about price hikes by home buyers
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 Improper securitization of asset backed securities by Investment banks
 Excess flow of money from the foreign investors in US banks
Do you agree that Federal Reserve has active role in emergence of Subprime mortgage
crisis?
 Disagree
 Neutral
 Agree
 Strongly Agree
Do you think that the practices and policies like quantitative easing and reduction in
discount rates that Federal Reserve adopted to deal with Subprime mortgage crisis were
effective?
 Disagree
 Neutral
 Agree
 Strongly Agree
How do you see the role of credit rating agencies in the bursting out of Subprime mortgage
crisis that led to creation of 2008 financial crisis in the global economy?
 Equally blamable like lenders and investment banks
 Completely blamable as if they had given accurate credit rating then the crisis might have
not been emerged.
 Not at all blamable
Is the rising real estate prices could be considered as one of the root cause factors for
subprime mortgage crisis?
 Yes
 No
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Do you think that the US economy as well as economies of other countries has now
improved after the subprime crisis which hampered the economic growth and reduced the
50% of market valuation of shares?
 Yes definitely
 Yes at somewhat extent
 May be or may be not
 Obviously not
As per your viewpoint, what major causes or consequences the subprime mortgage crisis
created in the economy?
 Reduction in equity market valuation
 Restricted economy growth
 Increased unemployment all over the world specially in US
 Decrease in purchasing power of people
 Increased in foreclosure
 Large number of Americans becomes homeless
 Decrease in manufacturing and service industry output
Do you think that there is a requirement or need to make stringent rules or to improvise
the responsibility and accountability of credit rating agencies?
 Disagree
 Neutral
 Agree
 Strongly Agree
Do the current global economic condition is still affected due to 2008 financial crisis?
 Yes
 No
 To some extent
What suggestions would you like to give to avoid such type of crisis in future?
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