1. Securitization MBS Subprime Mortgages Write-downs and Losses Understanding the Present US Recession Housing Bubble Housing Bubble Burst Road to recovery The Impact Presented By: Shiva Pillai Harish Narula Rajesh Bangera

2. Lot of money The Excess Capital Excess capital globally Where to invest in order to make it grow? Qualification guidelines pretty tight Difficult to get mortgages Securitization

3. The Process The Big Picture Source: BBC Website

4. The new Process Picture of Sub-Prime Model Individual to Broker Broker to Bank Bank to Investment Firm Investment Firm to the Investor Security

6. High Interest rates, High Risk

7. A R Ms

9. Low Risk (a pretty wild assumption)

10. Guaranteed Return (an even deadly assumption)MBS have developed extremely fast in 8 years Risk has been spread-out among Banks and Hedge-Funds Weak collateralization could induce a major liquidity crunch MBS Volume in Trillion US$

12. The US dream of owning your own home spread to many sectors of US society including low income borrowers

13. Stock Bubble – good sign to buy a new home

14. Stock Bubble Burst – an even better sign to buy a new home

15. 2001 recession (after the Terror strike) – Fed cuts Interest Rate

16. Home Ownership reach new heights

18. Expectations that the price of their home would continue to rise

19. 2005 - peak of the subprime boom, 1 in 5 mortgages was subprime

20. Housing prices reached its peak. They were now on a decline

21. Interest rates were beginning to “reset” to the higher rates

23. Not enough money after selling to cover the amount of the mortgage

24. This led to DEFAULT

25. After that Foreclosure and finally Auction

26. Bank gets much less than the original price of the home

27. More number of Defaults = More number of Auctions i.e. More number of Houses in the Market, which leads to further decrease in the housing prices

29. Belief that MBS was safe was proved to be wrong

30. Due to more number of DEFAULTS and fall in home prices

31. Backed by the fact that credit rating agencies had downgraded the ratings of these bonds

33. Pretty Nasty Defaults in Mortgages Historical USA mortgage default rates were 0.5% to 1.0% of all loans _________________________________________ As Per 2008 Q2 18.67 % 3.93 % PRIME SUB-PRIME

35. March 2008 – Bear Stearns dies

36. September 2008 – Lehman collapse, Merrill Lynch sold to BoA and AIG is nationalized with the US government becoming 80% shareholder

38. First 3 weeks of 08, the Dow Jones Industrial Average fell 9%

39. 1/18/08 Dow Jones/0.5%, S&P 500/0.6%, and NASDAQ/0.3%

41. American Home Mortgage (USA) – Aug. 6, 2007

42. Sentinel management Group (USA) – Aug. 17, 2007

43. Ameriquest (USA) – Aug. 31, 2007

44. NetBank (USA) – Sept. 30, 2007

45. Terra Securities (Norway) – Nov. 28, 2007

47. Sale of houses down, 2 millions homes evicted

48. Minorities

49. Disproportionate foreclosure, Hispanics & Blacks get higher cost loans

50. Economy Condition

51. Low consumer spending, Low GDP rate, Job cuts

52. Other Credit Markets

54. The Pile Up Write Downs & Losses TOTAL: $501.4 Billion Source: Bloomberg. All figures in $ billion

56. Solvency: Restructuring through bankruptcy, or government bailouts

57. Economic stimulus: Increased spending or cut taxes to offset declines in consumer spending and business investment

58. Homeowner assistance: Banks are adjusting the terms of mortgage loans to avoid foreclosure

59. Regulation: rules designed help stabilize the financial system (such as regulating derivatives)Discussions on theses topics are central to deciding what actions should be taken with regard to monetary policy, legislation, and potential programs

60. The Message The Good News??? Alan Greenspan stated: “The current credit crisis will come to an end when the overhang of inventories of newly built homes in largely liquidated, and home price deflation comes to an end . . . After a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business”

62. Credit Suisse Q2 profits climb by 29 percent

63. Investment Banking drives profits at Barclays

64. SocGen profit falls less than expected