lecture 12 - the financial crisis of 2008
TRANSCRIPT
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The Financial CrisisThe Financial Crisisof 2008of 2008
Special Lecture
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The Mortgage brokersThe Mortgage brokers
Mortgage brokers approved credit forall type of customers (including sub-prime loans)
This way they increased theircommission income
brokers absolved themselves of
responsibility by packaging these badmortgages with other mortgages andreselling them as investments.
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Home buyerscontact amortgagebroker
MB Approves loansincluding risky ones toget more commission
Loans are givenby a mortgagebank
(Countrywide,Indy Mac, Fannie& Freddie ,Citibank)
Lenders IssueMortgage backedsecurities (MBS)and sell toinvestment banker
InvestmentBankers (BearStearns, Lehman,Merrill Lynch)classify loansaccording to risklevel called CDO
The AAA CDOs arepaid first incase ofmortgage
defaults, but therate of return islower
The rated CDOs
were sold and junk
kept in SPV
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House Income
Freddie)
Mortgage Lenders(Countrywide, Indy
Mac, Fannie &
Freddie)
Banks(Citibank,
BOA)
Insurance)
Investor
s(Banks,
Funds,
Insurance)
Investment Banks(Bear Stearns, Lehman,
Merrill Lynch)CDOs
MBSs
Mortgage
Subprime
Insurers(AIG)
Rating
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Homeowners Equity vs.Homeowners Equity vs.MortgageMortgage
Source: The Federal Reserve
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Home Price IndicesHome Price Indices
Source: Standard & Poors
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Money started bleedingMoney started bleeding
The defaults caused massive losses inmortgage backed securities
The property prices fell further that
caused slower growth in construction ofnew homes and thousands of jobs werelost
Due to fall in prices of mortgage backed
securities many investors chose to walkaway without paying the loan, increasingfurther the losses of banks
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1111
Write-Offs by Financial Institutions
Unit: Billion Dollars
Merrill Lynch $22.4Citigroup 19.9UBS 14.4Morgan Stanley 9.4
HSBC 7.5Credit Agricole 3.6Deutsche Bank 3.2Bank of America 3.0CIBC 3.0Wachovia 2.7AIG 2.7
Barclays 2.7Royal Bank of Scotland 2.5Credit Suisse 1.9Bear Stearns 1.9JP Morgan Chase 1.4Countrywide 1.0Others 4.6
Total $107.8
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Credit well dried upCredit well dried up
As the losses went up, bankstightened control on credit
Many banks could not survive thebolt and sank under the heavylosses, others merged and some gothelp from govt
Govt did not support all of the fallingfirms
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Pakistan and US financialPakistan and US financialcrisiscrisis
Pakistan escaped from the direct effect ofUS financial crisis
But indirectly, there are several areas of
concern: tightened terms for access to international
debt markets
Slowing world growth rate can effect ourexports
But at the same time, recession will translateinto lower demand which will cause fall in oilprices
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Pakistan economic problemsPakistan economic problems
Pakistans economic problems arenot tied to the current globalfinancial crisis
The main economic problems ofPakistan are:Trade deficit
Budget deficitCurrency devaluation
Inflation