subpirme crises

8/14/2019 Subpirme Crises

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Citibank

Sub Prime Crises

Presented By :-SaadArifOwaisObaidJibran


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What is our Presentation about?

We are giving a persuasivepresentation to an audience that

contains members of Uppermanagement of Citibank and areconvincing them to change their policyrelated to issuing mortgages because

of the sub prime crises that arose dueto mortgages being sanctioned to SubPrime lenders.


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Sub Prime Crises

An ongoing economic problem jeopardizing the

existence of banks in general.

Created liquidity issues in the banking system owing to

Foreclosures which accelerated in the United States in

late 2006 Triggered a global Financial crises during

2007 and 2008.

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis


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What does Sub Prime mean?

Sub prime lending refers

practice of making loans to borrowers(who do not qualify for market interest rates)

Involving various risk factors such asIncome level

Size of the down payment made

Credit history

Employment status.



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Housing market:An Overview

Subprime borrowing was a major contributorto an increase in home ownership rates andthe demand for housing. This demand helped

fuel housing price increases and consumerspending. American home prices increasedby 124%

The bank was generating money and so itcontinued issuing Sub Prime mortgages.

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-26#cite_note-26


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Overbuilding during the boom period,increasing foreclosure rates andunwillingness of many homeowners tosell their homes at reduced marketprices have significantly increased thesupply of housing inventory available.

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-MSNBC-newhome-30#cite_note-MSNBC-newhome-30


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This excess supply of home inventory placessignificant downward pressure on prices. Asprices decline, more homeowners are at risk

of default and foreclosure. As of February 2008, housing prices are

expected to continue declining until this

inventory of surplus homes (excess supply)is reduced to more typical levels.

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-economist-downtown-32#cite_note-e

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-Ofheo-3q07hpi-33#cite_note-Ofheo-3q07hpi-33
http://en.wikipedia.org/wiki/Subprime_mortgage_crisishttp://en.wikipedia.org/wiki/Subprime_mortgage_crisis


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Easy credit, combined with theassumption that housing prices wouldcontinue to appreciate, alsoencouraged many subprime borrowersto obtain ARMs they could not affordafter the initial incentive period.

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-34#cite_note-34


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http://www.forbes.com/finance/mktguideapps/compinfo/AdvancedChart.jhtml?symbol=C


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11http://www.forbes.com/finance/mktguideapps/compinfo/AdvancedChart.jhtml?symbol=C


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Process

Owing to a form of financial engineering calledSecuritization.

many mortgage lenders had passed the rights to themortgage payments and related credit/default risk tothird-party investors via

Mortgage backed Securities (MBS). Collateralized debt obligation (CDO).



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Due to Sub Prime lending.

Bursting of the Us House Bubble.

High default rates on Sub prime" and other Adjustable

Rate Mortgages (ARM) made to

higher-risk Borrowers with lower income.

higher-risk Borrowers with lesser credit

history than "prime"

borrowers.

How did the Crises start?



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Process

Graphical Analysis

Contdhttp://news.bbc.co.uk/2/hi/business/7073131.stm


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Contd

http://news.bbc.co.uk/2/hi/business/7073131.stm


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Mortgage Bond Market



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Citibanks Mistake?

Poor judgment by Citibank.

Credit Risk under estimated by Citibank.

Mortgage brokers focused their efforts by selling sub-primemortgages in working class black areas where many peoplehad achieved home ownership.

Mortgage brokers told them that they could get cash byrefinancing their homes, but often neglected to properlyexplain that the new sub-prime mortgages would "reset"

after 2 years at double the interest rate.

http://www.dailytimes.com.pk


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Underwriters determine if the risk oflending to a particular borrower undercertain parameters is acceptable. In2007, 40 percent of all subprime loanswere generated by automatedunderwriting.

Citibanks Mistake?

http://en.wikipedia.org/wiki/Mortgage_underwriting


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Consequences of themistake for Citibank?


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21http://www.forbes.com/finance/mktguideapps/compinfo/AdvancedChart.jhtml?symbol=C


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22http://en.wikipedia.org/wiki/Image:Borrowing_Under_a_Securitization_Structure.gif


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Consequences for Citibank?

face $18.7 billion in additional write-downs for the quarter.

Citibank is expected to slash its $2.16-a-share annual dividendby an eye-popping 40%.

Citibank is expected to report a loss of $1.33 a share.

third-quarter profits fell 56.8% to $2.4 billion, or 47 cents a

share, from $5.5 billion, or $1.10 a share.

Salvage assets of seven affiliated structured investmentvehicles valued at $49 billion by putting those assets onto itsbalance sheet.

Contdhttp://www.dailytimes.com.pk


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Contd..

Citibank agreed to a $7.5 billion equity investmentfrom the Abu Dhabi Investment.

The firm has a serious need to preserve/raiseadditional capital.

A wave of repossessions is sweeping America as

many of these mortgages (ARM) reset to higherrates in the next two years.

Goldman Sachs analyst William Tanona predicted

big write-downs for Citigroup.http://www.dailytimes.com.pk


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Graphical Analysis

Contdhttp://news.bbc.co.uk/2/hi/business/7073131.stm


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Increase in liabilities recorded byCitibank.

Contd..


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Contd..



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Solutions for Citibank

Rely on data from only certified and reliable CreditRating Agency.

The rating processes can be re-examined and improvedto encourage greater transparency to the risks involved withcomplex mortgage-backed securities and the entities thatprovide them.

Have few but reliale brokers who dont mislead andmisdirect people for their own commission.

Contd


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Citibank should:

Change lending practices (Check proofs of income etc) (FalseSalary slips given by people).

Improve on bankruptcy protection.

Give credit counseling and education to customers.

Check carefully licensing and qualifications of lenders.

Using Media to increase peoples awareness.

Contd..


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REFRENCES



http://www.dailytimes.com.pk/default.asp?page=2007%5C11%5C04%5Cstory_

http://upload.wikimedia.org/wikipedia/en/0/09/Subprime_diagram.png

http://www.forbes.com/finance/mktguideapps/compinfo/AdvancedChart.jhtml?s

Solutions (Slide# 28 and 29) have been written by usafter analyzing the case of Citibank issuing sub primeloans and we have made these solutions keeping intoaccount the problems faced by them and then givingsolutions for these problems.
http://www.dailytimes.com.pk/default.asp?page=2007%5C11%5C04%5Cstory_4-11-2007_pg5_15http://www.forbes.com/finance/mktguideapps/compinfo/AdvancedChart.jhtml?symbol=Chttp://www.forbes.com/finance/mktguideapps/compinfo/AdvancedChart.jhtml?symbol=Chttp://www.dailytimes.com.pk/default.asp?page=2007%5C11%5C04%5Cstory_4-11-2007_pg5_15


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Thank You for your Patience.

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