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Role of loans in the global

financial crisis of 2007-08

Presented by:
Hina Yunus
Moeed Sadiq

Introduction
In this presentation we will talk about
the global financial crises of 2007-08
and the role of loans in it.
This financial crises started out from
America and spread around the globe.
It is considered the worst crisis after
the Great Depression of 1930s.
Its main cause is the combination of
debt and mortgage-backed assets.

History

Since the end of WW2 the prices of houses


have been increasing steadily in U.S.
In the 1980s financial institutions and
traders realized that US mortgages were a
previously untapped asset. Traders at
Salomon Brothers and Drexel Burnham
Lambert were looking to expand the bond
market and they discovered that the steady
stream of payments from US mortgages
could be restructured into bonds and then
sold off to investors.

History

In the late 1990s and early 2000s, there was an


explosion in the issuance of bonds backed by
mortgages, also known as mortgage-backed securities
(MBSs). The reason for this was the use of
securitization. In brief, securitization is the pooling of
debt and then issuing assets based upon that debt.
Investment banks were buying mortgages from
mortgage issuers, repackaging them and then selling
off specific tranches of the debt to investors. As time
went on, there were less and less new mortgages to
securitize so the structured products groups at banks
started repackingMBSs i.e. taking the unsellable
tranches of lots ofMBSs, repackaging them and then
selling the new product called collateralized debt
obligations or CDOs.

History
Taxpayers

relief Act of 1997

Starting Point

The housing bubble burst. (U.S subprime mortgage crisis)

What is sub-prime
lending?

Subprime lending means giving loans


to people who may have difficulty in
maintaining the repayment schedule.

Causes of crisis
1

Relaxation in lending
regulations
Poor credit worthiness of
borrowers

Higher interest costs


Borrowers unable to pay

Failure of banks and financial


institutions

Impacts of Subprime
crisis
Major banks suffered from huge
losses.
2. Lehman brothers went out of
business.
3. Merill Lynch had to sell itself to bank
of America.
4. In Sept 2008, AIG collapses as it
could not afford to pay for all of these
US mortgage defaults. The US
government nationalised AIG by
becoming 80% shareholder.
1.

Financial Institutions--Bankruptcy

New Century Financial


American Home Mortgage
Sentinel management Group
Ameriquest
NetBank
Terra Securities
American Freedom Mortgage Inc.

Financial Institutions---Writedowns

Citigroup
Merrill Lynch
UBS AG
Morgan Stanley
Credit Agricole
HSBC
Bank of America
CIBC
Deutsche Bank

The total write downs and losses were around $300$350 billion.

Domino effect
1

Sub Prime Mortgage Crisis

Collapse of financial System

Economic Crisis

4
5

Job loss
Low consumer spending

Recession

Low GDP growth

Poor prosperity of the countries

Deflationary Spiral
Layoffs
and wage
reductions

Falling
Demand

Bankruptci
es

Falling
Prices

Debt
Defaults

Global saving glut

Mexico in 1994, Asia in 19971998, Russia


in 1998, Brazil in 1999, and Argentina in
2002 faced economic crisis. The result was
a sharp decline in lending from the rest of
the world, steep falls in the value of their
currencies and stock markets, and
significant recessions. After the crises,
these countries increased their saving
substantially and became large lenders to
the rest of the world especially to the
United States.

Sub prime lending And


increase in interest rates

Super Power Status

This crisis made a question mark on


the super power status of U.S.

Global Impacts of the


crisis

Investors lost confidence in the stock


market.
Consumer spending slowed down due
to lack of cash.
USAs economic condition affected the
global economy.
World economy slipped into recession.
Exports decreased.

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