THE SUBPRIME MORTGAGE CRISIS will not calculate until another chapter. 1

PLAN INTRODUCTION I. Origins II. Transmission III. Contagion Conclusion & Impact of the crisis.

Definitions and preview of the conjuncture. INTRODUCTION Definitions and preview of the conjuncture.

The subprime mortgage crisis is a global and financial crisis. This crisis is considered as the worst financial crisis since the 1929 crisis. It started from 2006 with the Krach of the risky mortgage loans in the USA. Revealed to the world in february 2007 by the HSBC bank, it turns into a global financial crisis at the beginning of summer 2007.

DEFINITION A Subprime loan is a loan offered to someone with a bad credit record. Subprime borrowers are turned away from traditional lenders. The interest rate is lower than a standard loan from a bank. Traditionnaly, they have a reasonable chance of defaulting on the debt repayment.

How did it happened ? From where did it comes ? ORIGINS How did it happened ? From where did it comes ?

Crisis Origins Decrease of technology values ( Nasdaq 2000) Terrorist attacks (2001) Decrease of interest rates Huge liquidity Injection into the global banking system. Investors take advantage of low interest rates (to 1%) in order to speculate on the real estate market (leverage). Rise of real estate prices. Banks loans easily. The risk is hold up because loans are secured on the value of the property. Low interest rates the first 2 years, then the loan is indexed on the market rates. The real estate market went down  Interest rates went up. The home owners couldn’t afford their home. EVENTS SUBPRIMES BANKS FEDERAL RESERVE STOCK MARKET

How did it work ? Where did it go ? TRANSMISSION How did it work ? Where did it go ?

How does it work ? A family wants a house. The mortgage broker connects the family with the lender (commission).  Families are able to buy houses. Then, the mortgage is put in a CDO (Collateralized Debt Obligation) with other mortgages. The CDO is splitted into categories from the safiest to the riskiest. (Senior vs Junior).

Where did it go ? The CDO is rated by rating agencies. Then it’s spread to investment banks, hedge funds and others financial institutions. Mortgage refunds are transfered to the news acquisitor : So do risks.

CONTAGION Contagion at the financial markets, the US economy and on a worldwide scale

Financial markets contagion I Strong contagion effect. Banks have been heavily touched because they financed companies specialized in financing activities. By November 2008, US stocks had lost 45% of their value compared with 2007 value. In the second half of 2007, many mortgage companies shut down, suspended operations or were sold.

Financial markets contagion II Several billions dollars were lost by banks because of assets depreciation related to the subprime mortgage crisis. For example: Citigroup (USA) - $24.1 bln Merrill Lynch (USA) - $22.5 bln UBS AG (Switzerland) - $16.7 bln Morgan Stanley (USA) - $10.3 Credit Agricole (France) - $4.8 bln HSBC (United Kingdom) - $3.4 bln Bank of America (USA) - $5.28 bln CIBC (Canada) – 3.2 bln Deutsche Bank (Germany) - $3.1 bln 16

Financial markets contagion III Strong fall of the market indexes: - Dow Jones: 14.000 points to the 19/07/2007 against 12.800 points to the 16/10/2007. Now: 9,712.7 - CAC 40: 6 125 points to the 16/07/2007 compared with 5.265 to the 16/08/2007. Now: 3600

Financial sector contagion summary Subprime crisis  financial crisis  asset price deflation  liquidity/credit crunch

worldwide scale contagion: The most important impacts are made in developed countries especialy in US and europe. The American banking crisis are transformed into a financial and economic crisis which affects the worldwide economy

Real economy contagion Decrease of credits given to companies of householders  Consumption, Investment and GDP slowed down  Recession Risky householders became more and more vulnerable (1.200.000 in August 2007)  Devalorization of real estate patrimony.  Same impact on GDP. The decrease of real estate prices slows down the industry activity.

US consumer confidence

Bankruptcies & Unemployment. IMPACT OF THE CRISIS Bankruptcies & Unemployment.

Impact of the crisis I Financial Institutions – Bankruptcy New Century Financial (USA)– Apr. 2, 2007 American Home Mortgage (USA) – Aug. 6, 2007 Sentinel management Group (USA) – Aug. 17, 2007 Ameriquest (USA) – Aug. 31, 2007 NetBank (USA) – Sept. 30, 2007 Terra Securities (Norway) – Nov. 28, 2007 American Freedom Mortgage Inc. (USA) – Jan. 30, 2007

Impact of the crisis II 3 of the 5 biggest wholesale banks in Wall Street are changes hands in few months. In March2008, Wall St investment banks Bear Stearns dies purchase by JP Morgan Chase. In Sept 2008, Lehman Brothers collapses, Merrill Lynch is purchased by Bank of America. In Sept 2008, AIG collapses as it could not afford to pay for all of these US mortgage defaults. The US government nationalizes AIG by becoming 80% shareholder. Government sponsored Fannie Mae and Freddie Mac either directly owed or guaranteed nearly $5 trillion in mortgage obligations.

CONCLUSION Two million families will be evicted from their homes Finance lost 325.000 employment since August 2007  1,6% of its world manpower rise of unemployment. The International Monetary Fund (the IMF), estimate the cost of the world financial crisis at approximately 4.000 billion dollars  600 dollars/ Person

THANK YOU FOR YOUR ATTENTION By ANGELIER Damien & SERRAT Léo Video : explained by Damien & Léo. Directed by George LUCAS Staring : Steven SPIELBERG.