A Beginner Begins With The Very End

1. Subprime borrower’s mad rush to become house owners :

It was in 1999, the IT bubble bursted. There was a liquidity crisis which forced the government to reduce the interest rates. Due to the reduction in interest rates, there happened a housing sector boom. Many first time home owners started taking loans to build. Also NINJAs (People with No income, no job, no asset) started building houses, this sudden increase in the housing industry led to a rise in housing rates. The housing rates incre… Continue

The bull has been grinning for the past four years with its tooth’s shine glaring at the other global markets. With around 1.05 crore demat accounts in the country with 34 lakh secondary market investors, 2000 mutual fund companies, domestic companies as well as the 1100 FII’s are celebrating the festive era for their blessings from this bull. Nothing could stop her neither the recent sub-prime crisis nor the political uncertainty. Its run from 3000 pts in 2003 to 19000 levels which is the prese… Continue

“Where risk lies there return lies” - this is the age old adage which was being followed till this date in all the theoretical and conceptual studies. But in practicality, this is proved to be justified only upto certain extent which has been clearly illustrated by the crisis. There was a mad rush in buying the high return CDOs from the companies, hedge funds, investment banks etc. irrespective of the portfolio which backed CDOs. Investors were unaware of the underlying portfolio on which securi… Continue

The structured investment vehicle portfolio has 67.9% of the portfolio as AAA loans. The BBB+ rated securities are 0.2% of the portfolio. Much of these securities(BBB+ and lower) were remanded by the investment banks itself to accrue huge interest amounts which proved wrong and led them to huge losses. Trade receivables account to 70% of asset backed commercial paper (ABCP) conduits in may 2007. The next highest ABCP is real estate and mortgages accounting to 8%.

The CDOs were divided into thre… Continue

Credit rating agencies rated the CDOs based on certain rules framed for the same. They forgot to view the 360 degree view of the problem. 1st tranche CDO was insured and hence rated as AAA. But the credit rating agencies were not aware of the fact that having insurance for the CDOs may not save the investors if the subprime lenders default. Though the top rating agencies such as Moody's, Fitch, S & P rated the 1st tranche as AAA which are considered to be safe investments, the hypothesis was… Continue

The crisis which has shattered the hopes of a comeback for the economy without a mild recession, was estimated at $ 945 Billion- the massacre which IMF estimates as the subprime losses. Companies have written down huge losses and many companies have been either closed or acquired .Who imagined one of the top 5 investment banks - Bear Stearns would bailout and get acquired by JP Morgan Chase for a mere $10 per share. The Moody's credit rating was regarded as the indicator for a safe security - Wh… Continue