2008 Crisis

SUB PRIME CRISIS 2008

P BHASKAR RAKESH

* INVESTORS have huge money => they want to invest => safe bet with AAA credit rating is US FED treasury bills => but FED is giving only 1 % return => so they didn’t invested

* Banks/Financial Institutions => borrowed money for 1 % interest rate => gave house loans to people as real estate sector is booming.

* Now Investment banks thought of making the investors be part of this by giving higher returns (4% - 10%)

* Mortgage lenders through mortgage brokers Identified Prime Mortgagers and gave loans to them,by keeping house documents as security. Prime mortgagers will pay monthly interests and principal amount.

* Now investment bankers bought those mortgages from mortgage lender and created a new financial instruments called CDO.

* Investment bankers made 3 types of bonds basing on risk => investors bought those bonds thinking that they are getting high interest rates.

* Everything went fine and investors asked for more bonds => investment bankers asked for more mortgages from mortgage lenders.

TURNING POINT

* Mortgage lenders gave loans to subprime mortgagers (those who have bad credit history) thinking that even if they default, they can sell their house and make money.

* So the chain continued….

* As expected subprime mortgagers defaulted => more and more defaulted => suddenly because of over supply house rates came down => supply is more and demand is less

* Investors didn’t want to buy these bonds as real estate sector crashed.

* But already investment bankers bought thousands of these mortgages => no one in the market ready to buy this => so these investment bankers couldn’t pay interest rates to investors for bonds that they issued.

* Real estate sector crashed => Investors got huge loss => investing banks went bankrupt =>

SUBPRIME CRISIS

RESULTED IN