The presentation traces the roots of the infamous Lehman brothers crisis that rocked the globe and documents the lessons learned from this crisis.

2. INTRODUCTION
The subprime crisis took place in the
US.
Ripple effects spread across the
globe.
US economy was adversely impacted.

3. ADVERSE IMPACTS ON US ECONOMY
• Loss to US economy – US $ 500
billion
• Fall in consumer spending
• Defaults in housing loan
• Financial institutions had to write
off loans
• Government had to bailout through
stimulus packages

4. GENESIS OF THE CRISIS
• Mortgage loans on residential properties
were lent to those with low credit
worthiness.
• Debtors with low repayable ability – sub
prime borrowers.
• Loans had low margin money & low initial
teaser payments
• Higher risk of default – higher interest
rates for sub prime borrowers
• Securitisation of mortgage loans by Wall
Street firms

5. WHAT IS SECURITISATION?
• Conversion of existing assets or
future cash flows into marketable
securities.
• Conversion of non marketable assets
into marketable assets.

6. TOXIC ASSETS
Crisis began now
– international
investors – hedge
funds, pension
funds and banks
started investing
in such
securities.

7. WHAT HAPPENED NEXT?
• Sub prime borrowers defaulted in repaying
stipulated monthly investments (EMIs)
• High delinquency rates
• Interest rates swelled
• Home prices flattened and then turned
negative
• Borrowers – no option but to default –
repayment and refinancing options were no
longer feasible.
• Crisis sent shock waves in other parts of
the world.

8. IMPACT ON THE GLOBAL FINANCIAL SYSTEM
Foreign portfolio investors could not
sell their securities – there were no
buyers!
Several banks stared at losses
resulting from risky property loans!

9. REAL REASONS FOR CRISIS
Global economic imbalances – outcome
of long periods of excessively loose
monetary policies in advanced
economies.

10. IMPACT ON INDIAN FINANCIAL SYSTEM
Impact was lesser – exposure of Indian
financial system was limited.
RBI’s prudential norms – blessing in
disguise
Lower presence of foreign banks in Indian
banking sector was another reason

11. LESSONS FROM THE CRISIS
Larger economies like US impact
economies like India due to the effect
of globalisation
Globalisation is not just
internationalization of business – it
also means “cross border movement” of
financial crisis.