The document summarizes the evolution of the US home mortgage industry from the 1930s to the 2000s and how risky lending practices led to the global financial crisis. It discusses how government interventions created Fannie Mae and Freddie Mac to support the mortgage market after the Great Depression. It then explains how private securitization expanded risky subprime lending that was packaged and sold globally. When the subprime mortgage market collapsed in 2007 due to rising defaults, it spread contagion worldwide and caused a liquidity crisis and losses across the global financial system totaling over $586 billion.

1. Now we are ready to look into the mess !

6. Structured finance: The players in securitization Originator End borrowers Conduit/trust/ SPV/SPE/SIV Investment bank (underwriter) Rating agency Institutional investor End lenders Insurance company Broker Servicer $ $ $ $ $ Mortgages Mortgages MBS I&P ($) I&P ($) MBS, I&P ($) Financial returns ($) LEGEND KEY O&G – interest and principal SPV – special purpose vehicle SPE – special purpose enterprise SIV – special investment vehicle MBS – mortgage backed securities Founder: loan originator or investment bank Purpose: transfering ownerhship of claims (loans) and collateral (mortgages) in order to issue mortgage backed securities (bonds). Exposure of founder: implicit guarantee in case of large losses. Assigns credit rating to issued MBSs. Organizes issuing of MBSs and places MBSs to investors in financial markets. Broker places mortgage loans to borrowers for fee Manages the flow of interests and principal (I&P); usually, but not necessarilly the Originator Typically a specialized mortgage bank Mutual funds, pension funds, hedge funds… Can assume part of risks (insurance of mortgage loans, insurance of MBS returns).

7. Possible inter linkage in the US subprime mortgage market Source: http://www.norges-bank.no/templates/article____66901.aspx

13. In Short Source : http://www.imf.org/external/pubs/ft/fandd/2007/12/dodd.htm ,

14. Those good old days were gone now!!

15. How Subprime became Global Financial Crisis? Source: Financial Times , http://www.ft.com/cms/s/0/a09f751e-6187-11dd-af94-000077b07658,dwp_uuid=698e638e-e39a-11dc-8799-0000779fd2ac.html In billion US $ How could problems with subprime mortgages, being such a small sector of global financial markets, provoke such dislocation?

20. Subprime losses by Big Banks Worldwide :US$ 586.2 billion and still counting Source: Financial Times

22. Investments devalued across the Globe Source: BBC News, http://news.bbc.co.uk/2/hi/talking_point/7644574.stm

23. Subprime impact across globe Source: Financial Times

24. Impact of Financial crisis-felt across the globe Source: Reuters, http://www.reuters.com/news/globalcoverage/creditcrisis

26. Global pool of money Source: http://www.rbnz.govt.nz/speeches/2968727.html

27. Rise of Global Liquidity (1998 onwards) Source: http://www.rbnz.govt.nz/speeches/2968727.html

29. High Banks leverage ratio’s to fund MBS/CDO

30. Building up of the housing bubble

32. Starting 2006 housing bubble busted

33. LIBOR rate

34. Credit rating of complex financial instruments Source: IMF and WSJ

35. Speedy Foreclosures

36. Top 10 Bankruptcies

37. The American way of debt Source: http://www.nytimes.com/interactive/2008/07/20/business/20debt-trap.html?ei=5070

38. Average debt of American in 2004 Source: http://www.nytimes.com/interactive/2008/07/20/business/20debt-trap.html?ei=5070

39. Thanks