Professional Documents
Culture Documents
PD rm PD rm
Y Y
Y
Y
er
er
ABB
ABB
y
y
bu
bu
2.0
2.0
to
to
re
re
he
he
k
k
lic
lic
C
C
w om w om
w
w
w. w.
A B B Y Y.c A B B Y Y.c
….
Paper on
Submitted by
Ritesh T. Bhusari
btritesh@yahoo.com
9970561723
Y
er
er
ABB
ABB
y
y
bu
bu
2.0
2.0
to
to
re
re
he
he
Aspire’08
k
k
lic
lic
C
C
w om w om
w
w
w. w.
A B B Y Y.c A B B Y Y.c
Contents:
Chapter Page no.
Synopsis
1. Introduction 01
Financial instability
Impact on India
2. Overview of sub-prime mortgage industry 06
Mortgage
Sub-prime Mortgage
Some of the sub-prime mortgages include
3. The current sub-prime mortgage crisis in US 07
4. Bad effects on Financial Institutions of U.S. due to sub-prime
mortgage industry 07
5. Schematics for better understanding sub-prime crisis 08
Fig.2 & Fig.3
6. Factors Which Drive Stock Market 09
7. Can India withstand US economic shock? 10
8. How the US sub-prime crisis does influence the Indian Stock
market?
9. These could be possible solutions 11
10.Conclusion 13
11.Acknowledgement 14
12.Bibliography 15
The U.S. Sub-prime crisis & its effect on the Indian Stock Market
F T ra n sf o F T ra n sf o
PD rm PD rm
Y Y
Y
Y
er
er
ABB
ABB
y
y
bu
bu
2.0
2.0
to
to
re
re
he
he
Aspire’08
k
k
lic
lic
C
C
w om w om
w
w
w. w.
A B B Y Y.c A B B Y Y.c
Synopsis:
The marketing scenario changes and so does the economies of the world. It is
needless to say that even the strongest of strong economies can be vibrant influencing
the global financial structure. The U.S. economy & its measuring unit $ has always
been an influential factor for the emerging economies like India.
The interlinking effect is the residue of the changing trends that ignited way
back in 1981. In 1981, when Fed rate was 20 per cent, some 5.7 per cent US
households had held stocks. When, in the year 2001, Fed rates were 1 per cent, some
52 per cent of the US households became obsessed with Wall Street, a ten-fold
increase in 20 years. When the stocks that the households held appreciated in the
market, they began spending more by borrowing against the unrealized and illusory
stock values. This unrealized asset-based lending and spending yet another topic in
itself, is another reason for spending beyond current income. The appreciation in
house values, like appreciation in stock values, also encouraged the households to
borrow and spend. This has led to the sub-prime crisis in US.
The US dollar is faced with the prospect of losing its pre-eminence as the
dominant reserve asset as it weakens under the weight of its galloping current account
deficit and the spreading contagion of sub-prime woes and with this Dalal Street
replaces Wall Street, more dollars are pouring into the Indian stock market through
FIIs/FIs. But other face of coin has stroked severely on 21/01/08 when Sensex fell by
4000 pts this is because any crisis is not good for Share market.
The RBI along with SEBI will have to take extra care to further tighten
monetary expansion to mitigate the effect of Sub-prime crisis & thereby melting
dollars on turbulence of Indian stock market & ultimately on our economy, for this
purpose RBI can use instruments like issue of dollar/euro bonds.
The U.S. Sub-prime crisis & its effect on the Indian Stock Market
F T ra n sf o F T ra n sf o
PD rm PD rm
Y Y
Y
Y
er
er
ABB
ABB
y
y
bu
bu
2.0
2.0
to
to
re
re
he
he
Aspire’08
k
k
lic
lic
C
C
w om w om
w
w
w. w.
A B B Y Y.c A B B Y Y.c
Introduction:
The sub-prime mortgage market, which resulted in high credit risk and
counter-party risk in the US, is still facing uncertainties and financial instability — an
offshoot of imprudent policies of US banks and other financial institutions operating
there. In fact, financial markets across the world have been turbulent.
Financial instability
A large number of borrowers were lured by low interest rates and monthly
income schemes. Banks, in particular, did not observe transparency and concealed
from customers the fact that after two years, interest rates would become variable. As
a result of the interest burden, the repaying capacity of borrowers sank to the level of
bankruptcy and heavy dead assets, swallowing the bank’s financial viability and net
worth.
This viral crept into European Banks too. Since a large number of US banks
and other financial institutions are entering the Asian (especially Chinese and East-
Asian) and West Asian markets to mobilize funds to rescue themselves from
bankruptcy, there is the danger that financial instability may creep into Asia as well.
The U.S. Sub-prime crisis & its effect on the Indian Stock Market
F T ra n sf o F T ra n sf o
PD rm PD rm
Y Y
Y
Y
er
er
ABB
ABB
y
y
bu
bu
2.0
2.0
to
to
re
re
he
he
Aspire’08
k
k
lic
lic
C
C
w om w om
w
w
w. w.
A B B Y Y.c A B B Y Y.c
are already becoming uneasy with stock prices falling. On the international front,
another visible and emerging source of financial instability is the reckless creation of
massive liquidity at lower cost by the Fed to provide cash to the US financial
institutions, which may hasten further depreciation of the dollar and the appreciation
of other currencies, resulting in greater pressure in international trade relations.
Impact on India
This could have a number of side effects, especially on the financial markets
in India. For instance, Indian banks with branches in the US and the UK may lend to
banks affected by the sub-prime debt crisis. This would weaken their balance sheet in
future.
Solutions are many but while selecting we need to be very cautious, since our
primary economy sector i.e. agriculture is not the main contributor behind our recent
economic boom and our booming sector i.e. service is mainly depend upon global
market. So, it is likely the global cues have its effect on our financial market &
ultimately on our economy.
The U.S. Sub-prime crisis & its effect on the Indian Stock Market
F T ra n sf o F T ra n sf o
PD rm PD rm
Y Y
Y
Y
er
er
ABB
ABB
y
y
bu
bu
2.0
2.0
to
to
re
re
he
he
Aspire’08
k
k
lic
lic
C
C
w om w om
w
w
w. w.
A B B Y Y.c A B B Y Y.c
The U.S. Sub-prime crisis & its effect on the Indian Stock Market
F T ra n sf o F T ra n sf o
PD rm PD rm
Y Y
Y
Y
er
er
ABB
ABB
y
y
bu
bu
2.0
2.0
to
to
re
re
he
he
Aspire’08
k
k
lic
lic
C
C
w om w om
w
w
w. w.
A B B Y Y.c A B B Y Y.c
unlike mutual funds and pension funds, hedge funds are not usually regulated by
Securities Exchange Commission.)
In late 2006, several US sub-prime mortgage companies had to close down
due to losses. New Century Financial Corporation had to file for bankruptcy. Some
companies were accused for actively encouraging fraudulent income inflation on loan
applications. This led to collapse of stock prices for many companies in sub-prime
mortgage industry, notably for some large lenders like Countrywide Financial and
Washington Mutual.
Bad effects on Financial Institutions of U.S. due to sub-prime mortgage
industry:
• Merrill Lynch seized $800 million in assets from two Bear Stearns hedge
funds that were involved in securities backed by sub-prime loans. The two funds are
now reported to be essentially worthless
• American Home Mortgage Investment Corporation filed Chapter 11
bankruptcy
• Mortgage Guaranty Insurance Corporation announced it would discontinue
its purchase of Radian Group after suffering a $ 1 billion loss of its investment in
Credit-Based Asset Servicing and Securitization. C-BASS is seeking to restructure its
financing. The MGIC-Radian transaction would have been a $4.9 billion deal.
• French bank BNP Paribas stopped valuing three of its funds and suspended
all withdrawals by investors after United States sub-prime mortgage woes had caused
"a complete evaporation of liquidity”
• Goldman Sachs' $8 billion Global Alpha hedge fund, its largest, reportedly
lost 26% in 2007
• Citigroup has reported taking $700 million in losses in its credit business
The U.S. Sub-prime crisis & its effect on the Indian Stock Market
F T ra n sf o F T ra n sf o
PD rm PD rm
Y Y
Y
Y
er
er
ABB
ABB
y
y
bu
bu
2.0
2.0
to
to
re
re
he
he
Aspire’08
k
k
lic
lic
C
C
w om w om
w
w
w. w.
A B B Y Y.c A B B Y Y.c
(Fig. 2)
(Fig. 3)
The U.S. Sub-prime crisis & its effect on the Indian Stock Market
F T ra n sf o F T ra n sf o
PD rm PD rm
Y Y
Y
Y
er
er
ABB
ABB
y
y
bu
bu
2.0
2.0
to
to
re
re
he
he
Aspire’08
k
k
lic
lic
C
C
w om w om
w
w
w. w.
A B B Y Y.c A B B Y Y.c
The U.S. Sub-prime crisis & its effect on the Indian Stock Market
F T ra n sf o F T ra n sf o
PD rm PD rm
Y Y
Y
Y
er
er
ABB
ABB
y
y
bu
bu
2.0
2.0
to
to
re
re
he
he
Aspire’08
k
k
lic
lic
C
C
w om w om
w
w
w. w.
A B B Y Y.c A B B Y Y.c
The U.S. Sub-prime crisis & its effect on the Indian Stock Market
F T ra n sf o F T ra n sf o
PD rm PD rm
Y Y
Y
Y
er
er
ABB
ABB
y
y
bu
bu
2.0
2.0
to
to
re
re
he
he
Aspire’08
k
k
lic
lic
C
C
w om w om
w
w
w. w.
A B B Y Y.c A B B Y Y.c
Some Reasons:
First, several foreign institutional investors (FIIs) are reeling under the impact
of non-performing or bad loans originating in the US sub-prime market. It is likely to
slowdown, or even reverses, the flow of foreign direct investments in the Indian
economy. This, as you know, will affect the long-term growth prospects of our
economy.
The U.S. Sub-prime crisis & its effect on the Indian Stock Market
F T ra n sf o F T ra n sf o
PD rm PD rm
Y Y
Y
Y
er
er
ABB
ABB
y
y
bu
bu
2.0
2.0
to
to
re
re
he
he
Aspire’08
k
k
lic
lic
C
C
w om w om
w
w
w. w.
A B B Y Y.c A B B Y Y.c
The U.S. Sub-prime crisis & its effect on the Indian Stock Market
F T ra n sf o F T ra n sf o
PD rm PD rm
Y Y
Y
Y
er
er
ABB
ABB
y
y
bu
bu
2.0
2.0
to
to
re
re
he
he
Aspire’08
k
k
lic
lic
C
C
w om w om
w
w
w. w.
A B B Y Y.c A B B Y Y.c
Conclusion:
It may be noted that the stock market is still flush with liquidity and money
has not moved out of country. FIIs that entered the market to unload their position for
profit making will not do so now because foreign markets are not safe.
Moreover, there cannot be a stock market driven policy, but regular
intervention are necessary by regulatory bodies like SEBI & RBI. Money supply &
interested rate have to be determined by real variables such as economic growth and
their respective requirement for credit, and the inflation rate. In fact, growth in market
capitalization should be compared to investment growth in terms of production does
not happen; we should take a serious look at market capitalization. Market is still
bullish on the banking, power, media, and metals ferrous and mining sector and also
on the undervalued pharmaceutical sector.
The U.S. Sub-prime crisis & its effect on the Indian Stock Market
F T ra n sf o F T ra n sf o
PD rm PD rm
Y Y
Y
Y
er
er
ABB
ABB
y
y
bu
bu
2.0
2.0
to
to
re
re
he
he
Aspire’08
k
k
lic
lic
C
C
w om w om
w
w
w. w.
A B B Y Y.c A B B Y Y.c
Acknowledgement:
At the outset we acknowledge with our gratitude the guidance and direction
given to ous by Ms. Haridas, faculty of Economics MITSOM, PUNE to make our
paper so comprehensive and successful.
We are extremely grateful to Ms. Anjali Vamburkar for giving us a valuable
and comprehensive guidance, which make competent to digest difficult financial
jargon.
We consider ourselves very fortunate for having been selected by a very
reputed management institute to present ourselves in front of dignitaries & giving us
an opportunity to become more competent.
The U.S. Sub-prime crisis & its effect on the Indian Stock Market
F T ra n sf o F T ra n sf o
PD rm PD rm
Y Y
Y
Y
er
er
ABB
ABB
y
y
bu
bu
2.0
2.0
to
to
re
re
he
he
Aspire’08
k
k
lic
lic
C
C
w om w om
w
w
w. w.
A B B Y Y.c A B B Y Y.c
Bibliography:
1. Calvo Guillermo, November 12, 2007, FINANCIAL CRISES Lessons and
Prospects, Columbia University Journal, pp 225-265
2. Favaro Edgardo and Lahiri Ashok K., Book Fiscal Policies and sustainable
Growth in India, chapter no.4th, First edition Oxford Uni.press, pp 75-100
3. Giglitz Joseph E., September 2007, The Changing Global Economic
Landscape: Opportunities and Risks, Graz journal, pp 123-235
4. Khan M.Y. 28th January 2008, Turbulence in financial markets and the way
ahead, The Business Line, page no. 10
5. S. Gurumurthy, 21 december 2008, The $3.8 trillion pro-notes depreciating by
the hour, The Business Line, page no. 9
6. S. Venkitaramanan, 7th January 2008, Dollar decline and solutions, The
Business Line, page no. 10
7. V.Kandaswamy, 28th January 2008, Markets the day after, Capital Market
magazine, January-February issue, page no. 8
8. www.thehindubusinessline.com
9. www.wikipedia.com
10. www.thecapitalmarket.com
11. www.theeconomist.com
12. www.sebi.gov.in
13. www.rbi.org.in
The U.S. Sub-prime crisis & its effect on the Indian Stock Market