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Banks Subprime Crisis

Banks Subprime Crisis. Joel Damitier Corey Lyon Danny Hernandez. History of Banks. Citigroup Merger of Citicorp and Travelers Group Worlds Largest Financial Services Organization HSBC Focused mostly on lending Bank of America Largest Bank Holding Company in the U.S.

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Banks Subprime Crisis

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  1. BanksSubprime Crisis Joel Damitier Corey Lyon Danny Hernandez

  2. History of Banks • Citigroup • Merger of Citicorp and Travelers Group • Worlds Largest Financial Services Organization • HSBC • Focused mostly on lending • Bank of America • Largest Bank Holding Company in the U.S.

  3. Leading Up to the Sub-Prime Crisis • Banks would refuse to lend money to those with bad credit or low income. • In order to get a mortgage, the qualifications were strict • General process: 1. Broker provides mortgage loan 2. Broker sells mortgage to a bank 3. Firms collect thousands of mortgages each month that should continue throughout the life of the mortgages 4. Firm sells shares of that income to investors

  4. Leading Up to the Sub-Prime Crisis • Banks steadily loosened up on how they lend money: 1. SIVA- stated income, verified assets 2. NIVA- no income, verified assets 3. NINA- no income, no assets • Banks thought this would produce more mortgages and more securities

  5. Impact In the U.S.

  6. Banks and The Subprime Crisis • Stock Prices dropped making banks lose money on investments • Risky Lending • Easy for consumers to get loans • High interest rates • Borrowers could not afford the payments • Borrowers would default • Home Foreclosures

  7. Banks and The Subprime Crisis

  8. Banks and The Subprime Crisis • HSBC was the first to announce that they would see larger than anticipated losses from rising defaults in 2007 • New Century Financial filed for bankruptcy court protection in 2007 • Bank of America agreed to acquire Merrill Lynch in 2008 • BOA doesn’t buy Lehman Brothers.

  9. Stock Prices During Subprime Crisis

  10. Impact In the U.S. • Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. • Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008. • Americans' second-largest household asset, dropped by 22 percent, from $10.3 trillion in 2006 to $8 trillion in mid-2008.

  11. Impact In the U.S. • Investors don’t want to buy Mortgage Back Securities (MBS) • Affect on Borrower Interest rates rise More difficult to get loans Defaulting

  12. After The Crisis • Bailouts- Government intervention • New laws enacted(financial reformed) • Bank health improvement • For the first quarter in 2010, the net income of banks was $18 billion opposed to $5.6 billion exactly a year prior to that • Stricter lending

  13. Lessons Learned • Responsible lending and borrowing • better monitoring bank activities( transparency). • we can develop additional policy instruments.

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