Subprime Crisis: Sandipan Nandi Shamik Roy Uttiya Das
Subprime Crisis: Sandipan Nandi Shamik Roy Uttiya Das
Subprime Crisis: Sandipan Nandi Shamik Roy Uttiya Das
Some Happenings
Infosys reports a reduced Quarter on Quarter increase in profits Mindtree announces negative margin of operating profits Bench Strength of the top 5 Indian IT majors has grown at faster rate ie 48.5% compared to hiring rate growth of 38% Large companies like Oracle, IBM & Yahoo on a hiring freeze Banks like HSBC are writing of loans at the rate of $51 million a day
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Appraiser:
Real estate appraisers inspect homes prior to sale to determine their value, typically by comparing them to nearby properties that have recently been sold. Mortgage lenders require appraisals to assure the property is valuable enough to serve as collateral for the loan. Many critics believe that sloppy or dishonest appraisals contributed to the recent home-price bubble, setting the market up for the fall that followed
Auction-rate Security:
A type of debt security, such as a corporate or municipal bond, that carries a floating interest rate that is frequently reset through an auction process. Rates may be reset as often as daily, but rarely at intervals longer than 35 days. These securities have generally been promoted as safe, liquid investments offering higher yields than other "cash" equivalents, such as money market funds. But the credit crunch that grew out of the subprime crisis caused this market to dry up, making it difficult or impossible for investors to sell these holdings even though few, if any, of the securities' issuers had actually defaulted
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Credit Crunch: A situation in which banks and other financial institutions cut back on lending, or raise interest rates so high that individuals, businesses and institutions reduce their borrowing. In the subprime crisis, the credit crunch arose from widespread fear that borrowers would default Discount Rate and Discount Window: The discount window is a mechanism used by the Federal Reserve to make short term loans to qualifying banks which need cash to maintain liquidity. The discount rate is the interest rate charged on these loans. Historically, the discount window was limited to overnight loans to help with temporary emergencies. When the credit crunch arising from the subprime crisis made it difficult for banks to borrow, the Fed moved to open the window wider
Foreclosure:
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Foreclosure: The process of a lender taking ownership of a property after the borrower has defaulted, or stopped making monthly payments. The home is used for collateral to minimize the lender's losses. This is why mortgages charge lower interest rates than credit cards, which have no collateral. Typically, lenders resorting to foreclosure recover only about half of what they are owed, because of legal fees, the missed payments for the many months the process takes and the difficulty in selling a poorly maintained property Mortgage-backed Security: A form of security, similar to a bond that is backed up, or collateralized, by thousands of home loan bundled together by a securities firm such as an investment bank. Investors who purchase mortgaged-backed securities receive regular payments representing their share of the interest and principal payments made by homeowners
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Risk Premium:
Refers to the higher return investors demand to offset greater risks. "Junk" bonds issued by corporations with shaky finances typically pay higher interest than ultra-safe U.S. Treasury bonds, since investors worry the corporations will not make the payments promised
Securitization:
Streams of income, such as homeowners' monthly mortgage payments, can be bundled together into a form of bond that is sold to investors. Securitization allows the original lender to exchange a holding with a long-term value, such as the payments it is to receive on 30-year mortgages, into an immediate payment, providing cash for making additional loans. Securitization thus makes more mortgage money available, and it allows the risk of mortgage lending to be dispersed among investors around the world. Investors' appetite for high-yield investments may have encouraged mortgage lenders to offer more subprime loans than was wise, contributing to the subprime crisis
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Subprime Mortgage: Generally understood to be a mortgage offered to borrowers with low credit ratings or some other characteristic that increases the risk they will default, or fail to make their monthly loan payments. To offset this risk, subprime loans charge higher interest rates than ordinary "prime" loans. Most subprime loans start with a low "teaser" rate charged for the first one to three years Tranche:
A slice of something bigger. Mortgages are bundled together and converted to a kind of bond sold to investors. Although the pool as a whole may be too risky to earn an AAA investment rating, the securities can be offered in a series of tranches with varying risks. A high-risk tranche would be the first to suffer losses if homeowners stop making their monthly payments, but this tranche would pay the highest yield. Other tranches would have first rights to borrowers' monthly payments, making them safer, but their yields would be lower. By concentrating risks in low-rated tranches, investment banks can create AAA-rated securities out of a mortgage pool that as a whole could not qualify for such a high rating
Woes continues
High volatility in the markets due to recessionary fears in US cash flow to US slows down which effects high current account deficit. So where the money getting invested now? ECB has postponed interest hike Germany and France has planned tax cuts to support growth
THE CLOUDS OF SUBPRIME ARE MORE LIKELY TO BRING SPOT OF RAIN RATHER THAN A STORM TO EUROPES BIGGEST ECONOMIES - ECONOMISTS (SEPT 22ND , 2007
ISSUE)
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