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8/14/2019 Subpirme Crises
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Citibank
Sub Prime Crises
Presented By :-SaadArifOwaisObaidJibran
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What is our Presentation about?
We are giving a persuasivepresentation to an audience that
contains members of Uppermanagement of Citibank and areconvincing them to change their policyrelated to issuing mortgages because
of the sub prime crises that arose dueto mortgages being sanctioned to SubPrime lenders.
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Sub Prime Crises
An ongoing economic problem jeopardizing the
existence of banks in general.
Created liquidity issues in the banking system owing to
Foreclosures which accelerated in the United States in
late 2006 Triggered a global Financial crises during
2007 and 2008.
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis
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What does Sub Prime mean?
Sub prime lending refers
practice of making loans to borrowers(who do not qualify for market interest rates)
Involving various risk factors such asIncome level
Size of the down payment made
Credit history
Employment status.
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis
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Housing market:An Overview
Subprime borrowing was a major contributorto an increase in home ownership rates andthe demand for housing. This demand helped
fuel housing price increases and consumerspending. American home prices increasedby 124%
The bank was generating money and so itcontinued issuing Sub Prime mortgages.
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-26#cite_note-26
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Housing market:An Overview
Overbuilding during the boom period,increasing foreclosure rates andunwillingness of many homeowners tosell their homes at reduced marketprices have significantly increased thesupply of housing inventory available.
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-MSNBC-newhome-30#cite_note-MSNBC-newhome-30
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Housing market:An Overview
This excess supply of home inventory placessignificant downward pressure on prices. Asprices decline, more homeowners are at risk
of default and foreclosure. As of February 2008, housing prices are
expected to continue declining until this
inventory of surplus homes (excess supply)is reduced to more typical levels.
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-economist-downtown-32#cite_note-e
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-Ofheo-3q07hpi-33#cite_note-Ofheo-3q07hpi-33
http://en.wikipedia.org/wiki/Subprime_mortgage_crisishttp://en.wikipedia.org/wiki/Subprime_mortgage_crisis8/14/2019 Subpirme Crises
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Housing market:An Overview
Easy credit, combined with theassumption that housing prices wouldcontinue to appreciate, alsoencouraged many subprime borrowersto obtain ARMs they could not affordafter the initial incentive period.
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#cite_note-34#cite_note-34
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http://www.forbes.com/finance/mktguideapps/compinfo/AdvancedChart.jhtml?symbol=C
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11http://www.forbes.com/finance/mktguideapps/compinfo/AdvancedChart.jhtml?symbol=C
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Process
Owing to a form of financial engineering calledSecuritization.
many mortgage lenders had passed the rights to themortgage payments and related credit/default risk tothird-party investors via
Mortgage backed Securities (MBS). Collateralized debt obligation (CDO).
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis
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Due to Sub Prime lending.
Bursting of the Us House Bubble.
High default rates on Sub prime" and other Adjustable
Rate Mortgages (ARM) made to
higher-risk Borrowers with lower income.
higher-risk Borrowers with lesser credit
history than "prime"
borrowers.
How did the Crises start?
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis
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Process
Graphical Analysis
Contdhttp://news.bbc.co.uk/2/hi/business/7073131.stm
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Contd
http://news.bbc.co.uk/2/hi/business/7073131.stm
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Mortgage Bond Market
http://news.bbc.co.uk/2/hi/business/7073131.stm
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Citibanks Mistake?
Poor judgment by Citibank.
Credit Risk under estimated by Citibank.
Mortgage brokers focused their efforts by selling sub-primemortgages in working class black areas where many peoplehad achieved home ownership.
Mortgage brokers told them that they could get cash byrefinancing their homes, but often neglected to properlyexplain that the new sub-prime mortgages would "reset"
after 2 years at double the interest rate.
http://www.dailytimes.com.pk
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Underwriters determine if the risk oflending to a particular borrower undercertain parameters is acceptable. In2007, 40 percent of all subprime loanswere generated by automatedunderwriting.
Citibanks Mistake?
http://en.wikipedia.org/wiki/Mortgage_underwriting
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Consequences of themistake for Citibank?
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21http://www.forbes.com/finance/mktguideapps/compinfo/AdvancedChart.jhtml?symbol=C
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22http://en.wikipedia.org/wiki/Image:Borrowing_Under_a_Securitization_Structure.gif
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Consequences for Citibank?
face $18.7 billion in additional write-downs for the quarter.
Citibank is expected to slash its $2.16-a-share annual dividendby an eye-popping 40%.
Citibank is expected to report a loss of $1.33 a share.
third-quarter profits fell 56.8% to $2.4 billion, or 47 cents a
share, from $5.5 billion, or $1.10 a share.
Salvage assets of seven affiliated structured investmentvehicles valued at $49 billion by putting those assets onto itsbalance sheet.
Contdhttp://www.dailytimes.com.pk
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Contd..
Citibank agreed to a $7.5 billion equity investmentfrom the Abu Dhabi Investment.
The firm has a serious need to preserve/raiseadditional capital.
A wave of repossessions is sweeping America as
many of these mortgages (ARM) reset to higherrates in the next two years.
Goldman Sachs analyst William Tanona predicted
big write-downs for Citigroup.http://www.dailytimes.com.pk
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Graphical Analysis
Contdhttp://news.bbc.co.uk/2/hi/business/7073131.stm
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Increase in liabilities recorded byCitibank.
Contd..
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Contd..
http://news.bbc.co.uk/2/hi/business/7073131.stm
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Solutions for Citibank
Rely on data from only certified and reliable CreditRating Agency.
The rating processes can be re-examined and improvedto encourage greater transparency to the risks involved withcomplex mortgage-backed securities and the entities thatprovide them.
Have few but reliale brokers who dont mislead andmisdirect people for their own commission.
Contd
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Citibank should:
Change lending practices (Check proofs of income etc) (FalseSalary slips given by people).
Improve on bankruptcy protection.
Give credit counseling and education to customers.
Check carefully licensing and qualifications of lenders.
Using Media to increase peoples awareness.
Contd..
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REFRENCES
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis
http://news.bbc.co.uk/2/hi/business/7073131.stm
http://www.dailytimes.com.pk/default.asp?page=2007%5C11%5C04%5Cstory_
http://upload.wikimedia.org/wikipedia/en/0/09/Subprime_diagram.png
http://www.forbes.com/finance/mktguideapps/compinfo/AdvancedChart.jhtml?s
Solutions (Slide# 28 and 29) have been written by usafter analyzing the case of Citibank issuing sub primeloans and we have made these solutions keeping intoaccount the problems faced by them and then givingsolutions for these problems.
http://www.dailytimes.com.pk/default.asp?page=2007%5C11%5C04%5Cstory_4-11-2007_pg5_15http://www.forbes.com/finance/mktguideapps/compinfo/AdvancedChart.jhtml?symbol=Chttp://www.forbes.com/finance/mktguideapps/compinfo/AdvancedChart.jhtml?symbol=Chttp://www.dailytimes.com.pk/default.asp?page=2007%5C11%5C04%5Cstory_4-11-2007_pg5_158/14/2019 Subpirme Crises
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Thank You for your Patience.
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