2007_Financial_Services_Crisis_2008

2007_Financial_Services_Crisis_2008 - 2007 Financial...

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2007 Financial Services Crisis February 2008
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2 Quick Review of First Class Global Growth of Financial Markets Market Size and Composition of Financial Services  Companies Consumer and Corporate Segments Financial Services Profitability, Efficiency Ratio Response of Financial Services Companies Market trends New entrants Risk Cost reduction
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3 Quick Review  Financial Services Landscape Summary Fragmented and consolidating (Course packet material) Regulatory barriers restricting strategic options have mostly been  lifted Business mix options in consumer and corporate banking Pricing flexibility Location flexibility locally, regionally and globally Strategic options proliferate Bundling/unbundling On/off balance sheet Role of technology and risk management Competitive advantage potential Scale Segmentation Differentiation
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4 2007 Financial Services Crisis Mortgage Stress Situation 20% of $3 trillion loan origination volume in 2006 was subprime (50x growth over 5  years) 15% was Alt-A (investor or no/low doc loan) 30% of loans are teaser-rate, option arms (payments can be less than interest); $500b  reprice in ‘08 Mortgages are typically sold whole in mortgage securities or sliced/diced into CDOs 86.5% loan to value for new mortgages in ’06 vs. 78% five years ago; approximately  50% of home equity is mortgaged Market Changes Delinquencies (60 day delinquencies for subprime loans are > 20%, 60 day  delinquencies for all mortgages are 5.6%) and foreclosures (now 1.69% of loans are  in process of foreclosure) doubled in past year Reset of introductory teaser rate loans rapidly increased interest rates (most teaser  rate loans are yet to be reset) Real estate prices flattened to declined thus some 100% loan to value mortgages  were under water (mortgage>home value) CDO prices for lowest risk tranches are recently at 17; super-senior tranches are at  79 (down from 95 in August)
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5 2007 Financial Services Crisis Mortgage Stress Result Demand for new CDO issues (mostly mortgage backed securities) evaporated Originators were stuck with unwanted inventory and unfilled commitments  Balance sheet holders of mortgages and investors in CDOs (mutual funds, SIVs,  conduits, banks) faced declines in asset values (5-60%) and funding difficulties Approximately $150 billion written-off to date (Merrill, UBS and Citi have had the  largest write-offs) One prognosticator estimates >$700 b of write-offs will occur before the end; JPMorgan  estimates $200 b Recent Credit Suisse announcement ($3 b of write-offs preannounced) for Q1 ’08 signals 
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2007_Financial_Services_Crisis_2008 - 2007 Financial...

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