{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Ch05a - Chapter 5 Current Multinational Financial...

Info icon This preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 5 Current Multinational Financial Challenges: The Credit Crisis of 2007-2009
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
The Goals of Chapter 5 Introduce the notions of subprime debt and securitization Introduce the crisis of 2007 and 2008: subprime crisis , financial tsunami , and credit crisis Discuss several issues associated with the crisis Market-to-market accounting rule LIBOR Collateralized Debt Obligations (CDOs) Credit Default Swaps (CDSs) Structured Investment Vehicles (SIVs) Lessons learned from the crisis 5-2
Image of page 2
Subprime Debt and  Securitization 5-3
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
The Seeds of Crisis: Subprime Debt From 1995 to 2001, the Nasdaq index increased by a factor of more than 6, which is called the dot-com boom After the collapse of the dot-com bubble in 2000 and 2001, capital tried to find a safer target and began to flow toward the real estate sectors in the United States Some economists argued that much of the wealth accumulated from the equity markets during that period was now used to push the demand and prices of real estate upward The U.S. banking sector found mortgage lending highly profitable and saw it as a rapidly expanding market The mortgage lending business boomed due to the high demand The bright prospect of the housing price enhanced the value of collaterals for the mortgage 5-4
Image of page 4
In 1999, the U.S. Congress pass the Gramm-Leach- Bliley Financial Services Modernization Act, which repealed the Glass-Steagall Act of 1933 and eliminated the barriers between commercial and investment banks With the increase of the competition in the mortgage lending business, a growing number of the borrowers were with lower credit quality These borrowers who previously should be unqualified to borrow mortgages, and their associated mortgage agreements ( subprime debt ), carried higher debt obligations with lower income In traditional financial management terms, the debt-service coverage ratio, defined as the ratio of income available for servicing interest and principal payments of the debt, was increasingly inadequate 5-5 The Seeds of Crisis: Subprime Debt
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
The Seeds of Crisis: Subprime  Debt The competitiveness created various mortgage forms to attract borrowers, e.g., 1. Initially, borrowers pay floating rates, often priced at LIBOR, plus a small interest rate spread, and the loans would reset at much higher fixed rates within two to five years 2. Borrowers pay interest only in early years with a initial interest rates far below market rates, and have substantial step-ups in payments after the initial period of interest- only payments 5-6
Image of page 6
The Seeds of Crisis: Subprime Debt Mortgage loans in the U.S. marketplace are normally categorized (in increasing order of riskiness) as: Prime (or A-paper) A-prime mortgages are conforming or conventional loans, meaning it would meet the guarantee requirement and can be resale to government-sponsored institutions, e.g., Fannie Mae (Federal National Mortgage Association) or Freddie Mac (Federal Home Loan Mortgage Corporation)
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern