MBS – Mortgage Backed Securities :
2 MBS – Mortgage Backed Securities
Investment Banks :
3 Investment Banks An investment bank uses its proprietary book (own money) to lend others and invest. It started with the sub prime crisis. Banks like Lehman, buy mortgage loans from other banks, and then package them to sell bonds against the loan pool. Often they add cash to make the loan pool more attractive, so that the bonds can be sold at a higher price.
Suppose a mortgage was earning 6%, these bonds are sold at 4%. The difference is the spread which the investment bank earns.
By selling these structured bonds, it raises money and frees capital. But when homebuyers started defaulting, these bonds lost their value. It all began like this, and then the virus spreads across markets.
Sectors :
4 Sectors Banking
Investment Banking
Asset Management
Funds
Insurance
Stock Market
Currency
Commodities Liquidity & Interest Rate
Fund Raising issues
Losses on various Investments
Losses on Invt & Low Risk appetite
Losses on Insured Investment assets
Liquidity & Low Risk appetite
Appreciation on hard currencies
Gold – chosen Invt vehicle, Oil – Drops coz of lower expected demand Effects
Credit Default Swap : A way to insure against default by Bond Issuers :
5 Credit Default Swap : A way to insure against default by Bond Issuers Bank X Bank Y Company A Pays $ 10 Million
& Buys Bonds Receives 5% Interest Annually Buys Protection Against Default by Company A & Pays Premium Sells Protection
INDIA :
6 INDIA FII pullout
USD appreciation
Interest Rate hike & Inflation
ECB/ Money Market Liquidity Crisis
Low Risk appetite
Outstanding deals with gone-bust banks
IT / ITES – Contracts are stalled
Other exports – Positive due to USD appreciation, but getting orders could be tough
Slide 7:
7 THANK YOU Santosh Gopala
FIC CAF / RPL Team