Monthly Archives: September 2008

Credit Crisis demystified

When:

Seeds were sown way back in 1977. Known as Community Reinvestment Act  , is a United States federal law that requires banks and thrifts to offer credit throughout their entire market area and prohibits them from targeting only wealthier neighborhoods with their services. The bill encouraged the Federal National Mortgage Association, commonly known as Fannie Mae, to enable mortgage companies, savings and loans, commercial banks, credit unions, and state and local housing finance agencies to lend to home buyers.

Why

National grassroots pressure for affordable housing. Though there was considerable opposition from the mainstream banking community. Only one banker from ShoreBank in Chicago, testified in favor of the act.

Subprime Explained

Mr A seeks a housing loan to give shape to his dream home. But he doesn’t have good credit rating. This means that he is unable to clear all the stringent conditions that a bank imposes on an individual before it sanctions a loan. Since his credit is not good enough, no bank will give him a home loan as there is a fear that the chances of a default by him are high. Here enters , Mr B (a robust financial institution)who has good credit rating and is willing to take on some amount of risk and make profit.

 Given his good credit rating, the bank is willing to give Mr B a loan. The bank gives the loan at a certain rate of interest.Mr B then divides this loan into a lot of small portions and gives them out as home loans to lots of others like Mr A who do not have a great credit rating and to whom the bank would not have given a home loan in the first place.

Mr B gives out these loans at a rate of interest that is much higher rate than the rate at which he borrowed money from the bank. This higher rate is referred to as the sub-prime rate and this home loan market is referred to as the sub-prime home loan market.

By giving loan to many Mr A’s , Mr B is expecting to make lot of profit.  Mr B does not wait for the principal and the interest on the sub-prime home loans to be repaid, so that it can repay its loan to the bank (the prime lender), which has given it the loan.

So what does Mr B do? He goes ahead and securitises’ these loans. Securitisation means converting these home loans into financial securities, which promise to pay a certain rate of interest. These financial securities are then sold to Mr C (Institutional Investors)

 

And how is Mr C repaid? The interest and the principal that is repaid by Mr A through equated monthly installments (EMIs) is passed onto Mr C.

This looks so simple so what went wrong

 

The sub-prime home loans were given out as floating rate home loans. A floating rate home loan as the name suggests is not fixed. As interest rates go up, the interest rate on floating rate home loans also go up. As interest rates to be paid on floating rate home loans go up, the EMIs that need to be paid to service these loans go up as well.

What happened next is that people started defaulting on their obligations. Once more and more sub-prime borrowers started defaulting, payments to the institutional investors who had bought the financial securities stopped, leading to huge losses.  The housing bubble collapsed and mortgage-backed securities (bought by Mr C) were almost worthless . As defaults kept rising, Mr B could not service their loans that they had taken from banks. So they turned to other financial firms to help them out, but after a while these firms too stopped extending credit realizing that the collateral backing this credit would soon lose value in the falling real estate market.

 

Now burdened with tons of debt and no money to pay it back, the back of these financial entities broke, leading to the current meltdown.

Ok this is an American problem , so why are markets around the world crashing

Mr C who had invested in securitised paper from the sub-prime home loan market in the US, saw his investments turning into losses. Most big investors have a certain fixed proportion of their total investments invested in various parts of the world.  Once investments in the US turned bad, more money had to be invested in the US, to maintain that fixed proportion. In order to invest more money in the US, money had to come in from somewhere. To make up their losses in the sub-prime market in the United States, they went out to sell their investments in emerging markets like India where their investments have been doing well. So these big institutional investors, to make good of their losses in the sub-prime market, began to sell their investments in India and other markets around the world.


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Revealed – Similarities between Sarah Palin and Miss South Carolina?

Is this the reason why mccain campaign keeps Sarah Palin away from the media?

Couric: Have you ever been involved in any negotiations, for example, with the Russians?

Palin: We have trade missions back and forth, we do. It’s very important when you consider even national-security issues with Russia. As Putin rears his head and comes into the air space of the United States of America, where do they go? It’s Alaska. It’s just right over the border. It is from Alaska that we send those out to make sure that an eye is being kept on this very powerful nation, Russia, because they are right next to, they are right next to our state.

COURIC: Why isn’t it better, Governor Palin, to spend $700 billion helping middle-class families struggling with health care, housing, gas and groceries? … Instead of helping these big financial institutions that played a role in creating this mess?

PALIN: Ultimately, what the bailout does is help those who are concerned about the health care reform that is needed to help shore up the economy– Oh, it’s got to be about job creation too. So health care reform and reducing taxes and reining in spending has got to accompany tax reductions.

Remember Miss south Carolina who made the following statement:

I personally believe that U.S. Americans are unable to do so because uh some uh people out there in our nation don’t *have* maps and uh I believe that our ed- education like such as in South Africa and uh the- the Iraq everywhere like such as and I believe that they should uh our education over here in the U.S. should help the U.S. or- or- should help South Africa and should help the Iraq and the Asian countries so we will be able to build up our future

 

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Google Project – 10 to the power 100th

Robert Collier (don’t know who he is) once said “A single idea / the sudden flash of a thought / may be worth a million dollars.” Well , Google has just proved this to be true . Infact Google is offering 10 Million Dollars for that “Single Idea”  which can change the world by helping as many people as possible. 

Google has recently launched project 10100 (pronounced “Project 10 to the 100th”). Here is how it works

1. Send in your idea before October 20th

2. Selection of one hundred ideas will be put forward with, the public, to choose twenty semi-finalists. Then an advisory board will select up to five final ideas.

3.  Google will bring those ideas to life.

Criteria:

  • Reach: How many people would this idea affect?
  • Depth: How deeply are people impacted? How urgent is the need?
  • Attainability: Can this idea be implemented within a year or two?
  • Efficiency: How simple and cost-effective is your idea?
  • Longevity: How long will the idea’s impact last?

Click here for more details

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Zardari Flirting with Palin?

Mr Zardari described Republican vice presedential candidate Palin as “Gorgeous” . “You look so gorgeous. Now, I know why the whole of America is crazy about you,” Zardari said, while receiving Palin, also the Governor of Alaska, at the Millenium  Hotel in New York.”You are so nice,” 44-year-old Palin, a former Miss Wasilla runner up in Alaska beauty pageant, told Zardari, husband of slain former Pakistani Premier Benazir Bhutto.An aide of Zardari then told the two to keep shaking hands for the cameras.”I’m supposed to pose again,” said Palin, who has energised the Republican Presidential nominee John McCain’s camp.”If he’s (aide) insisting, I might hug,” 53-year-old Zardari replied, for which Palin smiled politely in response.

 

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And I always thought debt was a bad thing

G7 (also known as the G-7 or Group of Seven) is the meeting of the finance ministers from a group of seven industrialized nations.  The finance ministers of these countries meet several times a year to discuss economic policies. 

Now here is some data as of 2006 

1. France – Public Debt: 64.7% of GDP 

2. Italy – Public Debt: 107.8% of GDP

3. Germany – Public Debt: 66.8% of GDP

4. United Kingdom – Public Debt: 42.2% of GDP

5. United States – Public Debt: 64.7% of GDP (Change that to 71%)

6. Japan –  Public Debt: 176.2% of GDP

7. Canada – Public Debt: 65.4% of GDP

If high debt is considered a bad indicator of economy , then how come these countries are part of G7 that meet  “several times a year to discuss economic policies.” Maybe an economist can help me understand that.

Countries which are not part of G7

India – Public Debt 52.7 % of GDP

Brazil – Public Debt: 50% of GDP

China – Public Debt: 22.1% of GDP

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US National Debt and the presidents responsible for it

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Polar bears resort to cannibalism as Arctic ice shrinks

The Arctic sea ice melt is a disaster for the polar bears,” according to Kassie Siegel, staff attorney for the Center for Biological Diversity. “They are dependent on the Arctic sea ice for all of their essential behaviors, and as the ice melts and global warming transforms the Arctic, polar bears are starving, drowning, even resorting to cannibalism because they don’t have access to their usual food sources.”

Scientists have noticed increasing reports of starving Arctic polar bears attacking and feeding on one another in recent years. In one documented 2004 incident in northern Alaska, a male bear broke into a female’s den and killed her.

In May, the U.S. Department of Interior listed the polar bear as a “threatened” species under the Endangered Species Act. In a news release, U.S. Interior Secretary Dirk Kempthorne stated, “loss of sea ice threatens and will likely continue to threaten polar bear habitat. This loss of habitat puts polar bears at risk of becoming endangered in the foreseeable future, the standard established by the ESA for designating a threatened species.

 

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