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U.S. Subprime loan Issue

Extracts from this document...

Introduction

Letter of transmittal 18 April 2008 Mr. A.W Brian De Silva Department of Accounting and Finance Monash University, Caufiled Campus, 900 Dandenong Road Caufield East, Victoria 3145, Australia Dear Mr. De Silva, Please accept the following business report entitled "Analysis of the US sub-prime loan issue" as requested for the unit AFF 1300, Money And Capital Markets. The report outlines the reasons that caused the US sub-prime loan issue, which creates worldwide financial problems. Global impacts faced by other countries will also be discussed, with examples from the Australian Financial Markets. I hope that this report will fulfill the requirement as given by the unit and the faculty. Sincerely, Olivia Husein Business Report Analysis of the US sub-prime loan issue Name: Olivia Husein ID number: (20505574) Due date: 18 April 2008 Tutor: Mr. A.W Brian De Silva Unit code: AFF 1300 Unit name: Money and Capital Markets Assignment 1 Word count: 2492 words Table of contents Letter of transmittal 1 Table of contents 3 List of figures 4 1.1 Figure. 1 Sub-prime mortgage origination 4 1.2 Figure 2 credit rating on sub-prime performance in 2007 5 1.3 Figure 3 Increasing share of securitized home mortgages 5 List of tables 6 1.4 Table 1 Write-downs on the value of loans, MBS and CDOs 6 Executive summary 7 2 Introduction 8 2.1 Background information 8 3 Body 9 3.1 Reasons for the Sub-prime loan crisis 9 3.1.1 Housing downturn- housing bubble 9 3.1.2 Roles of financial institutions 9 3.1.3 Role of credit agency 11 3.1.4 Role of Securitization 12 3.1.5 Hedge funds 13 3.2 Global impact 13 3.2.1 Credit crunch and the effect in the banking sector 13 3.2.2 Effect in hedge funds 14 3.2.3 Effect in equity markets 14 3.2.4 Effect in financial institutions 14 3.3 Impact in Australia's Financial Market 15 3.3.1 Australian New Zealand Bank (ANZ) 16 3.3.2 Macquarie Bank 16 3.3.3 Centro Properties Group 17 4 Conclusion 18 5 Appendices 19 6 Reference lists 26 List of figures 1.1 Figure. ...read more.

Middle

It aggravated the problem not only by pushing rates lower, but also by fueling the market volatility that caused investor losses. There is a type of hedge fund strategy known as "credit arbitrage" which involves purchasing sub-prime bonds on credit and hedging these positions with credit default swaps, it increases demand for Collateral debt obligation (CDO). Because hedge funds use a significant amount of leverage, losses were amplified and many hedge funds shut down operations as they ran out of money in the face of margin calls (investopedia, 2008). 3.2 Global impact The shock waves emanating from the sub-prime mortgage earthquake are now spreading around the financial world. The collateral damage is being unveiled so quickly that it is difficult keeping up with all the collapsed hedge funds, injured banks, and defaulting mortgage brokers (Numerian, 2007). 3.2.1 Credit crunch and the effect in the banking sector The credit crunch was sparked as a result of the housing slump, rising interest rates, and record defaults in the sub-prime sector of the United States, and over recent weeks the global repercussions of this crisis have become increasingly evident. The credit crunch affected the Northern Rock bank in Britain most. When the fact of the credit crunch was discovered, many of the bank's 1.5 million savers queued at all hours of the day and night in order to withdraw their savings amidst fears that the bank might be on the verge of collapse (Kenny, 2007). The run on the Northern Rock's continued for days, despite the Bank of England's intervention with a guarantee of deposits (Long, 2007). In the space of a few days, over two billion pounds was withdrawn from Northern Rock by worried savers. Not only did this damage the company financially but it also did not favours in terms of its reputation, and many experts predicted that even if the bank survived the financial losses it would not survive the damage to its reputation. ...read more.

Conclusion

(2007), "The Greenspan and Kennedy papers on Equity Extraction from Housing (1990-2006) - A graphic exposition", viewed 10 April 2007, <http://www.pauljorion.com> Kenny, P. (2007), "the effect of the credit crunch in the UK", viewed 12 April 2008, < http://www.thriftyscot.co.uk> Lahart, J. (2007), "Egg Cracks Differ In Housing, Finance Shells", Wall Street Journal, viewed on 26 March 2008, < http://online.wsj.com> Long, S. (2007), "US mortgage crisis affects banks worldwide", viewed on 12 April 2008, < http://www.abc.net.au> Macdonald, J. (2004), "watch out for bad loan signals", viewed 26 March 2008, < http://www.bankrate.com> Macquarie revised 2008, viewed 29 March 2008, < http://www.macquarie.com.au> Murdoch, S. (2008), "ANZ interest rate rise a shield", viewed on 13 April 2008, <http://www.theaustralian.news.com.au> Numerian, (2007), "Sub-Prime market Earthquake is felt Worldwide", viewed on 11 April 2008, < http://www.agonist.org> Steverman, B. (2007), "Thornburg braces for tough times ahead", stock in the news, viewed on 12 April 2008, < http://www.businessweek.com> The age, (2008), "ANZ- Australia And New Zealand Banking Group Limited", the age, 11 April 2008, viewed 12 April 2008, <http://markets.theage.com.au> The age, (2008), "CNP- Cento Properties Group", the age, 11 April 2008, viewed 12 April 2008, <http://markets.theage.com.au> The age, (2008), "MQG- Macquarie Group Limited", the age, 11 April 2008, viewed 12 April 2008, http://markets.theage.com.au The economist, "CDOh no!", 8 November 2007, viewed on 11 April 2008, <http://www.economist.com> Thomas, D. & Lefort, C. (2008), "Macquarie Bank to scale back residential mortgage business", viewed on 29 March 2008, < http://www.iht.com> Time magazine, U.S edition, "by the numbers", (2005), viewed 10 April 2008, < http://www.time.com> Tomlinson, R., Evans, D. (2007), "CDOs mask huge sub-prime losses, abetted by credit rating agencies", International Herald Tribune, 1 June 2007, viewed on 11 April 2008, <http://www.iht.com> Trehan, V. (2007), "Economists brace for worsening Sub prime Crisis", viewed 28 March 2008, < http://www.npr.org> Wessel, D. (2007), "The Role of Securitization in Mortgage Lending", viewed 28 March 2008, < http://economistsview.typepad.com> Wikipedia revised 2008, viewed 20 March 2008, <http://en.wikipedia.org> Zappone, C., Saulwick, J. (2008), "ANZ warn of bad debt", viewed 13 April 2008, <http://business.smh.com.au> 1 ...read more.

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