US mortgage loan crisis: A subprimer (an article on Subprime from Times of India)

What is a subprime loan? 

In the US, borrowers are rated either as ‘prime’—indicating that they have good credit ratings based on their track record—or as ‘subprime’, meaning their track record in repaying loans has been below par. Loans given to subprime borrowers—which banks would normally be reluctant to—are categorised as subprime loans. Typically, it is the poor and young who form the bulk of subprime borrowers. 

Why were the subprime loans given out? 

In roughly five years leading up to 2007, many banks started giving loans to subprime borrowers, typically through subsidiaries. They did so because they believed that the real estate boom, which had more than doubled home prices in the US since 1997, would allow even people with dodgy credit backgrounds to repay on the loans they were taking to buy or build homes. The government also encouraged lenders to lend to subprime borrowers, arguing that this would help even the poor and young buy homes. 
    With stock markets booming and the system flush with liquidity, many big fund investors like hedge funds and mutual funds saw subprime loan portfolios as attractive investment opportunities. Hence, they bought such portfolios from the original lenders. This in turn meant the lenders had fresh funds to lend. The subprime loan market thus became a fast growing segment. 

What was the interest rate on subprime loans? 

Since the risk of default on such loans was higher, the interest rate charged on subprime loans was typically about two percentage points higher than the interest on prime loans. 
    This, of course, only added to the risk of subprime borrowers defaulting. The repayment capacity of subprime borrowers was in any case 
doubtful. The higher interest rate additionally 
meant substantially higher EMIs than for prime borrowers, further raising the risk of default. Further, lenders devised new instruments to reach out to more subprime borrowers. Being flush with funds they were willing to compromise on prudential norms. In one of the instruments they devised, they asked the borrowers to pay only the interest portion to begin with. The repayment of the principal portion was to start after two years. 

How did this turn into a crisis? 

The housing boom in the US started petering out in 2007. One major reason was that the boom had led to a massive increase in the supply of housing. Thus house prices started falling. This increased the default rate among subprime borrowers, many of whom were no longer able or willing to pay through their nose to buy a house that was declining in value. Since in home loans in the US, the collateral is typically 
the home being bought, this increased the supply of houses for sale while lowering the demand, thereby lowering prices even further and setting off a vicious cycle. 
    That this coincided with a slowdown in the US economy only made matters worse. Estimates are that US housing prices have dropped by almost 50% from their peak in 2006 in some cases. The declining value of the collateral means that lenders are left with less than the value of their loans and hence have to book losses. 

How did this end up become a systemic crisis? 

One major reason is that the original lenders had further sold their portfolios to other players in the market. There were also complex derivatives developed based on the loan portfolios, which were also sold to other players, some of whom then sold it on further and so on. As a result, nobody is absolutely sure what the size of the losses will be when the dust ultimately settles down. 
    Nobody is also very sure exactly who will take how much of a hit. It is also important to realise that the crisis has not affected only reckless lenders. For instance, Freddie Mac and Fannie Mae, which owned or guaranteed over half the roughly $12 trillion outstanding in home mortgages in the US, were widely perceived as being more prudent than most in their lending practices. However, the housing bust meant they too had to suffer losses—$14 billion combined in the 
    last four quarters—because of declining prices 
    for their collateral and increased default rates. The forced retreat of these two mortgage giants from the market, of course, only adds to every other player’s woes. 

What has been the impact of the crisis? 

Global banks and brokerages have had to write off an estimated $512 billion in subprime losses so far, with the largest hits taken by Citigroup ($55.1 billion) and Merrill Lynch ($52.2 billion). A little over half of these losses, or $260 billion, have been suffered by US-based firms, $227 billion by European firms and a relatively modest $24 billion by Asian ones. 
    Despite efforts by the US Federal Reserve to offer some financial assistance to the beleaguered financial sector, it has led to the collapse of Bear Sterns, one of the world’s largest investment banks and securities trading firm. Bear Sterns was bought out by JP Morgan Chase with some help from the Fed. 
    The crisis has also seen Lehman Brothers—the fourth largest investment bank in the US—file for bankruptcy. Merrill Lynch has been bought out by Bank of America. Freddie Mac and Fannie Mae have effectively been nationalised to prevent them from going under. Reports suggest that insurance major AIG (American Insurance Group) is also under severe pressure and has asked for a $40 billion bridge loan to tide over the crisis. If AIG also collapses, that would really test the entire financial sector. 

How is the rest of the world affected by the crisis? 

Apart from the fact that banks based in other parts of the world also suffered losses from the subprime market, there are two major ways in which the effect is felt across the globe. First, the US is the biggest borrower in the world since most countries hold their foreign exchange reserves in dollars and invest them in US securities. Thus, any crisis in the US has a direct bearing on other countries, particularly those with large reserves like Japan, China and—to a lesser extent—India. Also, since global equity markets are closely interlinked through institutional investors, any crisis affecting these investors sees a contagion effect throughout the world.

 

The Bus Ride

Sitting in the window seat of a crowded bus in Mumbai

Looking at the road, the cars, the taxis, the places

Spending time with myself, I took a pen and a paper

And decided to write something about that bus ride.

I could see faces, some with their bodies standing, some sitting

Looking here and there, trying to figure out something

Some talking, some singing, some thinking like me

And some wondering when will they get those filled seats.

Hundreds of shops coming by and going away

Some stay for a while, and leave when the bus moves again

Doctors, carpenters, electricians, car repairs

Looking at me, as if they have an endless tale to narrate.

The road, flooded with cars, bikes, trucks

With innumerous boards hanging in the middle of it

Carrying tons of load on its heart

Helping them to take their men to their destined destinations.

The beautiful path, that amazing breeze

The high towers, those waving waters in the seas

The sounds, the echoes, the lights, the thoughts

Were all but a part of that Bus Ride.

The mess called Indian Politics…

Deal or No Deal? It is a question chewing up the minds of millions of people across the country since the past few months, and with the current scenario, the situation has intensified even more. With Left withdrawing its support from the UPA, the entire political situation is on the verge of a breakthrough.

It all started when SP, after suffering humiliation at the hands of Congress a few years ago, suddenly made up the mind of backing the UPA. God only knows, apart from the people involved, what price would have been asked for such a favor!

And now, it has become nothing more than a number game. With 261 MPs backing the government and 259 opposing it, the benchmark of 271 will be decided by 22 odd MPs, with whom, ‘negotiations’ are being carried. So the fate of the government and of the deal lies in the hands of 4 small parties and 4 independent MPs!

The interesting thing is the nature of the negotiations. MPs which were never considered important are being given constituencies and promises of seats in the parliament. It is as if people are trying to buy people! Think of the time when similar thing happened centuries ago with white people buying the black people for doing their petty work. The only difference being the work done might not be that petty this time.

The most intriguing thing, though, is that the MPs who have been imprisoned for years for committing criminal offences are being released on bail to support the government, or otherwise. Besides, with some Muslim MPs backing the government, the argument of the deal being an anti-muslim affair still hangs in the middle.

Deal or whatever the reason may be, it is certainly proving beneficial for the small parties! And with the deadline for proving majority in the Parliament coming closer, it is all going to be more and more interesting.

What’s in store for the people of India as far as this political situation is concerned will become clear in a few days. Till then, lets just say we are living in a time when there is a mess called the Indian Politics!

PUC – Pest Under Control?!

Okay, I just spent two of the most smelly days of my life!

Day One: One half of the house was covered with white flowing waterlike liquid.

Day Two: Same on the other half.

Apparently it was a mixture of some pest killing chemicals with names of Dursban and Novan.

But its not just the smell that is intriguing; it’s the condition in which we lived in the house for those two days. All the wooden almirahs had to be emptied for pest controlling; that means whole lot of papers, door knobs and stoppers, bone chinas, even cisterns that you’ve never seen and probably will never use for the next ten years; come out from those almirahs and make there place on the beds. That also means a million clothing items which will, if lucky, be worn by our grandchildren, also come out and make our house theirs!

The good part, though, was sleeping on the floor like old times!

Okay, jokes apart, it really was an eye-opening experience, at least for me! Pests, especially, Termites (primarily known as Deemak), are so small things that we often ignore them and their effects on our woodwork. The house temple and the woodwork of the kitchen were so badly affected that the entire wooden blocks had to be thrown away and replaced. Similar was the scenario with the door and window moldings. And with the rising cost of wood and moldings, it reduced more than 5000 bucks from our bank account for the wooden things to be replaced. Add a 2000 more for the person who took the responsibility of killing the pests and you’ll get the estimate of how much ‘late application’ of the pest control chemicals cost. Man, how much money could have been saved if this same thing was done some time back! And the kind man was saying a bucket full of termite that he saw in our house was nothing compared to what he has seen in his long career of 25 years!

Termites, which are not bigger than ants, are those small things in our house that we always neglect but which are eating away our precious woodwork as we speak. Nobody gives a damn about them which is the reason they have to change their wooden almirahs, wooden moldings, sometime the entire doors and windows.

So don’t take it lightly, get your house pest controlled and enjoy the mess that your house becomes!

And the Winner Is…. Roger Nadal?!!

And the winner is... Roger Federer

And the winner is… Rafal Nadal

And the winner is… Roger Federer

And the winner is… Rafal Nadal

Is it just me thinking or Tennis has really become a two-man show? With four tournaments (Australian Open, US Open, French Open and The Wimbledon) taking place each year, it is the 5th year in a row with only two prominent names in Tennis – Roger Federer and Rafal Nadal. Every second tournament takes place and you see these two Tennis giants meeting once again in the finals. And with Federer 26 and Nadal 22, experts say this rivalry has only begun!

But the real question, I guess, is why Tennis has become a two-man show? Or, putting a little more perspective into the matter, has it always been like that?

Going back to the 70’s, there were great names like Bjorn Borg and John McEnroe, Jimmy Connors and Ivan Lendi, then came rivalries of Boris Becker and Pete Sampras and of Pete Sampras and Andre Agassi in the 90’s. And now in the 2000’s, its Roger Federer and Rafal Nadal.

More than 30 years down the line, 4 big tournaments each year, and you won’t find more than 15 prominent names in Men’s Singles. Is something wrong in the world of Tennis?

128 players participated in Men’s Singles in Wimbledon this year. All those Roger Federer played with before the final lost to him in straight sets. What’s so extraordinary in his playing style that only one man has the capability to match him? And what’s so extraordinary in that man’s playing style that he takes on things in a similar fashion on the clay?

There are names like Lleyton Hewitt, Andy Roddick, Marat Safin and likes, but all fail in front of them. And that too year and year repeatedly.

Aren’t people fit enough to become good tennis players? Or aren’t there good coaches available to teach others to play wonderful Tennis like these two? What’s so good in their technique that no one can match them?

Any comments?...

Marks or very good marks?

‘Study now and you will get to a good college and you will spend a happy life’, that’s what she says to her son. But books do not interest him. He is the toughest in his class though!

“Aunty, have you ever thought he could be the next Dara Singh?!” And she says, “What, have you gone crazy!! My son, a Dara Singh! He will study hard and become a Doctor! I will make sure he studies hard.”

But he never gets above 70% in class. What to do now... the mother is stressed more than the son.

At least this is the situation in more than 60% of Indian middle class households. Are the parents expecting too much from their children? Is forcing a child of 70% to study will really make him a 90% something? No.

At least that’s what ‘Aamir Khan’ claims by the bringing ‘Taare Zameen Par’ to the society. The whole movie has been shot to convey a simple message, ‘Every child can not be a 90%ier; however, EVERY CHILD IS SPECIAL’. Every child has some or the other ‘hidden capability’ and the society, the school and most importantly, the parents, does not even allow that ‘hidden capability’ to come out.

So, apart from making the child study, is it not a nice idea to make him/her experiment with different things, different fields like music, arts, dance, singing, outdoor games, indoor games and then let the child decide what he likes the most and what he dislikes the most.

I guess the real question is why can’t our children become the next Vishwanathan Anand or the next Roger Federer or the next Joe Satriani or the next A R Rehman? Why can’t our children become the next Hrithik Roshan or even the next Bill Gates?

In a world where one can exceed in a million different fields, why is the Indian Society still inclined towards studies? Why we always want our children to be Engineers or Doctors and never Dara Singhs?!

Besides, what are the chances of a 70 or even 80% student going to a ‘good’ college or university where even 90%age students are trying hard for admissions? Isn’t it better to have an area where the child can, with practice and hard work, become a veteran. Isn’t it better to have an area where, even if the child did not succeed in studies, can work hard into and start a career int?

Why Not?