US Financial Crisis: The Role of Subprime Mortgages



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Code : ECC0017

Year :
2008

Industry : Banking, Insurance and Financial Services

Region : US

Teaching Note: Available

Structured Assignment : Available

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Abstract: This case study helps to unravel the subpirme mortgage mystery by understanding MBSs and CDOs. This case study provides a backdrop for understanding the US financial crisis (2008). Adam Smith professed it's not at the benevolence of the butcher or the baker that the common man dines. Long after the Scottish scholar, more glamorous American bankers bestowed a dream home for all the Americans, who deserve one as well as those who don't, based on creditworthiness. Credit to the latter was named as 'subprime' lending, which ultimately doomed the entire banking system a destiny that an undeserving economic benevolence attracts. The case provides an idea about how the prime and subprime mortgage lending differs with each other and the evolution and growth of Mortgage-Backed Securities (MBS) market during the booming years of US housing industry. The case provides an understanding on how the greed nurtured by the financial institutions to earn hefty profit margins from subprime lending finally led to the meltdown of housing and subprime mortgage markets. It provides the history of development of MBS market and the spread of risks across the firms, by Government Sponsored Enterprises like Fannie Mae and Freddie Mac and leading Wall Street firms like Bear Stearns, Lehman Brothers, Merrill Lynch, etc., and how the collapse of US housing boom resulted in global financial turmoil.

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Pedagogical Objectives:

  • To analyse the reasons that encouraged financial institutions to shift from prime lending to subprime model of lending
  • To understand the concept of MBS, promoted by financial institutions and its ill effects that triggered the current crisis
  • To understand the recent developments in the US housing and banking industries
  • To analyse how the subprime crisis affected the housing and banking organisations.

    Keywords : Subprime, Mortgage, MBSs, CDOs, Housing Market, Foreclosures, Bear Stearns, AIG, Merrill Lynch, Financial Derivatives, Financial innovation, Delinquencies, Financial turmoil, US housing bubble

    Contents :
    US Subprime History
    Mortgage Bond Market and its Intricacies
    Delinquencies Leading to Credit Crisis
    Clues to the Clueless


    Case Introduction >>


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