Skip to main content

Sub-Prime and implications on the financial world- a small understanding of mine.....

These days the talk of the town……. oops talk of the whole globe is failure of several banks in US.
 
But I would say it is not the failure of the financial institutions but due the business model they were having.
 
But before getting to know what the model is, its better to know a few terms which is being on air for a while…….. (or at least the way I have understood thoseJJJJ)
 
1. Sub prime lending:
That is nothing but lending to some one whom u know so well that he/she will have problems in repaying the loan.
Sub-prime works in a very simple way:
1. Give a loan to some one who doesn’t have a credit rating worth a loan.
2. The loan period will be usually for a very long period. Say 30 yrs.
3. The person taking the loan will be taking the loan under the impression that after some time he will be able to make some money and settle the loan.
4. The lending terms usually will be like interest fixed for first 2 yrs. (for selling the loan to the poor borrower)
5. After the fixed rate period the lender starts charging at the premium rate from the borrower.
6. When the borrower turns bad most of the lenders sell the receivables to some financial institutions at a discount.
7. The financial institutions finance these sub prime receivable from the deposits accepted at a lower rate and purchasing the receivables of the sub prime lenders.
8. The money of the Banks, Hedge Funds, Insurance companies and Pension funds is invested in the financial institutions.
9. Thus the money deposited with a financial institution at notion that it is of low risk is indirectly finding a way into highly risky Sub prime market.
 
» Subprime lending, also called "B-Paper", "near-prime" or "second chance" lending, is a general term that refers to the practice of making loans to borrowers who do not qualify for market interest rates because of their patchy credit history or poor income records
» Subprime lending encompasses a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards, among others.
» There is nothing called as Savings Bank Account in USA. They live in a world where plastic money takes care of things (credit cards).
 
2. Rating Agencies:
» These agencies are nothing but a agency similar to our ISI (ISI - Bureau of Indian Standards) who rate to a financial instrument.
» These agencies are supposed to be independent from the financial institutions and Banks.
» But being the investment banks like Goldman Sachs having business in Equity research they have their own ratings.
» Thus the game begins, the corporate houses bargain for a good rating for merchant banking and other businesses with the Investment banks.
...to be continued...........

Comments

Popular posts from this blog

A Comment on Airline Business in India

1.Any airline is coming into picture after a large land area which might have been used for agriculture is taken away from farmers and given to Airport Authority. Thus high taxes are required to off set the social security of the people who lost the land. People would love to argue that the compensation is paid. But i would love to bring it to their attention that the amount is paltry and if you can't accept it think about this.Goverment will take away the house owned by you and giving you Government rates. 2. If AI needs bail out its because of private airlines only. No one knows why AI cancelled some of the most profitable routes wherein the load factor was always 100% (Kochi to middle east, Bangalore to some european nations etc). All these slots were given to private players. 3. The basic argument of economists for private sector is efficiency  and if private sector is not able to deliver it why not government take over it rather than bailing it out? And if Air India ca

GST; What Changes would make it work

After several red flags in the way the GSTN functions, finally the Officials from the finance ministry have indicated that indeed these issues are being reviewed at the highest level. As a Chartered Accountant with my experience from Fortune 500 company wherein the end users were all highly qualified people, the systems need to be simple. In case of GSTN, the system was pretty simple in paper. However when we got to use it, the complications came out. The system is highly illogical or rather not tweaked to match the practical requirements of the stakeholders. Be it the registration or the backend access to the tax department officials. Changes that would make the system workable. 1. No Matching of Invoices. Currently the buyer and the seller has to match the sales and purchases. Though a very simple process it is highly resource consuming. Just imagine a single paise difference in invoice will lead to manually matching the invoice with at least 2-3 minutes of time being sp

GST Challenges and My views

I felt there is need to review the GST process in the GST website due to various issues cropping up. The issues can be segregated into Legal and Technical. Legal being the issues which require the GST Council to recommend and the Govt to act. The Technical issues being the ones which needs the change to be approved by the respective process owners. Though this looks very simple, the issue is that most of the issues we face today are both Legal as well as Technical. I will be updating my blogs by taking up 1 issue at a time along with my views and workarounds. Lets discuss the issues one by one. 1. The Site : gst.gov.in Lots and lots of efforts have gone in creating this application. (The front end what we get to see is the webpage). However due to high traffic the site is slow at times. We, the taxpayers & Professionals use the site for variety of reasons viz a. New Registrations b. Checking the Status of the Application c. Filing of returns d. Check