Over the last 1 week, we have seen high level of volatility in the stock markets across the globe. Not only the US stock market, but stock markets across the globe have been seeing regular downfalls. Yesterday, a major French Bank named BNP Paribas has closed 3 of its mutual funds costing a loss of a staggering 2.2 billion dollars. While last week, Australia based Macquerie bank has informed its fund holders that there may a minimum of 25% loss on their portfolio. What is the reason for all this? Let me attempt to present a layman’s view on this.
There is a company called Subprime mortgage and it is having business in the US. The business of this company is to offer housing loans to individuals and businesses, similar to what we know as home loans offered by any bank. The company is big in size and has presence not only in US, but also in other countries as well. However, the problem started with its US based business only.
The company offers loans for buying or renting property in the US, same like any bank will offer home loan in India. It has been a hot favourite house loan company in US since a long time, but the recent exposures have resulted in its downfall. The problem started just around 10 days back, when the company discovered that majority of the individuals and organizations, to whom it has granted loans, are not in the state to repay their loans.
It takes decades for a company to build up its reputation; it takes less than an hour for the company to loose its creditworthiness. The moment these shortfalls where discovered, the company was in deep trouble. Not only the investors panicked, the entire real estate and house loan came under immense pressure. The wave effect caused the bearish mood to spread to other segments of the market as well and within a matter of few days, the entire US market came down and is still going down.
The problem did not stop there. US based Investment Company called Bear Sterns, which runs hedge funds, had significant exposure to the real estate market in US. The result, Bear Sterns funds and other funds in US went down in value. Since Bear Sterns is a finance company, the effect lead to downfall in prices of the financial sector as well, because other financial companies in US are also having investments in real estate market. Also, home loan is directly linked to banking and financial services sector. One went down, other also felt the pinch.
Continue to Part II of this article
3 comments:
Hi Shobhit,
I am a regular reader of your useful and informative blog. Of course its your blog and you can decide what advertisements you host, but IMHO the non-intrusive Google ads are better than the obstructive ads which pop-up when pointing over certain words.
-Fred
"Subprime Mortgage" is not a company, but a term that refers to the lending of money to people who would not be usually considered credit-worthy. More details in the corresponding Wikipedia article.
Hi Mathew,
It is true that Subprime refers to a landing practice, and is not a single company.
But as I mentioned in my article, I wanted to take a layman's view to explain the situation. Detailed reports are already there on news channels and newspapers - but sometimes it is too difficult to understand - so that's why made the explainations that way.
Thanks n keep posting your valuable comments.
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