Speaker: Mr.Vidyasagar
Class: Sec C, SS08-10

The batch of SS08-10 had the opportunity to interact with Mr.Vidyasgar, an academician and visiting faculty at various management schools, during the session conducted by him on “Sub Prime Crisis”.
The session started on a lighter note with the speaker asking the students if they would want to lend money to their friends, and if so to whom, how much, for how long and what were the reasons the lead them to decide whether to lend the money or not.
The students were slowly drawn into the topic when the speaker used their some of their answers to draw parallels to the reasons and causes of the sub-prime crisis that occurred in the US.
The crisis began with the bursting of the housing bubble in the US and high default rates on “subprime” and other adjustable rate mortgages (ARM) made to higher-risk borrowers with lower income or lesser credit history than “prime” borrowers
Beginning in late 2006, the U.S. subprime mortgage industry entered what many observers have begun to refer to as a meltdown. A steep rise in the rate of subprime mortgage foreclosures has caused more than 100 subprime mortgage lenders to fail or file for bankruptcy. Mortgage lenders and home builders fared terribly, but losses cut across sectors, with some of the worst-hit industries, such as metals & mining companies, having only the vaguest connection with lending or mortgages.

However, the crisis has had far-reaching consequences across the world. Sub-prime debts were repackaged by banks and trading houses into attractive-looking investment vehicles and securities that were snapped up by banks, traders and hedge funds on the US, European and Asian markets. When the crisis hit the subprime mortgage industry, those who bought into the market suddenly found their investments near-valueless. With market paranoia setting in, banks reined in their lending to each other and to business, leading to rising interest rates and difficulty in maintaining credit lines. As a result, ordinary, run-of-the-mill and healthy businesses across the world with no direct connection whatsoever to U.S. sub-prime suddenly started facing difficulties or even folding due to the banks’ unwillingness to budge on credit lines.

Lewis “Lewie” Ranieri, formerly of Salomon Brothers, considered the inventor of the mortgage-backed securities market in the 1970s, warned of the future impact of mortgage defaults: “This is the leading edge of the storm. … If you think this is bad, imagine what it’s going to be like in the middle of the crisis.”

On August 15, 2007, concerns about the subprime mortgage lending industry caused a sharp drop in stocks across the Nasdaq and Dow Jones, which affected almost all the stock markets worldwide. Record lows were observed in stock market prices across the Asian and European continents

It was during the session that many students realized the enormity and the seriousness of the situation and how wrong we are in assuming that this is a passing situation.
This also prompted the students to ask more and more questions, and the speaker was more than happy to clarify their queries.

The session was a very engrossing and interactive, and the speaker concluded with the remark that the extent to which the world economy was damaged due to the crisis may not completely be determined as the after effects of it will be felt in a long time to come.