JBIMS: Session on aFinancial Crisis a An Inside Viewa held

Mr Kumar started the session by taking the audience back in history to the 1980s Junk Bond crisis. He talked about the ingenuity of Mr Michael Milken in devising the high yield speculative grade bond market. He drew a parallel between the 1980s crisis and ongoing crisis by underlining the role of credit rating given to the financial instruments.

After drawing the parallel, he then went ahead to point the difference between the aprimea and asub-primea home loan borrowers based on the FICO score, generally known as the credit rating of an individual. He next moved on to explain the concept of asecuritizationa and acollateralized debt obligationsa (CDOs). He provided critical insight into how the repackaged CDO lead to raising the credit rating of the senior tranches above the rating of the underlying sub-prime mortgage. The senior tranches of high-yield CDOs could thus meet the minimum credit rating requirements of institutional investors despite the significant risk in the original underlying asset.

He then guided the audience through the various economic events post 9/11 such as the interest rates cuts and increasing housing prices until eventually the housing asset bubble had burst. The decline in housing prices is what he referred as the tipping point which resulted in rising home loan defaults and ultimately leading to the systemic failure of the entire financial system.

While explaining the US sub-prime crisis, he also put in to context the Indian scenario. He explained how the conservative financial policy by Indian regulators avoided a similar debacle in India. The session concluded with a round of question and answers.