BY : KRANTI CHANDRA A22 RAUNAQ VERMA A35 AKSHAY GUPTA A

Financial crises are major disruptions in financial markets characterized by sharp declines in asset prices and firm failures.
Beginning in August 2007, the U.S. entered into a crisis that was described as a once-in-acentury credit tsunami.

The mortgage market in the US is fuelled by what they refer to as subprime lending. Subprime lending is the practice of lending, basically in the form of mortgages for the purchase of residences, to borrowers who do not meet the usual criteria of borrowing the money at the cheapest prevailing market rate of interest. The root cause of the crisis was primarily an unregulated, undisciplined environment dealing with mortgage lending to subprime borrowers. Since the borrowers did not have adequate repaying capacity and also because subprime borrowing had to pay two-to-three percentage points higher rate of interest and they have a history of default, the situation became worse. But once the housing market collapsed, the lender institutions saw their balance-sheets go into red

Starting in Wall Street, others followed quickly. With soaring profits, all wanted in, even if it went beyond their area of expertise. Banks borrowed even more money to lend out so they could create more securitization. Some banks didnt need to rely on savers as much then, as long as they could borrow from other banks and sell those loans on as securities; bad loans would be the problem of whoever bought the securities. Some investment banks like Lehman Brothers got into mortgages, buying them in order to securitize them and then sell them on.
Some banks loaned even more to have an excuse to securitize those loans. Running out of whom to loan to, banks turned to the poor; the subprime, the riskier loans.

The housing market in the United States suffered greatly as many home owners who had taken out subprime loans found they were unable to meet their mortgage repayments. As the value of homes fell, the borrowers found themselves with negative equity. With a large number of borrowers defaulting on loans, banks were faced with a situation where the repossessed house and land was worth less on today's market than the bank had loaned out originally.
The banks had a liquidity crisis on their hands, and giving and obtaining loans became increasingly difficult as the fallout from the sub-prime lending bubble burst. This is commonly referred to as the credit crunch.

The three Ls that killed Lehman: 1.Leverage : A sensibly run retail bank would have leverage of, say, 12 times. In other words, for every 1 of cash and other readily available capital, it would lend 12. In 2004, Lehman's leverage was running at 20. Later, it rose past the twenties and thirties before peaking at an incredible 44 in 2007.

2. Liquidity : As markets fell, other banks started to worry about Lehman's shaky finances, so they moved to protect their own interests by pulling Lehman's lines of credit. Believing that Lehman did not have enough liquidity at hand, other banks refused to trade with it. Once a bank loses market confidence, it loses everything. Being unable to trade meant that Lehman and its business ceased to exist in other banks' eyes.

3. Losses : Lehman was heavily exposed to the US real-estate market, having been the largest underwriter of property loans in 2007. By the end of that year, Lehman had over $60 billion invested in commercial real estate (CRE) and was very big in subprime mortgages (loans to risky homebuyers).

As property prices crashed and repossessions and arrears skyrocketed, Lehman was caught in a perfect storm.

Lehman's total announced losses in 2008 came to $6.5 billion.

A slowdown in the US economy was a bad news for India. Foreign investors did withdraw $12 billion from Indias stock markets. India's exports to the US have also grown substantially over the years. US demand for imports from India declined. Weakening demand led to producers cutting production which resulted in increased unemployment. The industries most affected by weakening demand were airlines, hotels, real estate.

Downsizing in IT and Financial sector as companies cut costs.

The Indian Information Technology industry accounts for a 5.19% of the country's GDP. A weakening of demand in the US affected our IT and Business Process Outsourcing (BPO) sector the Foreign Direct Investment (FDI) started drying up and this affected investment In the Indian economy the number of tourists inflow to India also came down.

Despite an unprecedented global recession, India remained the second fastest growing economy in the world. Indias GDP grew by more than 6% throughout this period India is much less dependent than most countries on global flows of trade and capital.

India relies on external trade for about 20% of its GDP .

The countrys large and robust internal market accounts for the rest.

Indians continued producing goods and services for other Indians, and that kept the economy humming.
To lift the economy out of the recession the Government announced a package of Rs 35,000 crores in the first instance on December 7,