On
Sunday, 11th of January 2015, Mr. Amogh Gothoskar graced the
auditorium of SIMSREE with his presence. In the lecture organized by the
Corporate Relations Committee, he enlightened the batch on 'Securitization
and the US sub-prime mortgage crisis'. Mr Amogh, an entrepreneur since 5
years in the financial services sector and the
owner and CEO of 'End to End Financial
Services', spoke passionately on the topic of the financial crisis of
2007-2009.
He started the discussion by asking
the batch a few basic questions on the concepts of securitization and the
various types of securitization. He went on to explain the nitty-gritty of
securitization and the fundamental differences between the various types. Furthermore, he spoke about the basic securitization process that was carried out in the US
before the crisis and the various players that were involved in the
securitization process focusing mainly on mortgage backed securities. In the
build up to the explanation of the crisis, he also showed some statistics which
compared securitization and land
rates in the US with the
rest of the world and also showed a period based comparison of the same. This helped the
batch to get a rough idea of the gravity of the crisis and the sheer enormity
of it.
Mr. Amogh suggested that there
are many parties to be blamed and held responsible for the crisis, right from
the lenders to the investment banks, as well as the rating agencies. He said
this situation could have been avoided if the regulators and the rating
agencies would have been more alert of what the securitization process was evolving into.
Talking about Indian investors, he said that Indian investors
are generally risk averse and that has prevented such a crisis from happening
in India. He also said that one of the root causes for this crisis was the risk
taking nature of the American borrowers and investors. American borrowers were
enticed into taking up such seemingly easy loans. Also, investors bought
securities backed by those sub-prime loans in expectation of higher than normal
returns. He categorized an investor's psyche into two categories viz. risk
prone and risk averse. He build upon this investor psyche as the base to
further explain how this enabled the lenders to sell such risky loans and how
these loans got bundled up and found their way into the stock markets as
securities which adversely affected the entire financial ecosystem and the real
estate bubble finally burst.
In response to one of the questions
during the Q&A session, he said that bailing out the big companies to
mitigate the problem wasn't the ideal step as it could act as a fallback for
the companies in future if they were to engage into such activities again. But
in the hindsight, the US government had to bail them out to deflect a domino
effect from taking place and the decision turned out to be pragmatic if not
ideal. He also added that the government must be focused on creating real
employment rather than artificial, temporary employment for the population.
With this he ended a very fruitful and knowledge gaining session for the
students of SIMSREE.
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