The US subprime mortgage crisis significantly impacted the Australian market. (1) Low underwriting standards, risky financial instruments, and declining US house prices led to a liquidity squeeze and losses. (2) These effects spread globally in 2007-2008 through interconnected capital markets, freezing interbank lending. (3) In Australia, non-bank lenders collapsed while securitization halted and banks retreated, tightening credit availability for homeowners and businesses.

1. Impact on the Australian market of the US sub-
prime mortgage meltdown
Leo Tyndall, Tyndall Capital May 2012

2. Overview
 Why did it happen
 When did it happen
 What happened
 Knock on effect to Australia
 Government response
 Market response
 Long term effects
 Euro crisis and its effect on Australia
 Additional reading material
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3. Why did it happen
 Subprime market  Capital markets
suffer difficulties – Term mismatch
– Reset shock – Complex instruments
– Poor risk assessment – Pass-through
– Declining underwriting strategies – “no skin
– Declining house in the game”
prices – Rating agency
reliance
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4. When did it happen
 Early signs of  Bear Sterns bought  Lehmans
deteriorating portfolios by JP Morgan at bankrupty
 Falling US house prices 10ct a share  TARP implemented
 Arrears on home loans  Banks cut lending  Goldmans Sachs,
rising  CP conduit funding Morgan Stanley
 Liquidity squeeze by mid slowed or halted become banks
year  SLN(RMBS  Merrill Lynch
extendible CP) merge with BOA
halted  Wells and
Wachovia Bank
merged
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5. What happened
 Liquidity squeeze
– Interbank lending stopped
– Investors returned to cash
– Retail customers lost faith in banking sector
to the extent certain banks suffer significant
withdrawals
– SIVs collapsed
– Bond spreads widen ten fold or more
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6. Knock on effect to Australia
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7. Knock on effect to Australia
 Non bank institutions relying on offshore funding collapsed or
retreated:
– Basis capital, Allco, Elderslie
– RHG
 Securitisation market halted
– 2008 – 1 deal issued without AOFM assistance
– Australia CP market halted, resulting in banks being called on
their liquidity facilities
– Term issuance margins increased signficantly and resulted in
some issuers cancelling transactions
– Foreign banks retreated from the Australia market
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8. Knock on effect to Australia
Australia is not an island in the capital markets
Knock on effect to Australia
Source:RBA, UBS, S&P
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9. Government response
 1st stimulus package - October 2008, the Rudd government announced
that it would guarantee bank deposits
 An economic stimulus package worth $10.4 billion was announced
 AOFM to purchase RMBS
 RBA repo eligibility to include ABS
 Regulatory changes – major changes
– National Consumer Credit Code
– Personal Property Securities Act
– Rating agency regulation
– APS 120 – align to Basle 2 and consequently Basle 3
– Amendment to Banking Act – Covered Bonds allowed
 2nd economic stimulus package - February 2009, $47 billion was
allocated to help boost the economy
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10. Market response
 Pros
– Securitisation market showed a signs of
recovery
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11. Market response
 Pros
– Other investors supported securitisation
along side the AOFM participation
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12. Market response
 Cons
– RMBS Securitisation remains at significant low levels due to
the inability to offer bullet structures and minimal offshore
participation
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13. Market response
 Cons
– Credit enhancements level set by the rating agencies increased causing
inefficient pricing;
– Funds suffered significant redemptions and do not want to participate in any
asset purchase where liquidity in secondary market is slow;
– Foreign banks retreated from the markets;
– Major domestic banks hold more than 90% of the market share in mortgages
– Conduit funding is no longer an economical solution for banks and funders
– Covered bonds only helped the major banks due to the inability to offer a
support solution for the lower rated banks
– Investment banking model is not considered an attractive solution for most
banks. Accordingly innovation and competition is close to non existent in the
Australian market
– Issuers need mezzanine funding but pricing is high due to few participants in
the market
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14. Long term effects
 Subdued home lending
 Increase in securitisation of asset backed
securities
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15. Long term effects
 Slowing in the retail credit market
consequently slowing economy
– Pharmacy industry suffering reductions in
credit facilities
– Residential lending criteria tightening
resulting in a slowdown in housing industry
– SME suffering credit crunch due to an
reluctance by the major banks to lend in the
sector
– Less competitions due to foreign banks
withdrawing from the market
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16. Solutions
 Call support
 Covered bond support
 Mezzanine funding solutions
 Require super funds invest in fixed instruments
up ?%
 Support competitors in the market to the majors
 Regulate them with APRA – e.g. Housing
Coops.
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17. Euro Crisis – its effect to Australia
 Foreign banks retracting from the market
– Syndicated loan market slowed
– Commercial property market slowed
– Project finance slowed
– Unemployment increased – out of work bankers, property
professionals, project finance professionals
 Inability for the majors to handle the increase in demand
– Majors become selective
– Pricing increases
– Smaller player squeezed out due to funding constraints
– Reduced competition
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18. Additional reading material
 http://www.securitisation.com.au/marketsnapshot
 http://www.rba.gov.au/speeches/2008/sp-ag-160508.html (RBA paper,
2008, address to the Sub-prime Mortgage Meltdown Symposium)
 http://www.canstar.com.au/global-financial-crisis/
 http://www.rba.gov.au/publications/bulletin/2010/jun/8.html
 http
://archive.treasury.gov.au/documents/1396/PDF/04_Sub-prime_paper.pdf
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