Subprime lending is the practice of extending credit to borrowers with certain credit characteristics -- e.g.

a FICO score of less than 620 -- that disqualify them from loans at the prime rate (hence the term 'subprime'). Subprime lending covers different types of credit, including mortgages, auto loans, and credit cards. Since subprime borrowers often have poor or limited credit histories, they are typically perceived as riskier than prime borrowers. To compensate for this increased risk, lenders charge subprime borrowers a premium. For mortgages and other fixed-term loans, this is usually a higher interest rate; for credit cards, higher over-the-limit or late fees are also common. Despite the higher costs associated with subprime lending, it does give access to credit to people who might otherwise be denied. For this reason, subprime lending is a common first step toward credit repair; by maintaining a good payment record on their subprime loans, borrowers can establish their creditworthiness and eventually refinance their loans at lower, prime rates. (Subprime lending became popular in the U.S. in the mid-1990s, with outstanding debt increasing from $33 billion in 1993 to $332 billion in 2003. As of December 2007, there was an estimated $1.3 trillion in subprime mortgages outstanding.) A financial crisis that arose in the mortgage market after a sharp increase in mortgage foreclosures, mainly subprime, collapsed numerous mortgage lenders and hedge funds. The meltdown spilled over into the global credit market as risk premiums increased rapidly and capital liquidity was reduced. The sharp increase in foreclosures and the problems in the subprime mortgage market were largely blamed on loose lending practices, low interest rates, a housing bubble and excessive risk taking by lenders and investors. Originate-to-distribute Model and the Subprime Mortgage Crisis An originate-to-distribute (OTD) model of lending, where the originator of a loan sells it to various third parties, was a popular method of mortgage lending before the onset of the subprime mortgage crisis. We show that banks with high involvement in the OTD market during the pre-crisis period originated excessively

poor-quality mortgages. This result is not explained away by differences in observable borrower quality, geographical location of the property, or the cost of capital of high- and low-OTD banks. Instead, our evidence supports the view that the originating banks did not expend resources in screening their borrowers. The effect of OTD lending on poor mortgage quality is stronger for capital-constrained banks. Overall, we provide evidence that lack of screening incentives coupled with leverage-induced risktaking behavior significantly contributed to the current subprime mortgage crisis. Financial engineering, derivatives Financial engineering is the process of using combinations of various financial instruments to create new instruments. These new combinations are created in response to the needs of advanced financial applications. Derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The main types of derivatives are futures, forwards, options and swaps. The main use of derivatives is to reduce risk for one party. The diverse range of potential underlying assets and pay-off alternatives leads to a wide range of derivatives contracts available to be traded in the market. Derivatives can be based on different types of assets such as commodities, equities (stocks), residential mortgages, commercial real estate loans, bonds, interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI) see inflation derivatives or even an index of weather conditions, or other derivatives). Credit derivatives have become an increasingly large part of the derivative market. Credit Rating Agencies Credit rating agencies played a very important role at various stages in the subprime crisis. They have been highly criticized for understating the risk involved with new, complex securities that fueled the United States housing bubble, such as mortgage-backed securities.
Rating agencies lowered the credit ratings on $1.9 trillion in mortgage backed securities from Q3 2007 to Q2 2008, another indicator that their initial ratings were not accurate. This places additional pressure on financial institutions to lower the value of their MORTGAGE-BACKED SECURITIES.In turn, this may require these institutions to acquire additional capital, to maintain capital ratios. If this involves the sale of

new shares of stock, the value of existing shares is reduced. In other words, ratings downgrades pressure MBS and stock prices lower.

Large global imbalances Until the outbreak of financial crisis in August 2007, the mid-2000s was a period of strong economic performance throughout the world. Economic growth was generally robust; inflation generally low; international trade and especially financial flows expanded; and the emerging and developing world experienced widespread progress and a notable absence of crises. This apparently favorable equilibrium was underpinned, however, by three trends that appeared increasingly unsustainable as time went by. First, real estate values were rising at a high rate in many countries, including the worlds largest economy, the United States. Second, a number of countries were simultaneously running high and rising current account deficits, including the worlds largest economy, the United States. Third, leverage had built up to extraordinary levels in many sectors across the globe, notably among consumers in the United States and Europe and financial entities in many countries. Indeed, we ourselves began pointing to the potential risks of the global

MONETARY POLICY Monetary MGT

Maintenance of a sound monetary system is the basic objective of any central bank of a nation as aptly remarked by De kock. The term monetary management involves four major issues. (Rangarajan, 1994). They are ( 1) price stability (2) control over money supply (3) again control over money stock in the light of reserve money creation due to RBI credit to government and (4) rationalization of administered interest rate. The overall stance of monetary policy during the period 2007-083 will be: (RBI financial policy statement for the year 2007-08) 1 To reinforce the emphasis on price stability and well-anchored inflation expectations while ensuring a monetary and interest rates environment that supports export and investment demand in the economy so as to enable a continuation of the growth momentum 2 To emphasis credit quality and orderly conditions in financial markets for securing macroeconomic and in particular, financial stability while simultaneously pursuing greater credit penetration and financial inclusion and 3 To respond swiftly with all possible measures as appropriate to the evolving global and domestic situation impinging on inflation expectations and the growth momentum.

Economists have long held the view that the development of the financial system (financial deepening)it has proved hard to integrate money and financial intermediation into a standard dynamic general equilibrium framework of macroeconomics and growth. two aspects of financial contracting: bilateral commitment versus multilateral commitment. On the one hand, there may be a limit on how much a private agent can credibly promise to repay someone who provides finance: that is, the degree of bilateral commitment a borrower can make to an initial lender when selling a paper claim. On the other hand, there may be a limit on the extent to which the initial lender can resell the paper to someone else in a secondary market: in effect, the degree of multilateral commitment the borrower can make to repay any bearer of the claim.3 Multilateral commitment to repay any bearer is generally more demanding than bilateral commitment to repay the initial lender because, as an insider, the initial lender may become better informed about (or develop greater leverage over) the borrower than an outsider. In broad terms, the degree of bilateral commitment in an economy places a bound on the entire stock of private paper, whereas the degree of multilateral commitment determines how much of this paper can circulate.

Definition of 'Monetize'
1. To convert into money. 2. To convert from securities into currency that can be used to purchase goods and services.

Investopedia explains 'Monetize'

For example, you'll often hear Internet marketers talk about "monetizing website visitors." This is another way of saying that the marketers are trying to figure out a way of making money from website visitors, such as through advertising, ecommerce, etc.

China is a major economic power and holds huge amounts of foreign exchange reserves, and thus its policies could have a major impact on the global economy. For example, the Chinese government in November 2008 announced plans to implement a $586 billion package to help stimulate the domestic economy. If successful, this plan could also boost Chinese demand for imports. In addition, in an effort to help stabilize the U.S. economy, China might boost its holdings of U.S. Treasury securities, which would help fund the Federal Governments borrowing needs to purchase troubled U.S. assets and to finance economic stimulus packages. However, some U.S. policymakers have expressed concerns over the potential political and economic implications of Chinas large and growing holdings of U.S. Government debt securities. This report will be updated as events warrant. China places numerous restrictions on capital flows, particularly outflows, in part so that it can maintain its managed float currency policy.5 These restrictions limit the ability of Chinese citizens and many firms to invest their savings overseas, compelling them to invest those savings domestically, (such as in banks, the stock markets, real estate, and business ventures), although some Chinese attempt to shift funds overseas illegally. Thus, the exposure of Chinese private sector firms and individual Chinese investors to sub-prime U.S. mortgages is likely to be small.