Home Buyers Go Shopping
The home has long been touted as a key to financial security. Government policy encourages home ownership by providing federal income tax deductions on mortgage interest and requiring that lenders issue mortgages in poor neighborhoods. Renters are eager to buy and many homeowners trade up several times during their lifetime.

Interest Rates Fall
Interest rates fall to rarely seen lows, allowing the same monthly payment to support a larger loan. This makes homes affordable for people who previously had rented, and it allows homeowners to move up to properties that are more expensive.

Home Prices Rise
By allowing people to borrow more, low interest rates allow them to offer more when they bid on homes, driving home prices up.

Adjustable-Rate Loans
Home buyers finding prices getting out of reach resort to subprime and other adjustable-rate loans that start with low “teaser” rates allowing a person with a given income to qualify for a larger loan. After one, two or three years, rates reset by tracking an index of prevailing rates, causing monthly payments to rise.

Appraisers Help
Before issuing a mortgage, a lender requires that a property be appraised to assure that it is valuable enough to serve as collateral on the loan. Appraisers come under pressure from lenders and real estate agents to support the rapidly increasing home values, despite a growing belief that home prices are in a bubble.

Lenders Relax Standards
As home prices grow faster than incomes, it gets harder for borrowers to qualify for loans under traditional standards. To keep the volume of lending up, lenders gradually reduce down payment requirements from the traditional 10 percent of sales price to zero. They also stop requiring that borrowers prove they have enough income to make their loan payments.

Investors Seek Yield
With interest rates at unusually low levels, institutional investors — such as hedge funds, pension funds, endowments and insurers — hunt around for higher yields with investment-grade ratings. They are eager to buy securities backed by mortgages, since these pay more than U.S. Treasuries. Securities backed by subprime loans pay even more, since subprime borrowers are charged extra-high interest rates.

Securities Firms Comply
Banks and other securities firms such as Bear Stearns feed the yield-hungry investors by repackaging mortgages into mortgage-backed securities offering generous yields. Through this process of securitization, the mortgage lenders’ risk is passed on to investors around the world.

Ratings Agencies Help
Ratings agencies work with mortgage issuers, such as banks and other lenders, and loan packagers to find innovative ways to give investment-grade ratings to risky mortgage-backed securities. While ratings involve an assessment of the chance that borrowers will default, there is little track record for gauging this risk with the new types of securities, so ratings agencies and other participants rely on theoretical computer models.

Interest Rates Rise
As rates go up, resets cause monthly payments on adjustable-rate mortgages to soar, reaching levels many homeowners cannot afford.

Home Prices Fall
Higher interest rates mean a borrower with a given income must settle for a smaller mortgage. As fewer people qualify for big loans, home prices begin to drop.

Borrowers in Trouble
Rising interest rates push up monthly payments on adjustable-rate mortgages, and growing numbers of homeowners fall behind in payments.

Securities Lose Value
The growing mortgage delinquency rate exceeds expectations in the computer models, causing prices of mortgage-backed securities to plummet. Financial institutions that invested in them suffer enormous losses.

Credit Markets Freeze
Financial-market participants worry that institutions losing money on mortgage securities – the list includes investment houses and large institutional investors – may be forced to sell securities based on other types of debt, such as bonds, to raise money. That would cause a flood of supply that would depress prices. Investors thus become leery of all types of debt securities, causing prices to drop and making some nearly impossible to trade.

The Economy Slows
As it becomes harder for individuals and companies to borrow, economic activity slows. The economy heads toward recession.

Homeowner Feels Impact
Growing numbers of homeowners find they cannot afford their higher mortgage payments, and many discover their homes are no longer worth what they owe on their mortgages. As the economy weakens, unemployment rises. More and more homeowners fall behind in mortgage payments and enter the foreclosure process. They lose their homes, their jobs, or both.

Credit Markets Freeze
Financial-market participants worry that institutions losing money on mortgage securities may be forced to sell other types of securities to raise money. That would cause a flood of supply that would depress prices. Investors thus become leery of all types of debt securities, causing prices to drop and making some securities nearly impossible to trade.

Insanity is dead. Welcome to normalcy

Just about two months ago, an MBA from a top b-school held promise of gold class jobs on the Wall Street. All that became history when Lehman Brothers and Merill Lynch crashed. How are MBA alumni from three years ago dealing with it? What have they learned from it?

Suhas Anand, IIM Ahmedabad alumnus from the class of 2006 writes

I was at the Indian Institute of Management (IIM), Ahmedabad campus recently as part of my company’s summer recruitment process. It was a cool November evening at WIMWI. Things were also a little cold with the placement scenario, quipped an old time friend. News of top 20 MBA campuses in India not being able to place all its students for summer internship was also doing the rounds. All this was unthinkable just about a month back.

We then got into a debate about what could have fundamentally altered everything in 30 days, making the world go into a spin. The stock market of course, was one reason. The plunging valuations have put a brake on the grand growth plans of top companies. Their ability to raise fresh debt as well as the ability of financial institutions to give new loans has taken a beating, resulting in fewer avenues for fresh MBAs interested in the finance sector to work on.

The second and a more pronounced aspect in my opinion is also fear of the unknown, that of the very primitive kind. These days, across industry, nobody knows what tomorrow might look like. This uncertainty is a bigger reason stopping companies from absorbing smart MBAs than any so-called impediment in the India growth story.

A sense of fear lurks in the hallways of many top b-schools too. I tried to sweet talk a few students during my Ahmedabad visit into looking at the broader picture. I tried to prod them into thinking about a long term career spanning, say, 40 years where they were bound to see many more such major ups and downs. By the time these students graduate next year, the uncertainty would probably be history. However, things could also be as bad as they are now. But if things are as bad a year down the line, we would know for sure they are going to be that way for at least a couple of years, thus putting away the uncertainty and fear. Companies will then go back to the drawing board, rework their strategies and recruitment priorities.

Internationally too the situation is not very rosy. Quite a few of my batchmates have been directly hit. Even our wildest nightmares could not have prepared us for the shocking fact that Lehman Brothers or Merrill Lynch are no longer around. They were clearly among the most coveted jobs on campus at IIM Ahmedabad. Make no mistake about it – they attracted the absolute cream of talent from across campuses, second only to McKinsey and Goldman Sachs. Back then, I would have any day accepted a job offer from either of these pre-eminent former investment banks. That is when the realization hit me. I could very easily have been ‘Joe the Banker who lost his Wall Street job in which he used to sell unknown derivatives‘, had I been working in those banks.

Some of these batchmates have found new jobs and their life is back to normalcy. The events have affected them in a big way, but it has also given some the opportunity to sit back and think deeply about what is really meaningful for them, personally and professionally. A friend of mine left Wall Street for good to join MTV. Another person is taking six months off to travel around, doing photography and working on wildlife conservation. Some have come back to India and taken less stressful jobs in cities where their parents stay.

Barring the fact that I’ve lost quite a bit of moolah in the markets, this downturn hasn’t materially affected me much. However, it has made me humbler. It has made me more aware of good old thriftiness and the importance of diversification of assets. I have stopped making fun of my mother who invests in post office schemes and PPFs!

Current MBA students should realign their expectations from their career in light of recent developments. Insanity is dead. Welcome to normalcy.

Overall, I can sense a clear change in attitudes amongst my peer group and juniors (hopefully for better). People are now willing to work in India, in firms like Tata Administrative Services and Hindustal Unilever, Reliance and others. Investment banks will still be there this season, at least in the top three IIMs. But they will not recruit as much as they did in previous years. But there is no dearth of options in a large growing economy like ours.

What else would change? Corporates would no longer have time for people who bargain for sky high salaries with three other offer letters in hand, or people who shift jobs every six months for a 20 pc jump. Now is indeed the time to step back and think about the initial years of the career as an investment one is making in oneself. One should not sell out too early. Invest, learn, build relations and ensure that you are well equipped by the time the recession is over, hopefully in the next couple of years.

I personally think that in the aftermath of all this, the world will become a much wiser and saner place. Folks will tighten belts. The sheer insanity that drives million dollar bonuses for the middle management and 1,500-dollar-per-head dinners will be a thing of past. The prudent cost-management measures of old times will be back.

As for MBA aspirants, they should not be worried much. Two years is a long time frame. They would be better off putting all they can to get into the best business schools. That is the best bet against a downturn.

A lot of writers will of course laugh their way to the banks (whichever remain at the end of the carnage) by writing books analyzing what went wrong and the lessons we can learn from this crisis. It would be presumptuous and downright wrong to claim to know what exactly went wrong and how it is going to play out. All we can do is hope for the best and assume that knowledgeable people across central banks and governments are indeed pulling resources together to ensure minimal damage to real economy. As they say, when you come to see that you are not as wise today as you thought you were yesterday, you are wiser today.

Suhas Anand is an IIM Ahmedabad alumnus from the batch of 2006 and working with an internationally-renowned consultancy firm.