2008 WORLD CRISISA LOOK INTO THE EVENTS THAT LEAD TO A GLOBAL FINANCIAL CRISIS

SUBMITTED BY : JAGMEET SINGH BAJAJ

MANVEER KAUR

MEHAKPREET KAUR

WHAT WERE THE REASONS LEADING TO CRISIS ?• Housing price increase during 2000-2005, followed by a levelling off and price decline.

• Increase in the default and foreclosure rates beginning in the second half of 2006.

• Collapse of major investment banks in 2008.

• 2008 collapse of stock prices.

HOW IT HAPPENED ?• Due to Dot com bubble US federal set the interest rates to 1 percent.

• Investors don’t invest their money in Treasury bills because of low return rate.

• But banks(Wall street) could borrow money at cheap rate of 1 percent.

• And also banks got General reserves from Japan, China middle east.

• Borrowing became easy for banks and Cheap credit was now easily available.

Wall street

WALL STREET CONNECTING PRIVATE INVESTORS TO HOME OWNERS

HOW WAS IT DONE ?

Home owner Broker

LenderMortgage Investment banks in WALL Street

WHAT INVESTMENT BANKERS DID WITH MORTGAGES

CDO

Investment bankers

Private Investors

Other Investors

Risk takers or Hedge Funds

THE TIME WHEN PROBLEM STARTEDHome owner Broker

Mortgage LenderInvestment banks in WALL Street

SUB PRIME MORTGAGES• Lenders started lending to “Not so Responsible” owners where the risk involved was very high.

• Started lending without down payments and checking the income documents.

• The home owners started defaulting and the bankers possessing Mortgages were now left with houses.

• Number of houses available for sale kept on increasing

• There was more supply and less demand now.

• This lead to decline in housing prices.

DECLINE IN HOUSING PRICES

IMPACT ON STOCK MARKETS• As of mid-December of 2008, stock returns were down by 37 percent since the beginning of the year.

• This is nearly twice the magnitude of any year since 1950.

• This collapse eroded the wealth and endangered the retirement savings of many Americans

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THE EVENTS, PEOPLE AND BANKS WHICH CRASHED THE WORLD

HANK PAULSON

• Paulson was former CEO of Goldman Sachs

• Became Treasury Secretary in 2006

• He was not liked on the Wall Street

• As soon as he joined the Housing prices in California dropped to 12%

• He ended up almost single-handedly running the country's economic policy for the last year of the Bush Administration

ALAN GREENSPAN

• The Federal Reserve chairman

• Met his first major challenge in office by preventing the 1987 stock-market crash from spiralling into something much worse.

• Then, in the 1990s, he presided over a long economic and financial-market boom and attained the status of Washington's resident wizard.

• But the super-low interest rates Greenspan brought in the early 2000s and his long-standing disdain for regulation are now held up as leading causes of the mortgage crisis.

• The maestro admitted in an October congressional hearing that he had "made a mistake in presuming" that financial firms could regulate themselves.

ANGELO MOZILO

• Mozilo co-founded Countrywide in 1969 and built it into the largest mortgage lender in the U.S.

• Countrywide wasn't the first to offer exotic mortgages to borrowers with a questionable ability to repay them

• In its all-out embrace of such sales, however, it did legitimize the notion that practically any adult could handle a big fat mortgage

• He always said that he was building the American dream of owning a home.

• All these Loans were sold to the Wall street banks which further sold this TOXIC financial product all around the globe.

• In the wake of the housing bust, which toppled Countrywide and IndyMac Bank (another company Mozilo started), the executive's lavish pay package($100 million a year) was criticized by many, including Congress

MOVEMENT OF THESE TOXIC PRODUCTS GLOBALLY

• One of the First places where this toxic product first landed

• There was a golden age here before the meltdown

• London wanted to become the Financial capital of world

• Deregulation ‘Light touch’ was introduced which gave immense power to financial institutions in London

• Gordon brown eased this financial regulation and in lurk of earning money people were attracted to this market

LONDON

ICELAND

• Micro Cause of the meltdown

• It was never known for its banking and financial systems

• David oddsson Prime Minister of Iceland introduced his free Market principles and remake the country

• Privatization of the fishing industry by selling to big ship owners

• Some of the Biggest Banks were auctioned in suspicious circumstances

• Ended up in hands of close friends of the prime minister

• Privatized banks starting selling securities among them inflating the value of the currency

• Central bank lowered interest rate and easy credit was available

• People starting taking loans on properties and many other extravagant items

DUBAI

• The heaven of infrastructure development

• Sheikhs and investors with huge amount of money bought $1 Billion worth of real estate everyday.

• Housing prices were increasing rapidly and people bought apartments just to sell them off after some time.

• Sheikh Mohammed Bin Rashid al Maktoum was the ruler in dubai who started with the development of the worlds tallest building the Burj Khalifa.

PARIS

• The alarming bell first rang in Paris on 9 August 2007.

• BNP Paribas freeze three of their funds

• Indicated that they have no way of valuing the complex assets inside them known as collateralised debt obligations (CDOs), or packages of sub-prime loans

• Stopped all withdrawals from those funds

• The Ministry of economic affairs in Paris called for meetings under the finance minister Christine Lagarde

• It was indeed the day everything changed

• British Bank Northern Rock headed by Adam Applegarth

• Developed an unstable model that just clashed and bank ran out of money

• BBC flashed news of the banks crisis on 14 Sep 2007 and people started withdrawing money within 4 hours.

• They filled for a loan from the British Government

• People waited for 2 days in queues to get their money but couldn’t get any

• British Parliamentary investigation was setup in which Adam was defiant

NORTHERN ROCK IN LONDON

BEAR STEARNS GET HIT

• Jimmy Cayne was the richest CEO on the Wall Street of the 5th largest investment Bank of America Bear Stearns.

• In January 2008 Cayne was forced out of CEO position and made unpaid Chairman of Board

• The firm was the one with the largest amount of TOXIC product and was now in liquidity problems in March 2008

• Hank Paulson said that clients will out the cash and the bank will collapse in days

• The investment bank Bear Stearns is bought out by JP Morgan for $2 a share.

BAIL OUT OF FRANNIE MAE AND FREDDIE MAC

• On 7 September 2008 the US government bails out Fannie Mae and Freddie Mac – two huge firms that had guaranteed thousands of sub-prime mortgages

MERILL LYNCH SOLD TO BANK OF AMERICA

• On September 14 2008 Bank of America said it agreed to buy Merrill Lynch in an all-stock deal worth $50 billion, snagging the world's largest retail brokerage after one of the worst-ever weekends on Wall Street.

THE FALL OF LEHMAN BROTHERS• Dick Fuld the CEO of Lehman Brothers disagreed the offer of Firesale of his corporate

assets in order to cope up with the plummeting stock price

• Never agreed to the US Treasury Secretary

• Hank Paulson decided to have an Emergency meeting with CEOs of leading American banks

• Fuld was positive that his firm could survive this crisis

• But somehow the plan of selling the bank to British government was not approved

• The bank filled for Bankruptcy with a $630 billion debt at 2am on the Monday morning of 15 September 2008

• This was a chain reaction and triggered down the World Banking system as it was the largest bankruptcy in the history

WHAT WERE THE IMPACTS AND SUFFERINGS• Tens of millions of homeowners who had substantial equity in their homes two years ago had little or

nothing.

• The economy lost close to $6 trillion in housing wealth and an even larger amount of stock wealth.

• Americans lost an estimated average of more than a quarter of their collective net worth.

• Total retirement assets, Americans' second-largest household asset, dropped by 22%, from $10.3 trillion in 2006 to $8 trillion in mid-2008.

• The crisis rapidly developed and spread into a global economic shock, resulting in a number of European bank failures, declines in various stock indexes, and large reductions in the market value of equities and commodities.

• World political leaders, national ministers of finance and central bank directors coordinated their efforts to reduce fears, but the crisis continued.

• At the end of October 2008 a currency crisis developed.

• Investors started transferring vast capital resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading many emergent economies to seek aid from the International Monetary Fund.

• Economists announced that the "beginning of the end" of the crisis had begun, with the world starting to make the necessary actions to fix the crisis.

• Capital injection by governments; injection made systemically; interest rate cuts to help borrowers.

• The United Kingdom had started systemic injection, and the world's central banks were cutting interest rates.

• The US economy had been spending too much and borrowing too much for years and the rest of the world depended on the U.S. consumer as a source of global demand.

• For the first quarter of 2009, the annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, 18% in Latvia,9.8% in the Euro area and 21.5% for Mexico.

• Growth forecasts in Developing countries like Cambodia fell from more than 10% in 2007 to close to zero in 2009, and Kenya achieved only 3–4% growth in 2009, down from 7% in 2007.

• The World Bank reported in February 2009 that the Arab World was far less severely affected by the credit crunch

WHAT WERE GLOBAL IMPACTS AND SUFFERINGS

STEPS TAKEN TO REDUCE THE EFFECT• TARP: Troubled Asset Relief Program, the government's term for the Wall Street

bailout bill. The term was first coined by Treasury Secretary Henry Paulson. The $700 billion bill passed the Senate Oct. 1, the House Oct. 3, and was signed by President Bush that same day.

• AIG gets bailed out twice by the NY fed: September 17th ($85 billion) and October 8th ($37.8 billion)

• The Federal government pushed Citigroup and Wells Fargo to reach an agreement that would avoid a court battle over the two banks' fight for Wachovia.

• American Recovery and Reinvestment act of 2009: On February 17 President Obama outlined steps to "generate the greatest number of jobs" and stimulate the economy, including aid to small business, consumer rebates for energy efficient products and more infrastructure spending by Signing of the American Recovery and Reinvestment act.

• Big Banks pay Bailout Funds:American Express, Goldman Sachs, JPMorgan Chase and Morgan Stanley were among the bank holdings companies that agreed to return a combined $68.3 billion to the government. That represents more than a quarter of the federal bailout money that the nation’s banks have received since October 2008.

• U.S. President Barack Obama signs the Dodd-Frank Wall Street Reform and Consumer Protection Act:The law subjects more financial companies to federal oversight and regulates many derivatives contracts while creating a consumer protection regulator and a panel to detect risks to the financial system

• Bill passed by congress to avert US Fiscal Cliff:

The U.S. House of Representatives approved a Senate bill to avert $600 billion in automatic tax increases and spending cuts known as the "fiscal cliff.“

President Barack Obama makes a statement in the White House Briefing Room following passage by the House of tax legislation on January 1, 2013 in Washington, DC. The House and Senate have now both passed the legislation, averting the so-called fiscal cliff.

• AIG makes Final Repayment to Government for bailout:AIG, the insurance giant whose derivative bets went sour at the height of the 2008 worldwide financial pandemic, announced that it had repaid its final debt to the U.S. Treasury of its $22.7 billion government bailout.

Thank You