S.No.

Topic name

1 Introduction of global meltdown

2 8-year crash cycle of market

3 Pre-recession economic imbalances

4 Causes of global meltdown

5 Effect of global meltdown on world

6 Effect on Indian economy

7 Remedies

8 Conclusion

1
MELTDOWN

 A situation in which a rapid rise in the power level of a nuclear

reactor, as from a defect in the cooling system, results in the
melting of the fuel rods and the release of dangerous radiation and
may cause the core to sink into the earth

 A decline or breakdown in a situation or condition

 Ordered to disordered physical state without loss of material
Change of physical location
Let us take the example of snow and ice. When snow melts, there
is no loss of water. The internal ordering of water is lost in snow and it
becomes a liquid. Some work is done by the system with energy inputs
for heating. Heat is an input to melting; disorder is the result of
melting.

Global Meltdown
 Fed ↓ Interest (Since 9/11)
 Mortgages Cheap!!!
 Sub Prime Borrowers Flock
 Lenders- Collateralized Debt Obligations (CDO)
 Sell to IBs / Banks / Funds

Meltdown Continues?
 Sub-Prime > 800 BLN
 ALT-A > 1 TRLN
 Flexible Option Mortgage = 122 BLN OUT= Rest
Undisclosed

2
The financial crisis of 2007–2009 has been called the most serious
financial crisis since the Great Depression by leading economists, with its
global effects characterized by the failure of key businesses, declines in
consumer wealth estimated in the trillions of U.S. dollars, substantial
financial commitments incurred by governments, and a significant decline
in economic activity. Many causes have been proposed, with varying
weight assigned by experts. Both market-based and regulatory solutions
have been implemented or are under consideration, while significant risks
remain for the world economy.
In the years leading up to the start of the crisis in 2007, significant
amounts of foreign money flowed into the U.S. from fast-growing
economies in Asia and oil-producing countries. This inflow of funds

3
made it easier for the Federal Reserve to keep interest rates in the United
States too low from 2002–2006 which contributed to easy credit
conditions.

Recession
 A recession is a contraction phase of business cycle
 National bureau of economic research(NBER) is the official agency
in charge of declaring that the economy is in the state of
recession.

4
 In 1984
BHOPAL GAS TRAGEDY AND RIOTS
TAKES 15 MONTHS FOR RECOVERY

In 1992
HARSHAD MEHTA SCAM
TAKE 27 MONTHS FOR RECOVERY

In 2000
KETAN PAREKH SCAM
TAKES 46 MONTHS FOR RECONVERY

5
In 2008
USA SUBPRIME MELTDOWN
RECOVERY IS IN PROCESS

6
Among the various imbalances in which the US monetary policy
contributed by excessive money creation, leading to negative household
savings and a huge US trade deficit, dollar volatility and public deficits, a
focus can be made on the following ones:

Commodity boom
Further information: 2000s energy crisis and 2007–2008 world food price
crisis, 2008 Central Asia energy crisis and 2008 Bulgarian energy crisis.
The decade of the 2000s saw a global explosion in prices, focused
especially in commodities and housing, marking an end to the
commodities recession of 1980-2000. In 2008, the prices of many
commodities, notably oil and food, rose so high as to cause genuine
economic damage, threatening stagflation and a reversal of
globalization.
• In January 2008, oil prices surpassed $100 a barrel for the first time,
the first of many price milestones to be passed in the course of the
year.
• In July 2008, oil peaked at $147.30 a barrel and a gallon of gasoline

was more than $4 across most of the U.S.A.

• These high prices caused a dramatic drop in demand and prices fell

below $35 a barrel at the end of 2008. Some believe that this oil
price spike was the product of Peak Oil. There is concern that if the
economy was to improve, oil prices might return to pre-recession
levels.
• The food and fuel crises were both discussed at the 34th G8 summit

in July 2008
• Sulfuric acid (an important chemical commodity used in processes
such as steel processing, copper production and bioethanol
production) increased in price 3.5-fold in less than 1 year while

7
 producers of sodium hydroxide have declared force majeure due to
flooding, precipitating similarly steep price increases.
• In the second half of 2008, the prices of most commodities fell
dramatically on expectations of diminished demand in a world
recession.

Housing bubble

UK house prices between 1975 and 2006.

8
Real estate bubble
By 2007, real estate bubbles were still under way in many parts of the
world, especially in the United States, United Kingdom, United Arab
Emirates, Netherlands, Italy, Australia, New Zealand, Ireland, Spain,
France, Poland, South Africa, Israel, Greece, Bulgaria, Croatia,
Canada, Norway, Singapore, South Korea, Sweden, Finland,
Argentina, Baltic states, India, Romania, Russia, Ukraine and China.

U.S. Federal Reserve Chairman Alan Greenspan said in mid-2005

that "at a minimum, there's a little 'froth' (in the U.S. housing market)
… it's hard not to see that there are a lot of local bubbles"..
The Economist magazine, writing at the same time, went further,
saying "the worldwide rise in house prices is the biggest bubble in
history."
Real estate bubbles are followed by a price decrease also
known as a housing price crash that can result in many owners holding
negative equity (a mortgage debt higher than the current value of the
property).

Inflation
In February 2008, Reuters reported that global inflation was at historic
levels, and that domestic inflation was at 10-20 year highs for many
nations. "Excess money supply around the globe, monetary easing by
the Fed to tame financial crisis, growth surge supported by easy
monetary policy in Asia, speculation in commodities, agricultural
failure, rising cost of imports from China and rising demand of food
and commodities in the fast growing emerging markets," have been
named as possible reasons for the inflation

9
 In mid-2007, IMF data indicated that inflation was highest in the
oil-exporting countries, largely due to the unsterilized growth of foreign
exchange reserves, the term “unsterilized” referring to a lack of
monetary policy operations that could offset such a foreign exchange
intervention in order to maintain a country´s monetary policy target.
However, inflation was also growing in countries classified by the IMF as
"non-oil-exporting LDCs" (Least Developed Countries) and "Developing
Asia", on account of the rise in oil and food prices.
Inflation was also increasing in the developed countries, but remained
low compared to the developing world.

Inflation In India
• The Wholesale Price Index (WPI) and Consumer Price Index
measures the Inflation.
• WPI is the measure of headline inflation in India
• WPI preferred to CPI -wider commodity coverage available on
weekly basis computed at all-India basis

10
 The main causes of global meltdown are:

Triggering causes Leading causes

I.TRIGGERING CAUSES:
Triggering in general sense means the main, the basic
causes. So in this topic it means from the main and basic causes of global
meltdown. These causes are as follows:

Interest rates Subprime

Interest rates:

11
  US undergone a cycle of Interest rate reduction
 ↑Interest rates 17 times in a row to slow inflation
 Interest rate↑
 Borrowing Cost↑

Subprime
Based on the assumption that subprime lending precipitated the crisis,
some have argued that the Clinton Administration may be partially to
blame, while others have pointed to the passage of the Gramm-Leach-
Bliley Act by the 106th Congress, and over-leveraging by banks and
investors eager to achieve high returns on capital.

Some believe the roots of the crisis can be traced directly to subprime
lending by Fannie Mae and Freddie Mac, which are government
sponsored entities. The New York Times published an article that
reported the Clinton Administration pushed for subprime lending:
"Fannie Mae, the nation's biggest underwriter of home mortgages, has
been under increasing pressure from the Clinton Administration to
expand mortgage loans among low and moderate income people" (NYT,
30 September 1999).

In 1995, the administration also tinkered with Carter's Community

Reinvestment Act of 1977 by regulating and strengthening the anti-
redlining procedures. It is felt by many that this was done to help boost a
stagnated home ownership figure that had hovered around 65% for many
years. The result was a push by the administration for greater investment,
by financial institutions, into riskier loans. In a 2000 United States
Department of the Treasury study of lending trends for 305 cities from
1993 to 1998 it was shown that $467 billion of mortgage credit poured
out of CRA-covered lenders into low- and mid-level income borrowers

12
and neighborhoods. (See "The Community Reinvestment Act After
Financial Modernization," April 2000.)

Subprime is the cause of USA Economy melt down. It is the very

popular news among everyone and it is become very serious then
expected. It caused more damage to all the industries. Subprime crisis
caused big loss to the banks and now it is affecting the other industries
like AutoMobile companies (GM, Ford, etc.). In this blog I will write
about what exactly is the Subprime crisis and why USA banks created
such a big mistake in their era. Some experts comparing this disaster with
the 1930 Economy slow down in USA.

What is Subprime lending?

Subprime Mortgage Loans (or housing loans or junk loans) are very
risky. But since profits are high where the risk is high, a lot of lenders get
into this business to try and make a quick money.These loans are given to
people who have inability to repay the loan and they don’t have stable
income.

For example, a person who is working on IT company

earns Rs.40000 per month and he doesn’t have any other
income or assets. When the bank gives him loan of some
lakhs, the EMI for the month would be Rs.20000-Rs.30000.
If he lose the job, there is no possibility for him to pay the
EMI, he will just surrender the house to bank and go away.
This is the one simple example how Subprime problem starts.

13
14
Who opt subprime lending?
Individuals who have experienced severe financial problems are usually
labeled as higher risk and therefore have greater difficulty obtaining
credit, especially for large purchases such as automobiles or real estate.
These individuals may have had job loss, previous debt or marital
problems, or unexpected medical issues, usually these events were
unforeseen and cause a major setback in finances. As a result, late
payments, charge-offs, repossessions and even foreclosures may result.
Due to these previous credit problems, these individuals may also be
precluded from obtaining any type of loan for an automobile. To meet
this demand, lenders have seen that a tiered pricing arrangement, one
which allows these individuals to pay a higher interest rate, may allow
loans which otherwise may not occur.

Queen Elizabeth – Not

amused…
“If these things were
so large, how come
everyone missed
Subprimethem?
CrisisWhy
anddidthe
nobody
Impact on Indianotice it?
AWFUL!!!”
As interest rates started falling due to
excess liquidity, house prices rose
rapidly, creating a pool of wealth in
the hands of Americans, which they
unlocked by contracting mortgage
loans. It benefited them in two ways
— they got huge liquidity at inflated
housing prices and interest rates that

15
were practically lowest in the last twenty years. This became a virtuous
cycle, which resulted in very high consumer spending, obviously fuelling
global growth.
As interest rates started rising in the US due to inflation concerns, this
virtuous cycle came to a standstill and the demand for houses started
tapering. This resulted in lower prices for houses and many were unable
to cover the mortgage loans. It has now hit the entire banking industry in
the US and the virtuous cycle is becoming a vicious cycle.
What does all this mean for the Indian capital market? For one, the
flow of capital coming to the Indian stock market will be reduced. India
was always considered one of the robust emerging markets, but definitely
with certain political and economic risks.
Let us also look at domestic fundamentals. Indian markets
will see a correction because of high oil prices, high interest rates,
slowing down of exports because of the slowing down of the US
economy and rupee appreciation. This will definitely have an
impact on the GDP growth rate.
The stock market has, in the recent past, rallied largely because of global
cues and has almost completely ignored the local issues. With liquidity
drying up, the market will now focus on local issues, including political
uncertainties and corporate earnings. It is natural to expect that, finally,
fundamentals will rule over technicalities, and the market will look at
ground realities.
Perhaps a similar story will unfold in the next couple of months
for these lenders who have lent big money into the subprime markets.
One or more banks will fold, just like Enron did, resulting in a huge crisis
of confidence. It would be naive to wish away this major problem
inflicting the global markets and to presume that the Indian market is
decoupled. If the global super-tanker US, which has a 25 per cent share of

16
global GDP, slows down it will definitely have an impact on the Indian
economy.

II LEADING CAUSES

Leading
causes

Credit
Government creation
Activities

Other
Oil
Securitization claimed
prices
Practices Causes

Government activities as a cause

According to one wired.com article: "Then the model fell apart. Cracks
started appearing early on, when financial markets began behaving in
ways that users of Li's formula hadn't expected. The cracks became full-
fledged canyons in 2008—when ruptures in the financial system's
foundation swallowed up trillions of dollars and put the survival of the
global banking system in serious peril...Li's Gaussian copula formula will
go down in history as instrumental in causing the unfathomable losses
that brought the world financial system to its knees."
It has been estimated that the "from late 2005 to the middle of 2007,
around $450bn of CDO of ABS were issued, of which about one third

17
were created from risky mortgage-backed bonds...[o]ut of that pile,
around $305bn of the CDOs are now in a formal state of default, with the
CDOs underwritten by Merrill Lynch accounting for the biggest pile of
defaulted assets, followed by UBS and Citi."
These massive, practically unthinkable, losses have dramatically
impacted the balance sheets of banks across the globe, leaving them with
very little capital to continue operations.
Credit creation as a cause
The Austrian School of Economics proposes that the crisis is an excellent
example of the Austrian Business Cycle Theory, in which credit created
through the policies of central banking gives rise to an artificial boom,
which is inevitably followed by a bust. This perspective argues that the
monetary policy of central banks creates excessive quantities of cheap
credit by setting interest rates below where they would be set by a free
market..
Oil prices
Economist James D. Hamilton has argued that the increase in oil prices in
the period of 2007 through 2009 was a significant cause of the recession.
He evaluated several different approaches to estimating the impact of oil
price shocks on the economy, including some methods that had
previously shown a decline in the relationship between oil price shocks
and the overall economy. All of these methods "support a common
conclusion; had there been no increase in oil prices between 2007:Q3 and
2008:Q2, the US economy would not have been in a recession over the
period 2007:Q4 through 2008:Q3."

18
Other claimed causes
Many libertarians, including Congressman and former 2008 Presidential
candidate Ron Paul and Peter Schiff in his book Crash Proof, claim to
have predicted the crisis prior to its occurrence.
An empirical study by John B. Taylor concluded that the crisis was:
(1) caused by excess monetary expansion;
(2) Prolonged by an inability to evaluate counter-party risk due to
opaque financial statements; and
(3) Worsened by the unpredictable nature of government's response
to the crisis.
It has also been debated that the root cause of the crisis is
overproduction of goods caused by globalization Overproduction tends
to cause deflation and signs of deflation were evident in October and
November 2008, as commodity prices tumbled and the Federal Reserve
was lowering its target rate to an all-time-low 0.25%.
On the other hand, Professor Herman Daly suggests that it is
not actually an economic crisis, but rather a crisis of overgrowth
beyond sustainable ecological limits This reflects a claim made in the
1972 book Limits to Growth, which stated that without major
deviation from the policies followed in the 20th century, a permanent
end of economic growth could be reached sometime in the first two
decades of the 21st century, due to gradual depletion of natural
resources.

19
 By country

• Belgium
• Iceland
• Ireland
• Latvia
• Russia
• Spain

20
21
Subprime
Company mortgage
failures crisis of lehman brthers
• New Century Financial Corporation
• American Freedom Mortgage
• American Home Mortgage
• Bernard L. Madoff Investment Securities LLC
• Charter Communications
• Lehman Brothers
o Bankruptcy of Lehman Brothers
• Linens 'n Things
• Mervyns
• NetBank
• Terra Securities
o Terra Securities scandal
• Sentinel Management Group
• Washington Mutual
• Icesave
• Kaupthing Singer & Friedlander
• Yamato Life
• Circuit City
• Banco Privado Português
• Allco Finance Group
• Waterford Wedgwood
• Saab Automobile
• BearingPoint
• Tweeter
• Chrysler
o Chrysler Chapter 11 reorganization
• General Motors

o General Motors Chapter 11 reorganization

22
It culminated on September 9, when Lehman's shares plunged 45% to
$7.79, after it was reported that the state-run South Korean firm had
put talks on hold.
On September 17, 2008 Swiss Re estimates its overall net exposure to
Lehman Brothers as approximately CHF 50 million.
Investor confidence continued to erode as Lehman's stock lost
roughly half its value and pushed the S&P 500 down 3.4% on
September 9.
The Dow Jones lost 300 points the same day on investors' concerns
about the security of the bank. The U.S. government did not announce
any plans to assist with any possible financial crisis that emerged at
Lehman.
The next day, Lehman announced a loss of $3.9 billion and their
intent to sell off a majority stake in their investment-management
business, which includes Neuberger Berman. The stock slid seven
percent that day.
Lehman, after earlier rejecting questions on the sale of the company,
was reportedly searching for a buyer as its stock price dropped
another 40 percent on September 11, 2008.
Just before the collapse of Lehman Brothers, executives at Neuberger
Berman sent e-mail memos suggesting, among other things, that the
Lehman Brothers' top people forgo multi-million dollar bonuses to
"send a strong message to both employees and investors that
management is not shirking accountability for recent performance."
SubprimeCrisis and Banking Industry

Subprime crisis has ended history of many banks in the USA. As of now
22 banks closed because of Subprime crisis. It is started with the Lehman
Brothers, a 138 year old company filed bankrupt. It is followed by
Washington Mutual Funds. Like this 20 other small and medium size

23
banks fallen easily. American International Group (AIG) survived by
giving the $80 billion bail out money by the USA government. Another
major collapse with Citi Bank which has written off $60 billion as the
bad debts. CitiBank also rescued by the USA government using bail out
plan. It is estimated that USA needs atleast $800 billion required to
handle the Subprime crisis. It is not yet over and now the Automobile
companies are struggling. You can read that in the next section.

Survival of Automobile Biggies

Now the turn is Automobile industry and it is affected more than any
other industry in the USA. The major three companies in the USA,
General Motors(GM), Ford and Chrysler needs help from the
government to survive. The discussion is going on and the decision will
be taken by the next week. The fall of automobile companies will be
more, so it is expected that government will come to the rescue. i will
write the another post on details of how automobile companies went into
trouble

24
 INDIA IMMUNE?
NOT REALLY!!!

FII PULLING OUT

CAPITAL MARKET INDIAN INR
MARKET
ECR Restricted
INR
DOWN AVAILABILITY
LIMITED FOR

No CB DEBT.
No EQUITY
No GDR/ADR Overseas lender
- No appetite

25
 INDIA BANKS THOUGHT TO BE OUT OF IT
 Some banks in it / rumors abound
 Other- exposures undisclosed
 No one is lending to anyone
 Latest cost -CALL- 17%
-MIBOR-17%
 But no credit is available
 Small borrowers – Defaulting – INTENTIONAL??

26
 IMPACT ON ECONOMY
 Growth of capital - not available
 Investment - cycle
Slow—stop
 Demand & growth - slow—job loss
 Global slow down - impact on economy as
well

Impact on corporate
 No Fund Available
INDIA
OR
OVERSEAS

 No Fund Available
Debt
Or
Equity
Internal Generation
Limited
Slow business

Cash is king!!!!

27
Timeline of subprime losses
 June 2007
Bear Stearns spent $3.2bn (£1.5bn) bailing out two of its funds
exposed to the sub-prime market
 August 2007
American Home Mortgage, one of the largest US independent home
loan providers, filed for bankruptcy after laying off the majority of its
staff
 September 2007
1. Bank run in Northern Rock in UK
2. Northern Rock asked for and been granted emergency financial
support from the Bank of England, in the latter's role as lender of last
resort.
 March 2008
Bear Stearns was acquired by JP Morgan Chase for $1.2b
 September 2008
1. Fannie Mae and Freddie Mac placed into conservatorship

2. Lehman Brothers & Washington Mutual Inc. filed for

Ch11 Bankruptcy Protection

3. The Federal Reserve provided an emergency loan of $85b to AIG

4. British bank Bradford & Bingley was nationalized by UK

government by taking control of the bank’s £50b mortgages and

loans

28
 Remedies

Bailouts Capital Deposit Nationalization

Injection Guarantee

Bailout
A bailout is an act of giving capital to a company in danger of failing in
an attempt to save it from bankruptcy, insolvency, or total liquidation and
ruin; or to allow a failing company to fail gracefully without spreading
contagion.

29
Reasons against bailouts
1 Signals lower business standards for giant companies by incentivizing
risk
2 Creates moral hazard through the assurance of safety nets
3 Promotes centralized bureaucracy by allowing government powers to
choose the terms of the bailout
4 Instills a socialist style of government in which government creates
and maintains control over businesses.
5 Instills a corporatist style of government in which businesses use the
state's power to forcibly extract money from taxpayers.

Capital injection
Analysts in the media commonly refer to "capital injections" made by the
government in a public corporation, when some financial support is
provided. The notion of "capital injection" as such is not defined in the
SNA93 and in the ESA95. In the media, it may cover any payment from
government to a public corporation having the characteristics of either a
capital transfer or a financial transaction in national accounts.

Deposit Guarantee Schemes

Deposit Guarantee Schemes reimburse a limited amount of deposits to
depositors whose bank has failed. From the depositors' point of view, this
protects a part of their wealth from bank failures. From a financial
stability perspective, this promise prevents depositors from making panic
withdrawals from their bank, thereby preventing severe economic
consequences.
In October 2008, the Commission proposed urgent legislative changes
that entered into force in March 2009. In order to ensure greater

30
effectiveness of Deposit Guarantee Schemes, the Commission is now
reviewing the Directive as a whole.
Moreover, a number of reports were commissioned in recent years, an
expert roundtable took place in March 2009 and in 2006 a
Communication was issued.

Nationalization

Definition

31
 Government ownership of an industry or company.
Opposite of denationalization.

Alteration or assumption of control or ownership of private property by

the state. It is historically a more recent development than and differs in
motive and degree from “expropriation” or “eminent domain,” which is
the right of government to take property for particular public purposes
(such as the construction of roads, reservoirs, or hospitals), normally
accompanied by the payment of compensation.
More recently, a further impetus has been resentment of
foreign control over industries upon which the state may be largely
dependent, as in the nationalization of the oil industries in Mexico in
1938 and Iran in 1951, and in the nationalization of foreign businesses in
Cuba in 1960. A third motive for recent nationalizations may be the belief
in some developing countries that state control of various industrial
operations is at least temporarily necessary because of the lack of a
developed capital market or supply of entrepreneurs in the domestic
private sector.

32
From the above all discussion it can be concluded that there are many
factors which causes global meltdown also known as recession.
We have discussed above 8 year crashing cycle of stock market of India
but in this assignment recent US market crash has been discussed. This
meltdown is due to subprime lending in US. Which effect the whole
world in this subprime lending means “lending money to sub prime
borrowers i.e. lending to people with low or poor credit worthiness”.

33