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3 Financial Crisis and Credit Crunch
3 Financial Crisis and Credit Crunch
Eric Nelson
Jacob Payne
Samantha Duellman
Financial Crisis: Overview
Downturn in the world economy
Causes Events
Housing Slump Bear Stearns Bailout
Subprime Mortgage Crisis Northern Rock/Bank of
Financial Innovation England
Countrywide
Impacts
Bank Failures Solutions
Home Foreclosures The Federal Reserve has tried
http://maoxian.com/index.php?s=northern+rock
Events
Northern Rock
On September 14, 2007 customers waited outside the
branches to withdraw their savings
It is estimated that 5% of the total deposits were withdrawn
that day
The internet site became inaccessible due to the large
number of people that were trying to log on
As of November 17, 2007 a total of 10 companies had
put in bids to buy out Northern Rock, but all the offers
were materially below the previous trading value
On February 17, 2008 Northern Rock was bought by the
government and would be nationalized and the bank
would operate under a temporary period of public
ownership
Events
Countrywide Financial Crisis
When Countrywide finances mortgage loans, they
usually package them for sale to large investors as
mortgage backed securities
After the housing crisis began Countrywide was
severely affected
On August 3, 2007 the secondary market stopped the
sales of most non-conforming securities and days later
Countrywide announced that this disruption could hurt
it financially
Events
Countrywide Financial Crisis
On August 12, 2007 Countrywide was cited as a possible
bankruptcy risk by Merrill Lynch
Countrywide’s stock fell from $21. 29 in August down to
$8.64 in November
On January 11, 2008 Countrywide was bought out by
Bank of America for an all-stock $4 billion deal, down
from a $24 billion value one year ago
Countrywide was the nation’s largest mortgage lender,
so this deal is a landmark in the housing crisis
Solutions
Federal Reserve Actions
Bernanke and the Fed have been trying to stave off recession
very actively
The Fed reduced the interest rate 7 times since last
September, most recently on April 30th, when rates were
reduced a quarter point to 2 percent
The Fed has been trying to boost the amount of liquidity
available due to sharp declines in banks loaning to each other
The Fed began the Term Auction Facility in response to the
crisis on December 12th, 2007.
The TAF is a means of increasing liquidity by offering loans to
depository institutions which otherwise could not borrow
from the Fed
Solutions
Regulation
New plan unveiled by Treasury Secretary Henry
Paulson
One agency in charge of business conduct and consumer
protection
Eliminate office of Thrift Supervision and Commodity
Department
Solutions
Issues with Regulation
Keeping good regulators is difficult because they earn
much more in the private sector
Ensuring proper conduct of regulators is difficult
If banks were allowed to fail everyone would work
harder not to and would assess risk better.
Due to bailouts of major banks (Bear Stearns, Northern
Rock) the only viable option left is more and better
regulation in order to promote stability in the financial
system.
Solutions
Bank Regulations
The amount of money owed to banks is more than all
the money in existence, so we cannot possibly get out
of debt under this system
The bulk of this debt is in the form interest, which is an
arbitrary amount of money banks demand in return,
but never gave
The public must demand that money must not be
created by loaning it into existence, which in the end
causes inflation
Financial Crisis: Conclusion
Causes
Multiple factors played a role in this financial crisis
Most of the emphasis has been placed on the subprime
mortgage crisis
It has had effects that have stretched beyond the housing
market
Impacts
The impact of this financial crisis can be felt on all
levels from individuals to large corporations
Financial Crisis: Conclusion
Events
The far reaching events can show how powerful this
financial crisis is
Bear Stearns was saved to prevent further damage to
the financial market
It forced the nation’s largest mortgage lender into near
bankruptcy and an eventual buyout
Solutions
The Federal Reserve has stepped in but to little avail
Regulation seems to be a popular answer but what type
of regulation still needs to be developed
Financial Crisis: Conclusion
In a statement from Countrywide to the SEC
“Since the company is highly dependent on the
availability of credit to finance its operations,
disruptions in the debt markets or a reduction in our
credit ratings could have an adverse impact on our
earnings and financial condition, particularly in the
short term… Current conditions in the debt markets
include reduced liquidity and increased credit risk
premiums for certain market participants. These
conditions, which increase the cost and reduce the
availability of debt, may continue or worsen in the
future….”
References
• “Wall Street’s crisis.” The Economist. March 22-28, 2008: 11-12
• “The $2 bail-out.” The Economist. March 22-28, 2008: 81-82
• “What went wrong.” The Economist. March 22-28, 2008: 79-80
• “The long hangover.” The Economist. April 12-18, 2008: 79-80
• Scott Lanman and Alison Vekshin. “Bernanke Urges Action to Slow
Jump in U.S. Home Foreclosures.” Bloomberg. May 6, 2008 <
http://www.bloomberg.com/apps/news?pid=20601087&sid=aojlbhOfz
PaM&refer=home>
• Jeffery D. Sachs. “The Roots of America’s Financial Crisis.” Project
Syndicate. April 15, 2008 <http://www.project-syndicate.org/
commentary/sachs139>
• Tom Leonard. “Henry Paulson unveils bank regulation plan.” Daily
Telegraph. April 22, 2008.
<http://www.telegraph.co.uk/money/main.jhtml?
xml=/money/2008/04/01/cnusbanks101.xml>
References
“Waiting for Armageddon.” The Economist. March 27, 2008.
<http://www.economist.com/business/ displaystory.cfm?
story_id=10925548>
Mark Landler “Housing Woes in U.S. Spread Around
Globe.” The New York Times. April 14, 2008.
<http://www.nytimes.com/2008/04/14/business/worldbusin
ess/14real.html?
_r=1&em&ex=1208404800&en=ddcb233e7e3b3153&ei=5087%
0A&oref=slogin>
Chris Isadore “Fears of long recession rising.”
CNNMoney.com April 14, 2008. http://money.cnn.com/
2008/04/14/news/economy/how_bad/index.htm?
postversion=2008041415