Financial Market Meltdown

Mrs. Namita Kohli

Ms. Manpreet Kaur

ABSTRACT

“Systematic Financial Collapse” is more stressful than it looks. Together working overtime to keep it all
afloat. That’s a far different world from where we started with this mess and one that can’t be easily
changed. That’s the market reality being led by the financials that got the market into this mess. The
sector is absolutely crashing.

Meanwhile, more shoes are lining up to drop as the ripple effects of what happened earlier in the week
strech across the pond.

Infact there are a list of losses in market captialisation of biggest financials. Some of them as- AIG,
Bank of America, Lehman Bros., Freddie Mac. The warning signals have been sent out and the time is
NOW to seek refuge from the coming financial market meltdown that is about to engulf our world.

The first major shockwave in a series that will transform and reshape the order of things. It will bring the
greatest transfer of wealth the world has ever seen.

Unsuspecting investors are at on the totem pole of priorities when it comes to decisions regarding who
gets what. Financial Market Meltdown.

Now the question is how to come across from this biggest financial tsunami. One should do:

• One should hold no dollars except what is required to pay bills for six months. Get all the money
out of financial entities. Screw interest rates. Keep six months of cash in safety deposit box and
invest the balance in short term treasuries of other currencies.

• One should put a minimum of 1/3 of your LIQUID net worth in gold.

I recently quoted saying ;

“ CASH MAY BE KING IN THE NEAR FUTURE, BUT PHYSICAL HOLDINGS F PRECIOUS
METALS WILL BE THE ULTIMATE FORM OF CASH.”
 All in all, with such astonishingly large losses looming over the financial world there is no perfect
solution that will protect you from anything or everything that could happened.

Having more information about financial market meltdown one have to study about subprime mortgage crisis
and understanding financial liverage. If we get the causes for that one can a make emergence measures to get
out of it.

A Giant First Step in the Right Direction

• Management dealing in an environment full of pervasive conflicts of interest;

• Lack of strict transparency, reliability, and accuracy standards in financial reporting;
• Lack of independence between the key players in corporate governance (the board of directors,
management, and auditors);
• Lack of adequate enforcement tools at the disposal of regulators; and
• Widespread conflicts of interest influencing securities market transactions.

THE FINANCIAL MARKET’S MELTDOWN

Market Cap Losses Tallied for 25 Financial Heavy Hitters

I don’t know if you’ve noticed it or not, but I guess saving the world from “systematic financial collapse” is
more stressful than it looks.

Together they have been working overtime as they struggle to keep it all afloat. After all what lies in the
balance is only the fate of the world.

But despite practically rewriting all of the rules and pumping massive amounts of liquidity into the broken
system, the crisis has quickly transitioned into its endgame.

It’s no longer about liquidity. Instead, it has devolved in a matter of solvency.

So over the course of the last two weeks, “the system” has teetered on the edge of the abyss and the markets
have fallen apart. Reality bites.

1. The financial markets lead the meltdown

That’s the market reality that has turned this week into the worst one since9/11, as fear takes it’s seat in nearly
every trade. The sector is absolutely crashing and taking everything else down with it. And I do mean crashing.

After all, how else can you possibly explain it?

• Lehman Bros.is no more.

 • Freddie and Fannie are penny stocks.

And the U.S. taxpayer has become an 80% partner in a Dow component with an $85 billion loan to AIG to keep
it afloat.

But the one thing we do know is this: massive losses have been taken by investors in the financials.

That pressures the system in ways that the dot com bust never could have dreamed of. In fact, here’s a list of the
losses in market capitalization for 25 of the biggest financials since their rough peaks in October 2007.

These companies are not exactly E-toys. Their now and then positions in the market are shown and that include
the losses occurred to these.

Their losses include:

COMPANIES Then (billion $) Now (billion $) Down (%)

1 AIG 178.8 5.46 96.95

2 Bank of America 236.5 123.4 47.82
3 Citigroup 236.7 76.34 67.75
4 Merrill Lynch 63.9 30.2 52.74
5 Fannie Mae 64.8 0.45 99.3
6 Morgan Stanley 73.1 41.1 43.78
7 Wachovia 98.3 19.44 80.22
8 JP Morgan Chase 161 130.2 19.13
9 Capital One Financial 29.9 16.9 43.48
10 Washington Mutual 31.1 3.64 88.3
11 Lehman Bros. 34.4 0.80 97.6
12 Goldman Sachs 97.7 40.6 58.7
13 Wells Fargo 124.1 111.25 10.35
14 National City 16.4 2.8 83
15 Fifth Third Bancorp 18.8 7.9 57.6
16 American Express 74.8 37.5 49.87
17 Freddie Mac 41.5 0.16 99.6
18 Suntrust Banks 27 16.07 58.7
19 BB&T 23.2 18.4 20.69
20 Marshall & Llsley 11.6 4.48 61.3
21 Keycorp 13.2 5.68 56.97
22 Legg Mason 11.4 4.96 56.49
23 Comerica 8.3 4.74 42.89
24 Countrywide Financial 11.1 11.1 100
25 Bear Streams 14.8 0.00 100

2. Financial Market Meltdown

The warming signals have been sent out and the time is NOW to seek the refuge from the coming financial
market meltdown that is about to engulf our world.

The financial system as we have known it is about to get a major reality check. Many will go from having
money in the bank to little or nothing at all. Unsuspecting investors and citizens will soon learn the ugly truth
that they are very low on the totem pole of priorities when it comes to decisions regarding who gets what.

SIPC insurance, which is supposed to protect the stockholders in a brokerage, is even worse.

The reason this is happening is the mountain of OTC derivatives has suddenly become a massive landslide into
the ocean causing the biggest financial tsunami the world has ever seen.

2 (a) Junior Mining Shares

The current horrendous market situation is due to the following factors:

 Continued naked short selling of the junior mining share market

 Major redemptions with the hedge funds who are being forced to liquidate

 Lack of buyers in the market

 Panic selling by investors who get spooked seeing such losses.

Quality companies with good management teams, new discoveries, cash flow, low cost profitable production, or
near- term production will be rewarded in a big way as market events continue to unfold.

CASH COULD BE KING IN OUR NEAR FUTURE,THUS THE PRESSURE ON THE PART OF MANY TO
BATTEN DOWN THE HATCHES AND CASH UP.

2(b) Subprime mortgage crisis

The subprime mortgage crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage
deliquencies and foreclosures in the United States, with major adverse consequencies for banks and financial
markets around with globe. When USA house prices began to decline in 2006-07, mortgage deliquencies
soared, and there has been a large decline in the capital of many banks and US. The crisis began with the
bursting adjustable rate mortgages (ARM). During 2007, nearly 1.3 million U.S. housing properties were
subject to foreclosure activity, up 79% from 2006.

Financial products called mortgage-backed securities(MBS), which derive their value from mortgage payments.
Liquidity and solvency concerns regarding key financial institutions drove central banks to take action to
provide funds to banks to encourage lending to worthy borrowers and to restore faith in the commercial paper
markets. These actions were designed to stimulate economic growth and inspire confidence in the financial
markets.

2(c) Number of U.S. household properties subject to foreclosure

actions by quarter
By October 2007, approximately 16% of subprime adjustable rate mortgages (ARM) were either 90-days
delinquent or the lender had begun foreclosure proceedings, roughly triple the rate of 2005. By January 2008,
the delinquency rate had risen to 21% and by May 2008 it was 25%.

2 (d) Understanding financial leverage.

Credit risk arises because a borrower has the option of defaulting on the loan he/she owes. Traditionally, lenders
(who were primarily thrifts) bore the credit risk on the mortgages they issued. Over the past 60 years, a
variety of financial innovations have gradually made it possible for lenders to sell the right to receive the
payments on the mortgages they issue, through a process called securitization. The resulting securities
are called mortgage backed securities (MBS) and collateralized debt obligations (CDO).

 There are four primary types of risk:

• Credit risk - the risk that the homeowner or borrower will be unable or unwilling to pay back the loan;

• Asset price risk - the risk that assets (MBS in this case) will depreciate in value, resulting in financial
losses, markdowns and possibly margin calls;

• Liquidity risk - the risk that a business entity will be unable to obtain financing, such as from the
commercial paper market; and

• Counterparty risk - the risk that a party to a contract will be unable or unwilling to uphold their
obligations.

The aggregate effect of these and other risks has recently been called systemic risk, which refers to when
formerly uncorrelated risks shift and become highly correlated, damaging the entire financial system.

When homeowners default, the payments received by MBS and CDO investors decline and the perceived credit
risk rises. This has had a significant adverse effect on investors and the entire mortgage industry. The effect is
magnified by the high debt levels (financial leverage) households and businesses have incurred in recent years.
Finally, the risks associated with American mortgage lending have global impacts, because a major
consequence of MBS and CDOs is a closer integration of the USA housing and mortgage markets with global
financial markets.

Investors in MBS and CDOs can insure against credit risk by buying credit defaults swaps (CDS).

3. Causes of Financial Market Meltdown

The reasons proposed for this crisis are varied and complex. The crisis can be attributed to a number of
factors pervasive in both housing and credit markets, factors which emerged over a number of years.

 Causes proposed include

 inability of homeowners to make their mortgage payment

 poor judgment by borrowers and/or lenders,

 speculation and overbuilding during the boom period,

 risky mortgage products,

 high personal and corporate debt levels,

 financial products that distributed and perhaps concealed the risk of mortgage default,

 monetary policy,

 international trade imbalances, and

 Government regulation (or the lack thereof).

In its "Declaration of the Summit on Financial Markets and the World Economy," dated 15 November 2008,
leaders of the Group of 20 cited the following causes:

“ "During a period of strong global growth, growing capital flows, and prolonged stability earlier this ”
decade, market participants sought higher yields without an adequate appreciation of the risks and
failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk
management practices, increasingly complex and opaque financial products, and consequent excessive
leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in
some advanced countries, did not adequately appreciate and address the risks building up in financial
 markets, keep pace with financial innovation, or take into account the systemic ramifications of
domestic regulatory actions.”

This credit and house price explosion led to a building boom and eventually to a surplus of unsold homes,
which caused U.S. housing prices to peak and begin declining in mid-2006. These mortgages enticed borrowers
with a below market interest rate for some predetermined period, followed by market interest rates for the
remainder of the mortgage's term.

As more borrowers stop paying their mortgage payments, foreclosures and the supply of homes for sale increase

Economist Nouriel Roubini wrote in January 2009 that subprime mortgage defaults triggered the broader global
credit crisis, but were just one symptom of multiple debt bubble collapses: "This crisis is not merely the result
of the U.S. housing bubble’s bursting or the collapse of the United States’ subprime mortgage sector. The credit
excesses that created this disaster were global. There were many bubbles, and they extended beyond housing in
many countries to commercial real estate mortgages and loans, to credit cards, auto loans, and student loans.
There were bubbles for the securitized products that converted these loans and mortgages into complex, toxic,
and destructive financial instruments. And there were still more bubbles for local government borrowing,
leveraged buyouts, hedge funds, commercial and industrial loans, corporate bonds, commodities, and
credit-default swaps..." It is the bursting of the many bubbles that he believes are causing this crisis to spread
globally and magnify its impact.

4. Speculation

Speculation in residential real estate has been a contributing factor. During 2006, 22% of homes purchased
(1.65 million units) were for investment purposes, with an additional 14% (1.07 million units) purchased as
vacation homes. During 2005, these figures were 28% and 12%, respectively. In other words, a record level of
nearly 40% of homes purchases were not intended as primary residences. David Lereah, NAR's chief economist
at the time, stated that the 2006 decline in investment buying was expected: "Speculators left the market in
2006, which caused investment sales to fall much faster than the primary market.”

5. High-risk mortgage loans and lending practices

The combination of declining risk premia and credit standards is common to classic boom and bust credit
cycles. In addition to considering higher-risk borrowers, lenders have offered increasingly risky loan options
and borrowing incentives. In 2005, the median down payment for first-time home buyers was 2%, with 43%
of those buyers making no down payment whatsoever. By comparison, China has down payment
requirements that exceed 20%, with higher amounts for non-primary residences.
6. Borrowing under a securitization structure.
Securitization, a form of structured finance, involves the pooling of financial assets, especially those for which
there is no ready secondary market, such as mortgages, credit card receivables, student loans. The pooled assets

serve as collateral for new financial assets issued by the entity (mostly GSEs and investment banks) owning the
underlying assets.

Securitization, combined with investor appetite for mortgage-backed securities (MBS), and the high ratings
formerly granted to MBSs by rating agencies, meant that mortgages with a high risk of default could be
originated almost at will, with the risk shifted from the mortgage issuer to investors at large. Securitization
meant that issuers could repeatedly relend a given sum, greatly increasing their fee income. Since issuers no
longer carried any default risk, they had every incentive to lower their underwriting standards to increase their
loan volume and total profit

Emergency Economic Stabilization Act of 2008

Emergency Economic Stabilization Act of 2008, commonly referred to as a bailout of the U.S. financial
system, is a law enacted in response to the global financial crisis of 2008 authorizing the United States
Secretary of the Treasury to spend up to US$700 billion to purchase distressed assets, especially mortgage-
backed securities, and make capital injections into banks. Both foreign and domestic banks are included in the
bailout. The Federal Reserve also extended help to American Express, whose bank-holding application it
recently approved.The Act was proposed by Treasury Secretary Henry Paulson during the global financial crisis
of 2008.

The purpose of the plan was to purchase bad assets, reduce uncertainty regarding the worth of the remaining
assets, and restore confidence in the credit markets.

President Bush signed the bill into law within hours of its enactment, creating a $700 billion Troubled Assets
Relief Program to purchase failing bank assets.

Supporters of the bailout plan argued that the market intervention called for by the plan was vital to prevent
further erosion of confidence in the U.S. credit markets and that failure to act could lead to an economic
depression.

7 (a) Rationale for the Bailout

In his testimony before the U.S. Senate, Treasury Secretary Henry Paulson summarized the rationale for the
bailout:
 • Stabilize the economy: "We must... avoid a continuing series of financial institution failures and frozen
credit markets that threaten American families' financial well-being, the viability of businesses both
small and large, and the very health of our economy."
• Improve liquidity: "These bad loans have created a chain reaction and last week our credit markets
froze – even some Main Street non-financial companies had trouble financing their normal business
operations. If that situation were to persist, it would threaten all parts of our economy."
• Comprehensive strategy: "We must now take further, decisive action to fundamentally and
comprehensively address the root cause of this turmoil. And that root cause is the housing correction
which has resulted in illiquid mortgage-related assets that are choking off the flow of credit which is so
vitally important to our economy. We must address this underlying problem, and restore confidence in
our financial markets and financial institutions so they can perform their mission of supporting future
prosperity and growth."
• Immediate and significant: "This troubled asset relief program has to be properly designed for
immediate implementation and be sufficiently large to have maximum impact and restore market
confidence. It must also protect the taxpayer to the maximum extent possible, and include provisions
that ensure transparency and oversight while also ensuring the program can be implemented quickly and
run effectively."
• Broad impact: "This troubled asset purchase program on its own is the single most effective thing we
can do to help homeowners, the American people and stimulate our economy."

7 (b) Immediate Market Reactions

On September 19, 2008, when news of the bailout proposal emerged, the U.S. stock markets surged by
approximately 3%. Foreign stock markets also surged, and foreign currencies corrected slightly, after having
dropped earlier in the month. The value of the U.S. dollar dropped compared to other world currencies after the
plan was announced The front end oil futures contract spiked more than $25 a barrel during the day Monday
September 22, ending the day up over $16. This was a record for the biggest one-day gain. However, there are
other factors that caused the massive spike in oil prices. Traders who got "caught" at the end of the October
contract session were forced to purchase oil in large batches to cover themselves, adding to the surge in prices.
Further out, oil futures contracts rose by about $5 per barrel. Mortgage rates increased following the news of the
bailout plan. The 30-year fixed-rate mortgage averaged 5.78% in the week before the plan was announced; for
the week ending September 25, the average rate was 6.09%, still far below the average rate during the early
1990s recession, when it topped 9.0%.
The critical question today is: Can we now finally fix the problem? The answer depends on how
we define and implement the solution. First, we must determine what went wrong and identify
the transgressors. Second, we

must get to the root of the problem and define why a crisis reoccurred. Third, we must develop an action plan
that corrects—once and for all—not only the manifestations of the problem, but also its roots.

Who Were the Transgressors?

• Passive, nonindependent, and rubber-stamping boards of directors;

• Nonaccountable CEOs and senior management involved in serious conflicts of interest;
• Transaction-driven investment bankers and market-makers, and biased and nonindependent investment
analysts;
• Nonindependent public accounting firms; and
• Regulators paying more attention to the manifestations of the problem than to the systemic conflicts of
interest at the core of poor governance practices.

What Needs to Be Done Now?

Regulators must take the following actions:

• Monitor and take necessary action to avoid the negative impact of unintended consequences from the
application of Sarbanes-Oxley dispositions;
• Actively enforce laws and regulations relating to board of director and auditor independence from
management;
• In rule-making activities, prioritize the shareholder’s ability to monitor the board of directors’ structure,
operation, and performance;
• Ensure that the financial markets’ self-regulatory organizations (SRO) adopt strict governance listing
requirements; and
• Effect the necessary changes in the operation of the financial markets to guarantee a market free of the
conflicts of interest now widespread.
7. Conclusion

Although implementing corporate governance best practices would result in additional operating costs, I
must emphasize that good corporate governance is not an option but an obligation, if shareholder interest
is to be protected. Compliance costs are only a small fraction of the gargantuan losses suffered by
 stockholders who invested in companies whose shares became worthless because they did not comply
with good corporate governance practices.

REFERENCES

 Financial Market Meltdown

By: Steve Christ

 www.Google.com/ financial market. Co. in

 Emergence Economic Stabilisation

By: Henry Paulson

 The CPA Journal