Hasseeb, Mohamed Omar

900-06-1907
Econ 303-01
Term-Paper

The Global Financial Crisis

The global financial crisis of 2007-2008 is considered the second

worst financial crisis in the history of the United States after the great

depression of 1929 as stated by leading economists. The crisis did not

come up in seconds but it was the end result of an accumulation of

number of incorrect financial practices and regulations. Economists refer

to the subprime mortgage issue as the main reason behind this crisis,

however, There are a number of other reasons or, actually, a chain of

reasons that stands behind this crisis. In this paper, we will start by

examining the chain of financial events that led to this crisis and

therefore we start by the subprime mortgage market failure. Then, we

will explore how governments, especially American and Egyptian

governments, responded to this crisis and what are the regulatory

actions taken as well as the reaction of the financial sectors in both

countries.

The whole financial crisis started by the subprime mortgage

market failure. Prime borrowers are those borrowers who have a good

credit history and those are the ones who are usually accepted by banks

to get mortgage loans (Fredrick). Subprime mortgage is given to

borrowers in order to buy residential homes, but this category of

Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper

borrowers is more likely to default in paying back their debts. Banks

resorted to develop this so called "subprime mortgage" in response to

the increasing flow of money from local and foreigner investors who

refrained from investing their money in buying treasury bills, which are

considered to be risk-free, as their rate were lowered to one percent

only by federal reserve chairman "Alan Greenspan" in reaction to the

events of 9/11/2001 so as to maintain the American economy. This

means also that banks can borrow from the FED at a lower rate, and that

actually took place and banks borrowed great amounts of money which

led to an overabundance of credit available for borrowers and this

lowered the cost of credit and banks started to expand in giving loans.

Banks expanded in giving mortgages to prime borrowers and this

encouraged investment banks to buy the mortgages from banks and to

invent a new type of securities which is called the collateralized debt

obligation (CDO) and mortgage backed securities (MBS) that are derived

out of the mortgage loans, which is called securitization. These CDS and

MBS are rated by rating agencies and sold by the investment banks, like

Lehman Brothers, to other investors, banks or hedge funds. These

investors and banks made very high profits from buying CDO and MBS
Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper

and this encourage them to buy more from the investment bank.

Investment banks resorted to banks, original lenders to households, to

buy more mortgages in order to be able to issue more CDOs and MBS,

but banks were giving loans only to prime borrowers, but because of the

demand for mortgages banks were encouraged to give loans to the new

Sub-prime borrowers." Aided by liquidity from cash flows surging into

the United States from countries like China and India, the subprime

mortgage market took off after the recession was over in 2001,

becoming over a trillion dollar market by 2007"(Fredrick). The expansion

in giving sub-prime mortgages led also to an increase in the American

housing market which was suffering from a recession earlier. Even if the

sub-prime mortgage borrowers default to pay the loans, the mortgage

owner, whether the bank or investment banks, would sell the house at

high price and get their investments back. Therefore, this growth in sub-

prime mortgages market also led to an increase in the demand for

houses and houses appreciated in value. Then, what happened is that a

great number of sub-prime mortgages defaulted to pay their loans to

the investment banks, so the banks took over the houses and offered

them for sale, but with the number of defaults increasing, the supply of
Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper

houses increased significantly and this led to a sharp decrease in the

prices of these houses. Many of these investment banks went

bankruptcy and failed to pay back the loans they got which were in

millions or even billions. Examples of these bankruptcies are the case of

Lehman brothers, the fourth- largest investment bank in the USA, filed

for bankruptcy, also AIG, an insurance giant with assets over $1 trillion,

suffered an extreme liquidity crisis when its credit rating was downgrade

by Fitch and S&P (Fredric). This was a very illustrative explanation of the

reasons behind the crisis; however, going more into economic analysis

would further clear what caused the financial crisis. One of the

significant factors that lead to a financial crisis is the deterioration in

financial institutions balance sheet, and that was one of the factors in

the recent financial crisis. A great number of giant financial institutions

experienced deterioration in their balance sheets as Lehman brothers

that went into buying mortgages to securitize them and sell them again.

On September 08, after suffering losses in the subprime market, Lehman

Brothers filed for bankruptcy, making it the largest bankruptcy filing in

U.S. history (Fredrick).Also, Merrill Lynch, the third largest investment

bank, suffered great losses on its holding of sub-prime securities,

Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper

announced its sale to Bank of America for a price 60% below its price a

year earlier(Fredrick). This was the first stage in the financial crisis

because the whole process of securitization can be considered as

mismanagement of financial innovations that led to the asset down write

in the housing market. The fact that these financial institutions as well as

other corporations, as American freedom mortgage, General Motors and

others, increased the financial uncertainty in the US markets which led to

the second stage in the financial crisis which is the banking crisis where

banks went into bankruptcy as depositors, who feel unsecured and fear

the market risk, began to withdraw their deposits which led to what is

known as banking panic (Fredric). Deposits withdrawal with the

deterioration in banks assets' sheet due to banks' losses in securities and

CDOs plus the failure of many high profile firms and investment banks, as

mentioned before, led to the shocks that initiated the crisis. Needless to

say, the globalization of financial markets played a major role in

accelerating the spread of the crisis into European financial markets.

European investments were used in the purchasing of CDOs and MBS

which led to the same circumstances in banks failures, and shocks in the

European stock markets (Shah). The crisis did not stop there, but it
Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper

continued to affect emerging markets, like our Egyptian market, as well

as all markets around the world; however, the effects differ from each

market to other ones. To sum up, we can state that over issuance of sub-

prime mortgages and the market failure of this securities led to a chain of

effects on the housing market that houses lost their values which led to a

decrease in the banks' assets, and MBS and other derivatives became

worthless which also affected the insurance firms that were insuring

these securities and all of that caused the crisis.

Needless to state, governments had to react to eliminate the

effects or at least mitigate the crisis. First, we start by the US

Government as it was the country that is primarily responsible for the

crisis. The short term reaction is represented in the bailouts offered by

the US governments to get out the banks and corporations that were

mostly affected by the crisis, while the long term could be represented in

the regulatory reforms in the financial markets. After the crisis, a bailouts

that totals up to 700$ billion dollars were announced by President Bush

for bankrupted banks and financial institutions (Fredric). Two of the

largest investments banks in the USA (Goldman Sachs and Morgan

Stanley) were bailed-out by the U.S. government (CNBC). Other 25 banks

Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper

became insolvent and were taken over by the Federal Insurance

depository commission 'FDIC'. Stimulus packages were offered by the

American administration to mitigate the crisis. Regarding the monetary

stimulus package, the FED responded also by cutting down the target for

the Federal funds rate from 5.25% to 2%, and the discount rate from

5.75% to 2.25% which will encourage banks to get loans from the FED so

as to maintain liquidity as well as announcing that it will purchase MBS

and CDO from troubled banks (Bernanke). The U.S. government

committed more than "$10 Trillion dollars to economic recovery

packages between October 2008 and June 2009" (CNBC). Moreover, the

FED went further in cutting down the interest rate to zero by December

2008 (CNBC). On more long-term basis, the Economic Recovery Act of

2008 was proposed to mitigate the crisis (Fredric). In this act, the

Treasury Asset Relief Plan (TARP) compiled the treasury to spend "$700

billion purchasing subprime mortgage assets from troubled financial

institutions or to inject capital into banking institutions", as well as other

provisions to promote the recovery in the economy(Fredric). On the

regulatory level, the Department of treasury initiated a financial

regulatory reform which will further help in recovery of the economy and
Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper

provide more regulations that can aid in preventing future crises. Some

of the provisions included in this reform are imposing restricted

regulations and supervision over financial institutions especially those

with high risks; for example, hedge funds became under the supervision

of the SEC, another point is protecting consumers and investors from

financial abuse; for example, establishing new "Consumer Financial

Protection Agency to protect consumers across the financial sector from

unfair, deceptive, and abusive practices" as well as other provisions

(Financial Regulatory Reform).

As for the Egyptian economy, it is considered more vulnerable as it is still

an emerging market. Although the Egyptian financial market was not

involved in the sub-prime issue or even in the purchasing of CDOs &

MBS, it was affected by the crisis due to the globalization of financial

markets. The crisis effects on Egypt were mostly on the stock market,

banks, and overall GDP growth as it affected the trade balance due to

fewer exports and effects on the tourism industry. The effects of the

crisis affected Egypt's major sources of revenues like the tourism

industry, energy exports, and Suez Canal tolls (Zhongwen& Gongzheng).

The Egyptian stock market was the first to suffer from the crisis as
Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper

foreign investors rushed to sell their securities they had in the Egyptian

market to make up for their losses in other foreign exchange markets

(Khalil). Some of the Egyptian companies that were listed in foreign

exchange markets were also affected by the crashes that happened in

these markets when the crisis took place (Khalil). As for the Suez Canal,

it was affected by the decrease in the international trade due to the

financial crisis and "revenues fell from $504.5 m in August 2008 to

$469.6m in September 2008 and in October, November and December,

revenues amounted to $467.5 m, $419.8 m and $391.8 m respectively"

(Khalil). As for the GDP growth rate, the first half of 2008-2009 shows a

slowdown in the growth rate to reach 5.8 per cent compared with 6.5

per cent in the same period last year (Khalil).

Before the crisis, the Egyptian economy was in the middle of a reform

plan that started in the 1990's known as "the Economic Reform and

Structural Adjustment program (ERSAP) which aimed at stabilizing the

economy and promoting economic growth"(Ramadan). The reform

program is considered a very successful one as it made great

improvements in terms of GDP growth, decreasing unemployment rates,

and decreasing fiscal deficit (Ramadan). The Egyptian banking system

Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper

was also subject to a banking restructure program that started in 2oo4

and was also achieving all its objectives such as the restructuring the

financial and managerial structures of state-owned banks, upgrading CBE

banking supervision and other objectives (Investing in Partnership).

However, when the global financial crisis started to affect the Egyptian

economy, the Egyptian government responded by introducing both a

fiscal and a monetary stimulus packages to face the crisis (Ramadan). As

for the fiscal stimulus package, the Egyptian government introduced its

package of "LE 15.5 billion (1.5% of GDP) in 2008/09, mostly to finance

accelerated investments in public utilities"(Ramadan). In fact, the fiscal

stimulus package managed to increase the domestic demand in the

Egyptian market without increasing the budget deficit (Ramadan). The

Egyptian government offered another stimulus package as part of the

2009/2010 budget which worth about 6 billion pounds (Ramadan).

Regarding the monetary policy, the CBE announced that it will continue

to guarantee all the deposits in the banking sector in a step to make the

depositors feel safe about their deposits and to prevent a crisis in the

banks' deposits (Ramadan). The CBE also decreased the overnight

deposit and lending rates in reaction to the crisis (Ramadan). The

Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper

stimulus package banned the corporations from "investing in financial

instruments of more than 3-year maturity to encourage private sector to

reinvest their residuals"(Ramadan). Moreover, the CBE lowered the legal

requirements rate for banks on loans given to finance SME from 14% to

zero as to decrease the unemployment rate (Ramadan).

Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper

Works cited

Frederic S. Mishkin. The Economics of Money, Banking & Financial Markets.

.New York: Pearson & Addison Wesley, 8th edition, 2008
Shah, Anup. “Global Financial Crisis.” Global Issues, Updated: 25 Jul. 2009.
Accessed: 08 Dec. 2009. <http://www.globalissues.org/article/768/global-
financial-crisis>

Ramadan, Omneya. "Egypt Response to The global Crisis." http://mof.gov.eg.

June2009. Ministry of finance, Egypt, Web. 5 Dec 2009.
<http://mof.gov.eg/English/Egypt%20Response%20to%20the%20Global
%20Crisis.pdf>.

"Financial Regulatory Reform." www.financialstability.gov. Department of treasury,

Web. 4 Dec 2009.
<http://www.financialstability.gov/docs/regs/FinalReport_web.pdf>.

Khalil, Akram. "The global financial crisis: effects on the Egyptian economy." Center
for political&Strategic issues 119 (25 Jan 2009): n. pag. Web. 1 Dec 2009.
<http://acpss.ahram.org.eg/eng/ahram/2004/7/5/EGYP140.HTM>.

"Investing in Partnership." www.amcham.org.eg. American Chamber of Commerce in

Egypt, Web. 10 Dec 2009.
<http://www.amcham.org.eg/bsac/ustrade/pdffiles/EgyptReform06.pdf>.

Baldwin, Richard. "The IMF on fiscal policy in the crisis." (1 January 2009): n. pag.
Web. 4 Dec 2009. <http://www.voxeu.org/index.php?q=node/2743>.

Zhongwen& Gongzheng, Yu & Chen. "Egypt's economy slowing down due to global
financial crisis ." Xinhua (24 Mar 2009): n. pag. Web. 7 Dec 2009.
<http://news.xinhuanet.com/english/2009-03/24/content_11060358.htm>.
S. Bernanke , Ben. "The Crisis and the Policy Response." (13 January 2009 ): n. pag.
Web. 8 Dec 2009.
<http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm>.
CNBC.Boom, Bust & Blame: The inside Story of America's Economic Crisis.4 Dec
2009
http://www.cnbc.com/id/31189220
S. Bernanke , Ben. "The Crisis and the Policy Response." (13 January 2009 ): n. pag.
Web. 8 Dec 2009.
<http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm>.
Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper

Capital Adequacy of Egyptian Banks Sep.09

Credit Risk Exposure:
s
Assets Credit Risk Weight Amount Credit Risk
       
Local and discount Balances 100% 429793 429793
Balances with Banks abroad 20% 79758 15951.6
Balances with Banks in Egypt 20% 184166 36833.2
Total Credit Risk 482577.8
Market Risk Exposure
Assets Market Risk Weight Amount Market Risk  
Public Business Sector 8% 1392 111.36
Private Business Sector 8% 39773 3181.84
External Sector 8% 15744 1259.52
Total Market Risk 4552.72
Opeartional Risk
Year Net Profit/ Assets Amount Operation  
2006 0.7 761562 533093.4
2007 0.8 937923 750338.4
2008 0.8 1083311 866648.8
Total 2150080.6
Operational Risk Eposure: .15*Total of Gross Profit
322512.09
- Net profits of "June" is the one calculated here because there is not calculated total assets of
Sep.09
Operation
Total Risk Exposure Credit Risk Market Risk Risk
482577.8 4552.72 322512.09
Minimum Capital Requirement Total
.08*Total Risk 64771.4088 809642.61
Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper

Capital Adequacy for USA Banks for Oct.09

 Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper

Credit Risk Exposure:    

Credit
Assets Credit Risk Weight Amount Risk    
Commercial and industrial loans 100% 1,378.10 1378.1
Inter Bank Loans 20% 291.9 58.38
Real estate loans 50% 3,748.70 1874.35
Other loans and leases 100% 744.2 744.2
Consumer loans 100% 846.8 846.8
Loans to Commercial Banks 20% 85.4 17.08
    Total 4918.91
2- Calculating Market Risk Exposure    
Market
Assets Market Risk Weight Amount Risk
Trading assets 8% 338.5 27.08
Other securities 8% 932.1 74.568
Total 101.648
3- Calculating Opeartional Risk  
Year Net Profit    
2006 551.039
2007 616.995
2008 566
Total 1734.034    
Opeational Risk Eposure: .15*Total of Gross Profit
  260.1051
- Net profits of "June" is the one calculated here because there is not calculated total assets of Sep.09
Market Operation
Total Risk Exposure Credit Risk Risk Risk
4918.91 101.648 260.1051
Miniumum Capital Requirement Total
5280.663
.08*Total Risk 1
422.453048
Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper
Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper
Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper
Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper
Hasseeb, Mohamed Omar
900-06-1907
Econ 303-01
Term-Paper