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Adinarayan Gummalla Sneha Mehta Vishaka Parmar Rahul Rajagopalan Shruti Shetty Neshel Ashok

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Financial Crisis
Applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value Associated with banking panics, and many recessions coincided with these panics Stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults are the other situations of financial crises Do not directly result in changes in the real economy unless a recession or depression follows

Recession
In economics, a cycle contraction, a activity. recession is a business general slowdown in economic It occurs when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

Abstract
In 2008, a series of bank and insurance company failed

Fannie Mae (FNM) and Freddie Mac (FRE) were both taken over by the government
On September 14th Lehman Brothers declared bankruptcy

Bank of America agreed to purchase Merrill Lynch (MER), and American International Group (AIG) was saved by the federal government
On September 25th, J P Morgan Chase (JPM) agreed to purchase the assets of Washington Mutual (WM) in what was the biggest bank failure in history On September 17, 2008, more public corporations had filed for bankruptcy in the U.S. than in all of 2007

 During booming years banks advanced housing loans to people with low credit worthiness The financial institutions repackaged these debts into financial instruments called Collateralized Debt Obligations Surplus inventory of houses and the subsequent rise in interest rates led to the decline of housing prices in the year 2006-07

Unaffordable mortgage payments and many people defaulted or undertook foreclosure

The house prices crashed and affected many banks, mortgage companies and investment firms world-wide

Contd
Different reasons of the crisis include:
o o o o o Boom in the housing market Speculation High-risk mortgage loans Securitization practices Poor regulation of the financial institutions

The financial crisis has not only affected United States of America, but also European Union, U.K and Asia

Part I (How it Started)

After the great depression, the USA had 40 years of economic growth without single crisis In 1980s the financial industry exploded and the investment banks went public

By late 1990s the financial sector had consolidated into few gigantic firms, each of them so large that their failure could threaten the whole system
The next crisis came at the end of 90s, the IBs fueled massive bubble in internet stocks, which had a crash in 2001 that caused 5 trillion dollar losses

 In 2001, the USA financial sector was dominated by:

o 5 IBs- Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, Bear Steans o 2 Financial ConglomeratesCitigroup, JP Morgan o 3 Securities Insurance company: AIG, MBIA, AMBAC o 3 Rating Agencies: Moodys, S and P, Fitch

Securitization Food Chain

Contd
Between 2000 and 2003, the number of mortgage loans made each year nearly quadrupled

Contd
IBs actually preferred subprime loans because they carried higher interest rates Many loans were given to people who could not repay them

Part II (The Bubble)

Biggest Financial Bubble In The History

From 1996- real home prices effectively doubled

 Goldman Sachs, Bear Stearns, Lehman Brothers, Merrill Lynch, was all in on Subprime Lending The subprime lending alone increased from 30 billion a year in funding to over 600 billion a year, in 10 years Countrywide Financial- the largest subprime lender, issued 97 billion dollars worth of loans

Lehman Brothers was a top underwriter of subprime lending

Leverage
During the bubble, IBs were borrowing heavily
The ratio between borrowed money and the banks' own money was called leverage

Credit Default Swap

AIG was selling huge quantities of derivatives, called credit default swaps It worked like an Insurance Policy

Rating Agencies
The CDOs were sold to customers as safe investments Moody's, the largest rating agency, quadrupled its profits between 2000 and 2007

Part III (The Crisis)

2004 - FBI was already warning about an epidemic of mortgage fraud 2005 - The IMF's chief economist, Raghuram Rajan, warned that dangerous incentives could lead to a crisis 2006 - Nouriel Roubinis warnings 2007 - Allan Sloan's articles in Fortune magazine and the Washington Post in 2007, and repeated warnings from the IMF 2008 - Securitization food chain imploded

Market for CDOs Collapsed

March 2008- the investment bank Bear Stearns ran out of cash, and was acquired for two dollars a share by JP Morgan Chase September 2008- Henry Paulson announced the federal takeover of Fannie Mae and Freddie Mac, two giant mortgage lenders on the brink of collapse

Bear Stearns was rated A2, a month before it went bankrupt. Lehman Brothers, A2 within days of failing AIG AA, within days of being bailed out Fannie Mae and Freddie Mac were AAA when they were rescued Citigroup, Merrill, all of them had high investment-grade ratings September 12th - Lehman Brothers had run out of cash, and the entire investment banking industry was sinking fast. Henry Paulson and Timothy Geithner, president of the New York Federal Reserve, called an emergency meeting with the CEOs of the major banks Merrill Lynch, another major investment bank had also failed and acquired by Bank of America. The only bank interested in buying Lehman was British firm Barclays Neither Lehman nor the Federal Reserve had done any planning for the bankruptcy

Contd

Contd
All transactions came to a halt. The hedge funds who had assets with Lehman, in London discovered that they couldn't get those assets back The oldest money market fund in the nation wrote off roughly three quarters of a billion dollars in bad debt issued by the now-bankrupt Lehman Brothers Lehman's failure also caused commercial paper market a collapse in the

AIG owed 13 billion dollars to holders of credit default swaps; and it didn't have the money Paulson and Bernanke ask Congress for 700 billion dollars to bail out the banks

 When AIG was bailed out, the owners of its credit default swaps, the most prominent of which was Goldman Sachs, were paid 61 billion dollars the next day. A hundred and sixty billion dollars went through AIG; 14 billion went to Goldman Sachs October 4th, 2008- President Bush signs a 700-billiondollar bailout bill

Contd

Contd
The recession accelerates, and spreads globally Unemployment in the United States and Europe quickly rises to 10% Chinese manufacturers see sales cut. Over 10 million migrant workers in China lose their jobs Singapore was growing at about 20 percent. And then suddenly it went to minus nine in the particular quarter

Exports collapsed
People were living, day to day, paycheck to paycheck

Part IV (Accountability)
The men who destroyed their own companies , & plunged the world into crisis , walked away from, the wreckage with their fortunes intact Very few economic experts warned about crisis , many of them opposed reforms A lot of smaller banks have been taken over by big ones

Part V (Present Scenario)

US has become a more unequal society and its economic dominance have declined US Companies outsources its jobs in countries like China As the middle class fell, there is a political urge to respond by making it easier to get credit The financial industry is a service industry and it should serve others, before it serves itself

Impact of crisis on stock market

FIIs had been heavy buyers in the Indian stock markets in the past few years They invested heavily i.e. in millions of $ and bought out stocks of India's famous companies Once the subprime crisis started looming, the US financial players and other companies got stuck with bad debt Companies like Lehman which were unable to raise enough capital were declared bankrupt Since almost all FIIs opted to sell out their holdings simultaneously the prices of shares of companies that were once considered invincible came down like a rocket that ran out of gas The BSE Index or Sensex was somewhere around 21000 during Jan 08 and it was hoverin at about 8000 to 10000 marks during oct,08

Impact of crisis on banks

Subprime crisis has ended up history of many banks in U.S.A. As of now, 22 banks closed because of sub prime crisis, and it started with Lehman brothers, a 138 yr old company was filed bankrupt Our Indian banks are slightly better protected from the financial meltdown, largely because of the greater role of the nationalized banks and other controls on domestic finance Strict regulation and conservative policies adopted by the RBI have ensured that banks in India are relatively insulated from the travails of their western counterpart

Impact of crisis on real estate

Real estate was badly affected by the current financial downturn RBI has already increased the interest rates to control inflation

The crisis has forced many of the global majors to either postpone or cut the expansion plan With the large investment banks going bankrupt, the projects have to be discounted, leading to the slump in the real estate market as well

Impact of crisis on employment

From the beginning of summer 2008 there has been a slew of bad news in US that caused ripple effects across the globe Current slow down in US will make the Indian IT and BPO companies to reduce their dependency to US and start marketing their services to other countries like APAC (Asia-pacific) and Latin America and EMEA (Europe, middle east and Africa) In wall street all the investment banks are converting themselves to commercial banks, mergers and acquisitions of financial institutions will take place soon This means there will be no more lavish IT and BPO budgets for them to spend and this will significantly reduce the profit margin for the Indian IT companies

Conclusion
The financial industry turned its back on society, corrupted the political system and plunged the world economy into crisis Banks play a critical role in current economy, hence if a large bank suffers a loss, the entire economy gets affected This crisis has shown the loopholes of financial system and working of the Govt. to global economy Precaution is better than cure