global financial crisis
TRANSCRIPT
December 1, 2008
Global Financial CrisisSummary of the media’s coverage of the timeline, causes, implications, impact and recommended path forward
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Table of Contents
Objective and Methodology
Global Financial Crisis
• Timeline of Events
• Causes and Implications
• Future Outlook and Recommendations
Appendixes
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Global Financial CrisisObjective and Methodology
Universe of Expert Opinions and Articles
~100 articles and reports from preferred sources
~50 Relevant Articles for analysis
Synopsis
Step 1Selected 12 publications (e.g., Economist, FT, Wall Street Journal), 8 think tanks and select sources from other media such as radio
Scanned all sources for coverage of the current global financial crisis between mid 2007 and October 2008
Objective: Provide a rich, yet concise summary of the media coverage on the current global financial crisis
Step 2Read ~100 articles and shortlisted them according to the following criteria:
• Analytical insight
• Breadth of coverage
• Uniqueness of opinion
Step 3Summarized shortlisted articles and incorporated them into the slides that follow which cover:
• Timeline of events (2007/08)
• Causes and Implications of the Global Financial Crisis
• Global Impact
• Future Outlook and Recommendations
The synopsis was created using the following methodology:
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Table of Contents
Objective and Methodology
Global Financial Crisis
• Timeline of Events
• Causes and Implications
• Future Outlook and Recommendations
Appendixes
| Copyright © 2008 Grail Research, LLC — ConfidentialNovember 19, 2008 5
The current financial crisis is categorized as the worst since the Great Depression. Some of the major events related to the crisis are mapped to the Dow Jones Industrial Average
0
12,000
15,000
9,000
DJIA Index Value, June 2007-October 2008
Source: News Releases
Global Financial CrisisTimeline of Events – 2007/08
Nov’ 07 Dec’ 07 Feb’ 08 Mar’ 08 Jun’ 08 Sep’ 08 Oct’ 08Jun’ 07-Jul’07
Two hedge funds of
Bear Sterns
forced to dump
assets, due to losses. Bear
Stearns funds file
for bankruptcy
Aug’ 07
Lehman Brothers
and HSBC shut some
of their offices
Sep’ 07
Federal Reserve reduces the fed
fund rates by half
percentage point
Oct’ 07
Merrill Lynch reports loss on
USD 8.4 Bn write
down
Morgan Stanley suffers loss of USD
3.7 Bn
Fed and other
central banks share
~USD 40 Bn in
special loans to banks
US financial
crisis affects
UBS which confirms loss of
USD 18.4 Bn
JP Morgan and Fed Reserve
take steps to rescue
Bear Stearns
S&P cuts ratings of Morgan Stanley, Merrill
Lynch and Lehman Brothers
Jul’ 08
Merrill has USD 5.7
Bn of write downs;
sells shares
Government rescues banks by
nationalizing Fannie Mae, Freddie Mac and giving
AIG an emergency loan of USD
85 Bn
Lehman Brothers files for
bankruptcy
Russia, Romania
and Ukraine close their
stock exchange
for few days due to crisis
Iceland’s financial crisis grows as all three of its
major banks are nationalized
Governments of many countries announce
bailouts for their financial institutions
Housing bubble bursts
Financial institutions fall
Stock market collapses Future outlook
Henry Paulson assures investors that the sub-prime
problem is contained Paulson shares that the US Treasury has no plans to bailout Fannie Mae or
Freddie Mac
Paulson rejected the possibility of the
housing crisis leading to a broader economic
crisis
Bernanke and Paulson urge fast
action to approve the USD 700 Bn bailout
Nouriel Roubini states that
governments will have to come up with even bigger
international rescues
Bank of America
buys Merrill
Lynch for USD 50
Bn; Bank of China
buys 20% stake in
Rothschild
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Global Financial CrisisCauses: US Housing Market CollapseMany experts believe that the global crisis was triggered by the US housing market collapse
Note: 1Collateralized Debt Obligations Source: ‘The Giant Pool of Money’, NPR News and This American Life Episode, Sep 09, 2008; ‘Crazy crisis may herald the end of new derivative folly’, FT, Dec 23, 2007; ‘Rethinking Capital Regulation’, WSJ, Aug 23, 2008; ‘Central banks and financial crises’, WSJ, Aug 23, 2008; ‘Spooking investors - Financial markets remain on edge because the credit crunch has not been solved’, Economist, Oct 25, 2008; ‘Out of the frying pan’, Economist, Jun 05, 2008
Easy access to credit: Falling interest rates and rising availability of mortgages, combined with rising housing prices encouraged consumers to buy homes
Relaxed lending standards: To cater to the growing number of mortgage seekers, lenders relaxed standards and issued a large number of sub-prime loans
Inadequate regulations: Regulations did not keep pace with innovations in US financial products, leading to much higher complexity, poor transparency and greater risk
Complex credit derivatives: The invention and use of complex debt derivatives such as CDOs1 made it difficult to identify and contain the sub-prime lending problem, once default rates began to rise
Market collapse: The property boom led an over-supply of housing and prices could no longer be supported. Just like the self-perpetuating behavior that led to the rise, the crash was also self-perpetuating. As prices fell, more foreclosures started taking place, increasing the supply of homes on the market. Lenders started to tighten their standards and fewer consumers could qualify for mortgages and help reduce the supply
US Housing Market Collapse
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Global Financial CrisisCauses: US Housing Market Collapse… some experts have other opinions
New Bank Capital Requirements: Some experts believe that an international regulation (Basel I) that came into effect in 1988 contributed to the financial crisis. This regulation mandates that banks hold more capital if they make riskier loans or investments. This encouraged banks to get rid of risky loans by turning them into securities to be sold to investors
Role of the Credit Rating Agencies: Many experts blame ratings agencies such as Moody’s, Standard & Poor’s and Fitch for the crisis because they granted AAA ratings to risky mortgage backed securities (MBS). Profits of ratings agencies grew rapidly over the last decade. Almost all agencies follow an ‘issuer-pays’ revenue model1, and this poses a potential conflict of interest, which some experts contend led to inappropriately high ratings for risky MBS.
Riskier Investment Decisions by Banks: Some experts blame poor decision-making on the part of banks for the crisis. Banks kept huge amounts of MBS on their balance sheets in spite of the sub-prime risk involved. They financed these and other risky assets with short-term market borrowing and with a decline in the housing market, banks found it difficult to roll over short-term loans against these MBS and hence were forced to sell the assets at a substantial loss
Mark-to-Market Accounting Rules: Financial regulation such as mark-to-market accounting stipulates that financial firms must treat potential losses as cash losses. Even though many financial instruments may still yield returns in the future, their current asset price is highly devalued. This concept makes firms ripe for forced liquidation, chases away capital, and leads to further decline in asset values
Misleading Economic Statistics: Some statisticians believe that government statistics (e.g. GDP and unemployment rate) have been revised over the years to show the best possible picture of the US economy. These experts hold that such revisions in economic statistics are misleading and were used by Wall Street to sell their over-valued products
Note: 1The entity that issues the security is also seeking the rating, and pays the rating agency for the ratingSource: ‘New Bank Capital Requirement Helped to Spread Credit Woes’, WSJ, Aug 30, 2008; ‘How to Start the Healing Now’, WSJ, Oct 01, 2008; ‘Rethinking Capital Regulation’, WSJ, Aug 23, 2008; ‘Economy lacked a trusted national leader’, Washington Post, Oct 15, 2008; ‘Wall Street: the dark theory’, Fortune, Sep 19, 2008; ‘Triple-A Failure’, New York Times, Apr 27, 2008
Alternative Viewpoints
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Global Financial CrisisImpact: Global Economic Slowdown
Source: ‘The Giant Pool of Money’, NPR News and This American Life Episode, Sep 09, 2008; ‘Off a cliff’, Economist, Oct 10, 2008; ‘Market meltdown: Global problem, global cure’, Fortune, Oct 06, 2008; ‘Europe to U.S.: You messed up the rescue, too’, Fortune, Oct 13, 2008; ‘The end of the beginning’, Economist, Oct 16, 2008; ‘When fortune frowned’, Economist, Oct 09, 2008; ‘But will it work’, Economist, Oct 16, 2008; ‘Yahoo expected to point to advert drop-off’, Financial Times, Oct 20, 2008; ‘India’s Jet Airways cuts 1,900 jobs’, Oct 16, 2008; ‘U.S. layoffs increase as businesses confront crisis’, IHT, Oct 26, 2008
World stock markets have taken a beating, leading to a loss in confidence amongst investors who are stepping back in spite of several cuts in lending rates by the banks
• E.g. DJIA fell below 10,000 mark (first time in four years) plunging more than 800 points in a single day in October. The fall was mirrored in stock markets, such as NASDAQ, NYSE, Nikkei 225, London’s FTSE, Germany’s DAX, etc
Impact on Stock Markets GloballyBoth institutional investors and individual investors have suffered huge losses both in MBS and related products, and in equities
• Banks alone are reported to have suffered USD 600 Bn of credit-related losses globally. According to IMF estimates, American and European banks are predicted to loose USD 10 trillion of assets
Losses to InvestorsFailure of banks fueled anxiety in international banking markets leading to a freeze in inter-bank lending
Freeze in Inter Bank Credit
There have been job cuts in many companies across various sectors around the globe. This trend has not been limited to the financial sector alone
• High number of layoffs were announced in the US through September 2008: 111,000 in financial sector, 95,000 in automotive sector, 62,000 in transportation, 51,000 in retail, 28,000 in telecommunications and more in other sectors
There is considerable decline in business all over world marked by reduced output and consumer spending, particularly in Britain, France, Germany and Japan. The industries being impacted include automotive, airline, building materials etc. Automotive companies such as GM, Ford and Toyota reported 45%, 30% and 23% decline in sales respectively, in October 2008
Several bailout packages have been announced by governments around the world to fight the growing financial crisis
• The US has announced a USD 700 Bn bailout package for its banking sector, Germany announced a bailout package of more than USD 200 Bn and Britain more than USD 500 Bn for this financial crisis (see appendix for more detail on global bailout announcements)
Increasing Unemployment Decline in Businesses Globally Bailouts
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Global Financial CrisisFuture Outlook
By Experts Most Common Future Outlook Scenarios
Consolidation and Restructuring of Banks – Changes are already evident with deals that are taking place:
• Bank of America taking over Merrill Lynch
• Bank of China acquiring 20% stake in private banks such as Rothschild
• Barclays acquiring Lehman Brothers
• BNP Paribas expected to take a majority stake in the Belgian and Luxembourg operations of Fortis NV
Emerging Economies to Help Out Developed Nations – Cash rich economies of world (developing nations and their Sovereign Wealth Funds) are expected to bailout the developed nations from the current crisis. As stock prices of the big banks from developed nations fall, they are expected to attract investors from developing nations. Some experts believe that China will act as the savior of developed economies facing the risk of recession by buying their banks
Worsening financial crisis due to the unraveling of Alt-A mortgages– This is the segment of mortgage loans given to prime borrowers but without complete documentation. From 2002 to 2007, Alt-A mortgages as a percentage of total mortgages have risen from 2% to ~13%, and experts say that the defaults on this category of mortgages will impact the financial market even more than sub-prime lending
Source: ‘How to build a better bailout’, Fortune, Oct 06, 2008; ‘Why it's stimulus time again’, Fortune, Oct 14, 2008; ‘Financial sector in crisis’, FT, Sep 10, 2008; ‘A Return to 'Normality'?’, WSJ, Sep 03, 2008; ‘Global breakdown: Winners and losers’, Fortune, Sep 30, 2008; ‘Market meltdown: Global problem, global cure’, Fortune, Oct 06, 2008; ‘A monetary malaise’, Economist, Oct 09, 2008; ‘Barclays: Wall Street's new gambler’, Fortune Oct 21, 2008
Opinions about what happens next gravitate toward several scenarios
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Source: ‘The $700 Billion Question: How Much Is That Exotic Security?’, Knowledge@Wharton, Oct 01, 2008; ‘How to build a better bailout’, Fortune, Oct 06, 2008; ‘Why it's stimulus time again’, Fortune, Oct 14, 2008; ‘Financial sector in crisis’, FT, Sep 10, 2008; ‘A Return to 'Normality'?’, WSJ, Sep 03, 2008; ‘Europe to U.S.: You messed up the rescue, too’, Fortune, Oct 13, 2008; ‘Keeping U.S. Financial Markets Competitive And Orderly’, Forbes, Mar 31, 2008
Global Financial CrisisRecommendationsOpinion leaders and governments have made various recommendations for how to manage the current global financial crisis and stabilize the economy …
Paulson’s suggestions for the US financial market include:• Fed should be the highest authority regulating all financial institutions and a new
authority should look after consumer protection issues• The Securities and Exchange Commission should be merged with the
Commodity Futures Trading Commission. Thus by tightening the regulatory gaps, banks will follow the Basel II guidelines (which it claims could have mitigated the credit crisis, if followed earlier)
• Large investors, such as insurance companies, should be brought under the federal regulations, by allowing them to opt for federal chartering and oversight (instead of state chartering)
European governments reportedly believe that rather than buying toxic assets, the government should focus to recapitalize the banks directly in exchange for some control of operations of the banks
By Henry Paulson, Treasury Secretary of US By European Governments
Some experts have suggested alternative bail-out plans, such as:• Government Loans: Funds allocated for bailout can be used to provide loans (with mortgage securities as collateral) rather than
buying the securities outright. This avoids the complexity of pricing the securities and enables interest from the loans to be returned to taxpayers or used for their benefit
• Reverse Auction: The government (one buyer) can invite lowest bids from many sellers for different categories of securities• Issue T-Bonds Now: The US Treasury should borrow money to pay for the bailout now by issuing 5-year and 10-year notes, since
interest rates and the cost of funding the bailout will rise as the economy begins to recoverSome experts have also indicated that the real solution is to stabilize employment and hence cash flow. They believe that though the government is infusing liquidity into the market, households can still default on various debt instruments and hence the problem will still remain unsolved
By Opinion Leaders
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Table of Contents
Objective and Methodology
Global Financial Crisis
Appendixes
• A: Global Bailout Announcements
• B: Relevant Opinion Articles
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Global Financial Crisis Appendix A: Global Bailout Announcements as of Dec 1, 2008
Starting with the US financial sector, the crisis soon spread across the globe and into other markets beyond just financial servicesIn response to the crisis, governments around the world have infused capital to bail out and stabilize many private banks such as Fortis Bank, Royal Bank of Scotland, etc, and companies in other sectors
Note: All figures are in USD; Bailout announcements updated on Dec 1, 2008; Figures only include capital allocated for institutions in the form of equity or debt; 1Loans provided by Institutions such as IMF and World Bank or other countries.
US725 Bn
544.8 Bn
UK437.5 Bn98.1 Bn
France 54.1 Bn18.1 Bn
Austria20.3 Bn3.5 Bn
Chile 0.85 Bn
UAE32.6 Bn
Russia216.4 Bn23.5 Bn
Iceland2 Bn1
0.7 Bn
Ukraine16.5 Bn1
1.3 Bn
Spain41 Bn
Hungary 31.9 Bn1
Qatar5.3 Bn
Germany136.6 Bn92.2 Bn
Canada21.6 Bn
South Korea
42.2 Bn
Belgium22.1 Bn
Netherlands92.6 Bn
Denmark0.9 Bn
Norway0.8 BnLatvia
0.4 BnLuxembourg
4.2 Bn
India0.7 Bn
Switzerland59.3 Bn
Belarus2 Bn1
0Bn – 100Bn 101Bn – 250Bn 251Bn – 400Bn Above 400BnTotal Bailout Legend
CompanyBailouts
Government Bailout Funds
ASEAN, Japan, China and South Korea
80 Bn
The total value of global bailout announcements to date is USD 1.89 trillion
China8 Bn
0.4 Bn
Pakistan7.6 Bn1
Oman2 Bn
Kazakhstan5 Bn
International Financial Corporation
(For banks of poor countries)
3 BnSerbia0.5 Bn1
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Global Financial CrisisAppendix B: Relevant Opinion Articles and Radio Shows
Date Title Source Links17-Oct-07 Think the credit crunch is over? Think again Fortune http://money.cnn.com/2007/10/17/news/economy/eavis_creditcrunch.fortune/index.htm
10-Jan-08 Same as it ever was - What do earlier banking crises reveal about America's travails today? Economist http://www.economist.com/finance/displaystory.cfm?story_id=10496807
31-Mar-08 How to crack the credit crunch Fortune http://money.cnn.com/2008/03/27/news/fed-information.fortune/index.htm?postversion=2008032911
22-May-08 Predicting The U.S. Recovery: Some Leading Indicators Are BetterThan Others TD Bank Financial Group http://www.td.com/economics/special/bc0508_usecon.pdf
23-Jun-08 The U.S. Credit Crisis In Perspective Forbes http://www.forbes.com/2008/06/23/credit-crisis-japan-ent-fin-cs_kw_0623whartoncreditcrisis.html
23-Aug-08 Central banks and financial crises Wall Street Journal http://online.wsj.com/public/resources/documents/Fed-Buiter081608.pdf?mod=relevancy
23-Aug-08 Rethinking Capital Regulation Wall Street Journal http://online.wsj.com/public/resources/documents/Fed-JacksonHole.pdf?mod=relevancy
5-Sep-08 Giant Pool of Money This American Life (and NPR News) http://www.thislife.org/extras/radio/355_transcript.pdf
10-Sep-08 Financial sector in crisis Financial Times http://www.ft.com/cms/s/0/ffa3bbd4-7f18-11dd-a3da-000077b07658.html
17-Sep-08 Wharton Faculty Debate the Impact of the Financial Crisis Knowledge@Wharton http://knowledge.wharton.upenn.edu/article.cfm?articleid=2053
19-Sep-08 Wall Street: The dark theory Fortune http://money.cnn.com/2008/09/19/news/economy/siklos_shadowstats.fortune/
23-Sep-08 "Constructing a Financial Perfect Storm" by Jagadeesh Gokhale Cato Institute http://www.cato.org/dailypodcast/podcast-archive.php?podcast_id=745
30-Sep-08 Global breakdown: Winners and losers Fortune http://money.cnn.com/2008/09/29/news/economy/gumbel_world_economy.fortune/index.htm
01-Oct-08 The $700 Billion Question: How Much Is That Exotic Security? Knowledge@Wharton http://knowledge.wharton.upenn.edu/article.cfm?articleid=2064
01-Oct-08 How to Start the Healing Now Wall Street Journal http://online.wsj.com/article/SB122282734447293049.html
02-Oct-08 Blocked pipes - When banks find it hard to borrow, so do the rest of us Economist http://www.economist.com/displaystory.cfm?story_id=12342237
06-Oct-08 How to build a better bailout Fortune http://money.cnn.com/2008/10/06/news/economy/betterbailout_sloan.fortune/
9-Oct-08 A monetary malaise Economist http://www.economist.com/specialreports/displaystory.cfm?story_id=12373682
10-Oct-08 Off a cliff Economist http://www.economist.com/finance/displaystory.cfm?story_id=12405370
13-Oct-08 Europe to U.S.: You messed up the rescue, too Fortune http://money.cnn.com/2008/10/13/news/international/gumbel_eurobank.fortune/index.htm
16-Oct-08 The end of the beginning? Economist http://www.economist.com/world/europe/displaystory.cfm?story_id=12436221
15-Oct-08 Analysis: Economy lacked a trusted national leader Washington Post http://www.washingtonpost.com/ac2/wp-dyn/emailafriend?contentId=AR2008101500432&sent=no
13-Oct-08 We can beat this crisis Fortune http://money.cnn.com/2008/10/10/news/economy/fox_great_depression.fortune/index.htm?postversion=2008101307
25-Oct-08 Spooking investors - Financial markets remain on edge because the credit crunch has not been solved Economist http://www.economist.com/finance/displaystory.cfm?story_id=10024679
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Global Financial CrisisAppendix C: Key Sources
Think Tanks
Journals/ Publications
Radio Stations
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