GLOBAL CREDIT CRISISGLOBAL FINANCIAL CRISIS

Simplified By CA Avik KediaFounder, Sanchayan Society [www.SanchayanSociety.org]

Visiting Faculty, MDI Gurgaon [www.mdi.ac.in]

What we will discuss today

Globalization Interconnected World EconomyGlobal Financial CrisisOil EconomicsDollar TradeThe Great DepressionFuture Outlook

Some images from the crisis….

Before we start- ‘some basics’

$1 US = Rs.50 (approx.)

1 Billion = 100 crores

$ 1 Billion = Rs.5000 crores

1000 Billion = 1 Trillion

India vs. China vs. United States

2008 GDP data as per IMF

India China United States

$ 1.3 $ 4.4 $ 14.2

GDP Rank 12 3 1

Figures in Trillion US Dollars

GDP defined• In economics, GDP means Gross Domestic Product. GDP is

defined as the value of all goods and services produced within the geographic territory of an economy in a given interval, such as a year.

• GDP = consumption + investment + government spending + (exports − imports)

Monetary Authority

India

RBI

Monitors Interest Rates & Manage Govt. Finances

United States

Federal Reserve (Fed)

Monitors Interest Rates

Importance of Interest rates

• Interest rates determine money supply and demand,• Expansion & Investment plans are decided by interest

rates• Interest rate changes affect the flow of funds globally

Value of a Company

Value = No. of shares x Share Price

Global Financial Crisis

A. Causes of the Global CrisisB. Effects of the Global CrisisC. Measures/ Actions taken to combat global crisis

A. Causes of the Global Crisis

Origins of the crisis – Collapse of Bretton Woods Monetary system,

Gold Standard IMF and World Bank set up in 1944 Fixed exchange rates : $35 per ounce (28 gms) of gold

US eliminates the fixed gold price in 1971

2000-2001 Dot-com Bubble

C o m p a n y

3 /10 /2 00 0 p r ic e

3 /0 5 /2 00 1 p r ic e *

% c h a n g e

Ya h o o $178.06 $22.19 -88%

G a t e w a y $62.50 $16.07 -74%C is c o S y s t e m s

$68.19 $23.08 -66%

e B a y $96.63 $38.00 -61%H e w le t t -P a c k a r d

$73.47 $30.38 -59%

O r a c le $40.81 $17.00 -58%S u n M ic r o s y s t e ms

$47.09 $20.94 -56%

D e l l $51.25 $23.44 -54%

In t e l $60.00 $30.38 -49%

M ic r o s o f t $101.00 $57.44 -43%

C o m p a q $28.44 $20.07 -29%A m e r ic a O n l in e

$58.63 $43.80 -25%* a d ju s t e d f o r s p l i t s

S o u r c e : C N E T In v e s t o r

Alan Greenspan’s Policies

• Federal Reserve Governor from 1987 to 2006• Reduced interest rates to 1%• Cheap Money Supply• Excessive Leverage

Housing Bubble

• House Prices increase globally due to speculation• Fannie Mae and Feddie Mac bailout• ‘House as an Investment’• “Negative Equity”

Real home price vs. Rent

Commodities and Oil speculation

• Crude Oil price goes to $147/barrel• Crude Oil price falls to $35/barrel• Huge demand from China & India• Boom in Copper, Iron ore, Steel prices

Oil Price chart

Greed of Investment Banks, Wall Street brokers, Credit Rating Agencies and Bonus Culture

• ‘Investment Banking’ becomes hottest sector

• Banks provided cheap liquidity

• Excessive risk taking• Banks indulge in

speculation• Weak regulatory

environment : creation of complex financial derivatives – CDS, CDO

• Lehman Brothers & Bear Sterns goes Bankrupt

• AIG- world’s largest insurer goes bankrupt

China

China’s Trade Surplus

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

US Exports to

China

13.1 16.3 19.2 22.1 28.4 34.7 41.8 55.2 65.2 71.5

US Imports from China

81.8 100 102.3 125.2 152.4 196.7 243.5 287.8 321.5 337.8

US Balance -68.7 -83.7 -83 -103.1 -124 -162 -201.6 -232.5 -256.3 -266.3

US-China Trade Statistics

Figures in US $ Billion

Petrodollars

• Dollar is the main currency used to buy petrol• Petrodollars reinvested in US bonds leading to

cheap money supply for US banks,

World Oil Reserves

B. Effects of the Global Crisis

Stock Markets Crash….

-37%

-28%-33%

-28%

-37% -39%

-68%

-44%

-58%

-50%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

S&P 500 Mexico Brazil UK Germany France Russia Japan China India

Collapse of Housing Bubble

• Housing Prices fall sharply,• House bought as

investments hit hardest,• Boom in construction and

heavy machinery bursts,

Collapse of Commodities bubble and Oil speculation

• Boom in commodities and raw materials comes to an end as economies contract and companies cut back on expansion plans,

• Raw materials exporters see huge decline in exports,• Oil falls sharply from $147 to $35,

Unemployment and Global Poverty

• Worldwide unemployment• Funding for poverty programs

reduced sharply• Sharp reduction in salary

packages

Corporate Bankruptcy & Bailouts

• Lehman Brothers• Bear Sterns• AIG• Circuit City• Nortel• Fannie Mae• Countrywide Financial• Freddie Mac• General Motors• Chrysler

Auto Industry – GM, Chrysler bankrupt

• Major auto companies go bankrupt worldwide,

• TATA buys JLR from Ford,• Many auto components

suppliers and auto dealerships shut down,

• Auto sector sales fall sharply,

Impact on India – IT, Outsourcing, Gems and Jewellery, and Textiles sectors hit hardest

• India, largest exporter of gems and jewellery to United States, suffers due to recession in US,

• Millions of unorganized workers in gems and jewellery sector lost jobs,

• IT sector, dependent on the US, suffers due to cutbacks in technology spending by the US.

Effect on Exports of Emerging Economies and Protectionism

• Export driven emerging economies like Brazil, China, India suffer due to decreased demand from US and Europe,

• Protectionism rears its ugly head, as countries strive to stimulate demand for their own products,

C. Measures / Actions to combat Global Crisis

International Stimulus Packages

US TARP, Toxic Assets, Geithner Plan

• $1 Trillion Geithner Toxic Assets Plan• $ 700 billion bailout• $ 185 - AIG • $ 45 - Citibank

US Bailout and Guarantees

Interest Rates Cut worldwide by ECB, US FED, Australia, Japan, India

• Interest rates cut to unfreeze credit markets and stimulate borrowing & demand,

• Interest rates in US reduced to 0.25%• Home loans made cheaper in India,

Stricter Government Regulation

• Governments worldwide call for monitoring banking system and illegal tax havens,

• United States Government regulates wall street pay and bonus,

• IMF regains authority and gets funds for lending to developing countries,

Lehman Brothers• 4th largest US Investment Bank• Bankrupt on 15th September 2008• DEBT = $613 Billion • BOND DEBT = $ 155 Billion• EQUITY = $ 22 Billion• Assets = $639 Billion• Revenue = $59 Billion• Net Profit = $6.7 Billion• Employees = 26,200

CONCLUSION

• Future Outlook• Worsening Macro Economy• Increasing Fiscal Deficit• Booming Stock Markets once again

How to stay updated• Read Financial

Newspapers • Read Wikipedia,

Wikinvest, other sites regularly

• Read magazines like The Economist, BusinessWeek, Business Today

• INVEST YOUR TIME before YOUR MONEY

Thank You