1. Global Financial Crises
Naveen Kumar H M
From OFSS
By PresenterMedia.com

2. FINANCIAL CRISIS
 The term financial crisis is applied broadly to a variety of situations in which some financial assets suddenly
lose a large part of their nominal value.
 A financial crisis can come as a result of institutions or assets being overvalued, and can be exacerbated by
investor behaviour. A rapid string of sell offs can further result in lower asset prices or more savings
withdrawals. If left unchecked, the crisis can cause the economy to go into a recession or depression.
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3. Country creditworthiness is now inter-shuffled
“Advanced” countries (Formerly) “Developing” countries
AAA Germany, UK Singapore, Hong Kong
AA+ US, France
AA Belgium Chile
AA- Japan China
A+ Korea
A Malaysia, South Africa
A- Brazil, Thailand, Botswana
BBB+ Ireland, Italy, Spain
BBB- Iceland Colombia, India
BB+ Indonesia, Philippines
BB Portugal Costa Rica, Jordan
B Burkina Faso
SD Greece
S&P ratings, Feb.2012 updated 8/2012

4. Causes: How did we get into this mess?
Market Behaviour Cycle
New opportunity
Increased credit
Speculation
Excessive gearing
Financial distress
Credit crunch

5. Global Impacts of the Crisis
 Investors will be very cautious to
act
 Lack confidence in stock/bond
market
 Consumer spending will slowdown
 Lack of cash or unwilling to spend
World economy slip into recession
 U.S. economy condition affected
global economy
GDP growth will be low
 Lose businesses
 Lose jobs
 Economy slow down
 Financial market
 May take long time to recover
Unemployment rate may be
high
 Slow economy increase
unemployment rate
 Exports will decrease in China,
Korea, Taiwan
 GDP growth heavily depends
on export
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6. US ECONOMY & FINANCIAL MARKETS

7. • US Financial Markets
The United States has experienced 32 business cycles since 1854. While
the average duration of recessions has decreased, recent recessions have
been global and severe.
1854-1919
• 16 recessions averaging 22 months
1919-1945
• 6 recessions averaging 18 months
1945-2011
• 11 recessions averaging 11 months
7
Annual GDP Growth Since 1930
12
10
8
6
4
2
0
-2
-4
-6
1930
1934
1938
1942
1946
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
Annual GDP Growth Since 1930

8. With the steady decline of the manufacturing sector in the United States through outsourcing of
production to cheap labor areas abroad, 2.9 million well-paying manufacturing jobs have
disappeared in the period 2005-2008 alone. And that’s on top of a loss of more than 3 million jobs in
manufacturing from 1998 to 2003, with millions more lost in the entire postwar period.

9. 9

10. Treasury Rates and Inflation
10 Year Treasury Rates vs Consumer Price Index (YoY Chg)
18
16
14
12
10
8
6
4
2
0
-2
-4
Dec-69
Dec-71
Dec-73
Dec-75
Dec-77
Dec-79
Dec-81
Dec-83
Dec-85
Dec-87
Dec-89
Dec-91
Dec-93
Dec-95
Dec-97
Dec-99
Dec-01
Dec-03
Dec-05
Dec-07
Dec-09
10 Year Treasury Rates CPI YoY Chg

11. US Unemployment and Stock Market Returns
US Unemployment Rates and the Dow Jones Industrial Average
16000
14000
12000
10000
8000
6000
4000
2000
0
Dec-69
Dec-72
Dec-75
Dec-78
Dec-81
Dec-84
Dec-87
Dec-90
Dec-93
Dec-96
Dec-99
Dec-02
Dec-05
Dec-08
Dow Jones Industrial Average
12
10
8
6
4
2
0
Unemployment Rate
Dow Jones Industrial Average Unemployment Rate

12. Wall Street Instability
• 1987 -- Black Monday
• Blamed on program trading, this crash started in Hong Kong
and caused the Dow Jones Industrial Average to fall 22.61%.
• 1990-1992 -- Early 1990’s Recession
• Although the stock market quickly recovered from the 1987 crash,
Dow Jones Industrial Average 1985-Present
the Savings and Loan Crisis led to hundreds of bank failures and the RTC
• 1997 -- Asian Flu Crisis
• The Dow Jones Industrial Average fell 7.2% in one day amid concerns
about Asian economies and their impact on the United States
• 1998 -- Long Term Capital Management
• Used complex mathematical models to take advantage of fixed income
arbitrage opportunities. Fund grew bigger, confidence in risk models.
The Russian Financial Crisis led to a bailout of LTCM of $4.6 billion
• Late 1990s-Early 2000s -- Dot-com Bubble
Dow Jones Industrial Average 1985-Present
16000
14000
12000
10000
8000
6000
4000
2000
0
January-85
January-87
January-89
January-91
January-93
January-95
January-97
January-99
January-01
January-03
January-05
January-07
January-09
January-11
• A speculative bubble from about 1995-2000 in internet stocks which led to the rapid rise of equities in industrialized nations. Investors bet big on the
future earnings potential of internet firms with no track record. The NASDAQ Composite lost 78% of its value from peak to trough in the early 2000s.
• Early 2000s -- Corporate Scandals
• Enron, Tyco, Worldcom and many others lost billions as the result of failed corporate governance and fraud. Enron hid billions in debt from failed deals
and projects with accounting loopholes, special purpose entities and the help of its auditor, Arthur Andersen. Worldcom was involved in a similar
accounting scandal, as the recession in early 2000’s hurt their core business and led to fraudulent accounting methods.
•2007-2009 -- Financial Crisis
• The collapse of the US housing bubble caused the value of securities tied to US real estate to plummet. Resulted in the collapse of large financial
institutions, the bailout of banks by national governments and downturns in stock markets across the world.
•2011 -- Financial Crisis II?
• The US Treasury downgrade and solvency issues in Europe have resulted in fears of a global slowdown as developed economies struggle to grow despite
low interest rates and a plethora of government stimulus.

13. Lehman Brothers and General Motors stock, 2007-2011
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14. Citigroup and American International stock, 2007-2011
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15. Fannie Mae and Freddie Mac stock, 2007-2011
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16. WHAT`S HAPPENING IN RECENT YEAR
In 2006/07, RBS paid $100 billion for ABN Amro.
For this amount it could buy in 2008:
Citibank $22.5 billion
Morgan Stanley $10.5 billion
Goldman Sachs $21 billion
Merrill Lynch $12.3 billion
Deutsche Bank $13 billion
Barclays $12.7 billion
And still have $8 billion change......with which it would
be able to pick up GM, Ford, Chrysler and the Honda F1
Team.

17. GLOBAL FINANCIAL CRISIS

18. Introduction
 The U.S. and the global economy have been – and
continue to be – in serious crisis, and the current
global recession is the worst economic downturn
since the Great Depression of the early twentieth
century
 The ‘Financial Crisis OF 2008’ , also called the US
Meltdown, has its origin in the United States housing
sector back in 2001-02, but gradually extended over
a period of time and eventually brought the entire
world under its grip
 The financial crisis is characterized by contracted
liquidity in the global credit and housing market,
triggered by the failure of mortgage companies,
investment banks, and government institutions
which had heavily invested in subprime loans.
Though the crisis started in 2005-06, but has
become more visible during 2007-08, when many of
the renowned Wall Street firms collapsed.
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19. September 14, 2008:
Merrill Lynch sold to Bank of
America amidst fears of a
liquidity crisis and Lehman
Brothers collapse September 15, 2008:
Sep-08 Sep-08 Sep-08 Sep-08 Sep-08 Oct-08
September 7, 2008:
Federal takeover of Fannie
Mae and Freddie Mac
Lehman Brothers files for
bankruptcy protection
September 16, 2008:
Moody's and Standard and
Poor's downgrade ratings
on AIG's credit on concerns
over continuing losses to
mortgage-backed securities,
sending the company into
fears of insolvency.
September 19, 2008:
Paulson financial rescue
plan unveiled after a volatile
week in stock and debt
markets.
September 17, 2008: The
US Federal Reserve loans
$85 billion to American
International Group (AIG)
to avoid bankruptcy.
September 25, 2008:
Washington Mutual was
seized by the Federal
Deposit Insurance
Corporation, and its banking
assets were sold to JP
Morgan Chase for $1.9bn.
September 29, 2008: The
House rejected bail-out bill,
DJIA down 7%
October 3,2008: The
House pass the bail out bill
GLOBAL FINANCE CRISIS- "Red September"

21. GLOBAL FINANCIAL CRISIS -
NATURE OF THE CRISIS

22. Origins of the Crisis
• The periodic crises resulting from the
capitalist business cycle now unfolds at
the global level
• The current crisis of the world economy
is an outcome of the consolidation of
economic power that the globalization
of capital has secured for the
transnational corporations
• This has led to a string of problems
associated with the financial, banking,
real estate, and productive sectors of
the economy that have triggered
the current economic crisis

23. US Capitalist economic system
It manifests itself in a number of
ways, including:
• The problem of
overproduction/under consumption
• Increasing unemployment and
underemployment
• Decline in real wages and rise in
super-profits
• The sub-prime mortgage and credit
card debt
• Speculative corporate financial
activities
• Increased polarization of wealth and
income
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24. How Did All This Happen?
 From 1820 to 1970, every decade U.S.
workers experienced a rising level of
wages
 In the 1970s this came to an end; real
wages stopped rising and they have never
resumed since
 U.S. workers became more productive,
but got paid the same; wages began to
stagnate and decline
 The gap between labor and capital grew
bigger
 The large corporations made huge profits
and had much money at their disposal
 They bought other corporations (mergers
and acquisitions) and they put their
money into banks
 The banks loaned that money (with
interest) to workers who didn’t have
money to consume
 This was done to raise their purchasing
power because their wages weren’t
enough to buy things
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25. Then What?
 Since employers no longer raised workers’ wages, the workers had to
go into debt to survive
 Debt went up and up and things got out of control
 The banks continued to loan money through new loans (secondary
mortgages) at high interest rates, and this was a profit bonanza for
the banks
 As corporations increasingly began to invest abroad (outsourcing
production and services), U.S. workers lost their jobs, and this led to
greater unemployment and underemployment
 Unemployed workers with a lot of debt were unable to make their
mortgage and credit card payments, and this led to foreclosures and
bankruptcies
 This, in turn, led to the collapse of the banking system, necessitating
a government bailout of the banks
 It is only through the nearly trillion dollar stimulus funds that the
U.S. government poured into the economy to save the banks from
default that a financial collapse was averted
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26. Subprime Mortgage Crisis
• Sharp rise in home foreclosures in late 2006
• Only 9% in 1996, 13% in 1999, 20% in 2006
• $1.3 Trillion subprime mortgage as of March 2007
• The delinquency rate had risen to 21% by 2008
• Subprime Borrowers
• For poor credit history
• Limited income
• Subprime Lenders
• Greater risks
• High returns

27. 27
Dissecting A Classic Financial Boom and Bust
New Century collapse;
Stimulus Euphoria Leveling Crash
700
600
500
400
300
200
100
Source: Inside Mortgage Finance
Subprime Mortgage Originations ($BN)
$
Extended
low interest
rate
environment
(2001-2003)
Home price
appreciation and
virtually zero credit
losses (2003-2006)
HSBC warning
(Jan/Feb 2007)
BSAM blow-up
(June 2007)
“The
Reckoning”
(2008/09)
0

28. MBS: an industry which grew too fast...
 MBS have developed
extremely fast in 8 years.
 Risk has been spread-out
among Banks and Hedge-
Funds through “obligations
baskets” sold by SPV
working from off-shore
zones.
Weak collateralization
could induce a major
liquidity crunch.
50
45
40
35
30
25
20
15
10
5
0
1998 2002 2004 2005 2006 2007
MBS
volume (in
Trillion
USD)

29. The development of Mortgage Based Securities
• Credit Default Swaps (CDS).
• Collateralized Debt Obligations (CDO).
• Collateralized Loan Obligations (CLO).
• “Selling” risk on financial markets: MBS are
actually a kind of insurance system for the
emitter and they are attractive bonds for buyers
till the default rate is low (usually 0.5%).
• But MBS have spread the risk throughout the
financial system and everybody can become an
insurance company if it buy a CDS or a CDO….

30. The Banking crisis
• Banks have been the main user of MBS (40% of
cumulative total).
• Strong competition in a deregulated market has
made Subprime-ARM based CDS attractive to
boost Banks profit rates.
• The use of SPV and SPV-based Securities-baskets
by banks has decreased transparency.
• New accounting rules (“Mark to Market”) have
increased Banks and Insurance companies
vulnerability to financial market fluctuations.

31. GLOBAL FINANCIAL CRISIS
CAUSES OF THE CRISIS

32. Boom and bust in the housing market
 The Financial crisis actually started with the
bursting of housing “bubble” that began in 2001
and started growing at a rapid rate until it
reached its peak in 2005.
 The factors that led to the rapid increase in the
demand for house price are-- low interest rate
and the huge inflow of foreign capital from
countries such as China, Japan U.K. Also,
subprime loans added fuel to the fire, further
increasing the demand for houses.
The Housing Downturn
 Excess supply of home inventory
 Sales volume of new homes dropped
 Reduced market prices (- 10.4% 12/06-
12/07)
 Increasing foreclosure rates
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33. Motive of Investment : Speculation
 It was observed that investment in housing
sector yield high return compared to other
traditional investment avenues.
 As a result investment in housing sector
increased. During 2006, 22 per cent of homes
purchased (1.65 million units) were for
investment purposes, with an additional 14
per cent (1.07 million units) purchased as
vacation homes.
Financial Institutions
 Attraction from high returns
 Offered high-risk loan and incentives
 Believes that will pass on the risk to
others
Borrowers
 Difficulties in re-financing
 Begin to default on loans
 Walk away from properties
 Fraudulent misrepresentation
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34. High risk loans and lending practices
 The subprime loans were highly risky, as
these loans were offered to the high risk
borrowers-- illegal immigrants, person
without any job, any assets and any income.
 The repayment from these borrowers was
hardly expected.
 The share of subprime mortgages to total
originations increased from 5 per cent ($35
billions) in 1994 to 20 per cent ($600
billions) in 2006
• Securitization
• Mortgage backed securities
• Risk readily transferred to other
investors
• From 54% in 2001 to 75% in 2006
 A flattening curve at low levels led to
hunger for yield
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 Interest Rate pushed investors to take
on greater credit risk (e.g., subprime
Below is Ratio of Subprime MBS Issuance
to Total Subprime Originations
76%
37%
80%
75%
70%
65%
60%
55%
50%
45%
40%
35%
30%
1999 2000 2001 2002 2003 2004 2005

35. Central bank policies
 Less concerned with avoiding asset
bubbles
 React after bubbles burst (housing
bubble and dot-com bubble) to minimize
the impact
 No determination on monetary policy
1. The Golden Age Is Over
Asset originators and asset
holders have enjoyed a
Golden Age
 Institutions risk more because of Fed’s
rescue
 Monetary Policy vs Fiscal Policy
 A flattening curve at low levels led to
hunger for yield… and pushed investors
to take on
greater credit risk (e.g., subprime
Flood of yield-hungry capital ─ domestic
and foreign ─ funded the expansion
Fed Chairmen Game
http://sffed-education.org/chairman/
2Y
10Y
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3M
6M
3Y
5Y
30Y
6%
5%
4%
3%
2%
1%
0%
US TSY Yield Curve
12/31/02 12/31/03 12/31/04 6/30/2005 12/31/2005 2/1/2006
• Negative real short-term rates
• Steep yield curve
• Tight spreads
• Declining volatility
And it was a Golden Age for
mortgage servicers in
particular
2002
2006

36. Government Policies
 To provide house at affordable price to
all the people was the priority of both
the Clinton and Bush administration.
 In 1974, President Carter passed the
Community Reinvestment Act. This Act
made mandatory for all the banks and
saving institution to provide home
loans to the lower income people in
broad outlying areas where they had
branch.
 Glass-Steagall Act contributes to the
subprime crisis (FDIC back up)
 Financial service modernization Act
reduced the d/f between investment
bank and normal bank
 No Control with Fiscal Policy
 Build support to Capitalist / Investors
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37. Fiscal policy :
The US does have a long-term debt problem.
How far can we get by cutting spending?
 Total federal spending = $3 ½ trillion .
That spending minus tax revenue leaves
a budget deficit of $ ¾ trillion in 2013, down
from $1.1 trillion in 2012, and from $1.4 trillion
in 2009.
 Many Republican congressmen have
campaigned to cut only non-defense
discretionary spending, to exempt defense &
senior-related spending (Soc. Security &
Medicare).
 And adamantly no tax increase.
 That was their official platform in the 2010
election.
Even if we could set all non-defense
discretionary spending =0, it would not
eliminate the deficit.
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Not
sustainable

38. GLOBAL FINANCIAL CRISIS
IMPACT of the crisis

39. Direct Impacts of the Crisis
Financial Institutions –
Bankruptcy
 New Century Financial (USA)– Apr. 2,
2007
 American Home Mortgage (USA) – Aug.
6, 2007
 Sentinel management Group (USA) –
Aug. 17, 2007
 Ameriquest (USA) – Aug. 31, 2007
 NetBank (USA) – Sept. 30, 2007
 Terra Securities (Norway) – Nov. 28,
2007
 American Freedom Mortgage Inc. (USA)
– Jan. 30, 2007

40. Direct Impacts of the Crisis
Financial Institutions – Write-Downs
 Citigroup (USA) - $24.1 bln
 Merrill Lynch (USA) - $22.5 bln
 UBS AG (Switzerland) - $16.7 bln
 Morgan Stanley (USA) - $10.3
 Credit Agricole (France) - $4.8 bln
 HSBC (United Kingdom) - $3.4 bln
 Bank of America (USA) - $5.28 bln
 CIBC (Canada) – 3.2 bln
 Deutsche Bank (Germany) - $3.1 bln
By 02/19/08 losses or write-downs > U.S. $150 bln
Be expected exceeding $200 - $400 bln. But ended up with $770 bln

41. Domestic Impacts of the Crisis
Economy Condition
• Recession
• Low GDP growth rate
• Business close out or lose money (banks, builders etc.)
• Weak financial market
• Low consumer spending
• Lose jobs
Other credit markets
• Credit card
• Car loan

42. GLOBAL FINANCIAL CRISIS
Impacts of the US Financial Crisis on
Indian Economy

43. Impacts on Indian Economy
 Impact on stock market
The immediate impact of the US financial crisis has been felt when India’s stock
market started falling. On 10 October, Rs. 250,000 crores was wiped out on a single day
bourses of the India’s share market. The Sensex lost 1000 points on that day before
regaining 200 points, an intraday loss of 200 points. This huge withdrawal from the India’s
stock market was mainly by Foreign Institutional Investors (FIIs), and participatory-notes.
 Impact on India’s trade
The trade deficit is reaching at alarming proportions. Because of worker’s
remittances. NRI deposits, FII investment and so on, the current deficit is at around $10
billion. But if the remittances dry up and FII takes flight, then we may head for another
1991 crisis like situation.
 Impact on India’s export
With the US and several European countries slipping under the full blown recession, Indian
exports have run into difficult times, since October. Manufacturing sectors like leather,
textile, gems and jewellery have been hit hard because of the slump in the demand in the
US and Europe. Indian exports fell by 9.9 per cent in November 2008, when the impact of
declining consumer demand in the US and other major global market, with negative
growth for the second month, running and widening monthly trade deficit over $10
billions.
43

44.  Impact on India’s handloom sector, jewelry export and tourism
Again reduction in demand in the OECD countries affected the Indian gems and
jewellery industry, handloom and tourism sectors. Around 50,000 artisans employed in
jewellery industry have lost their jobs as a result of the global economic meltdown.
Further, the crisis had affected the Rs. 3000 crores handloom industry and volume of
handloom exports dropped by 4.6 per cent in 2007-08, creating widespread
unemployment in this sector (Chandran, 2008).
 Exchange rate depreciation
With the outflow of FIIs, India’s rupee depreciated approximately by 20 per cent
against US dollar and stood at Rs. 49 per dollar at some point, creating panic among the
importers
.
 IT-BPO sector
The overall Indian IT-BPO revenue aggregate is expected to grow by over 33 per
cent and reach $64 billion by the end of current fiscal year (FY200). Over the same
period, direct employment to reach nearly 2 million, an increase of about 375000
professionals over the previous year. IT sectors derives about 75 percent of their
revenues from US and IT-ITES (Information Technology Enabled Services) contributes
about 5.5 percent towards India’s total export. So the meltdown in the US will definitely
impact IT sector. Further, if Fortune 500 companies slash their IT budgets, Indian firms
could adversely be affected.
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45.  FII and FDI
The contagious financial meltdown eroded a
large chunk of money from the Indian stock market,
which will definitely impact the Indian corporate
sector. Due to global recession, FIIs made withdrawal
of $5.5 billion, whereas the inflow of foreign direct
investment (FDI) doubled from $7.5biilion in 2007-08
to $19.3 billion in 2008 (April-September).
Conclusion:
From the above argument it can be noted
down that the ‘Financial or Subprime Crisis’ was the
shear consequences of ‘greed’ and to make ‘too
much profit’ on the part of Wall Street Firms and
Investment Banks. This crisis also shows the failure
of capitalist market economy. Though the Indian
economy would be able to withstand the crisis
without any major difficulty, but the crisis is still
causing mayhem all over the world.
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48. Thank You