international financial management

1. The Great Crises
2007-2010
Mayank Garg
Roll No. 466
Sec: FA

2. Events That Caused Credit Crunch!
• July 2007: Credit Crunch begins with the subprime mortgage crises in
the United states
• Aug 2007: US Credit Crunch goes Global due to the interaction of the
world banks who also have subprime mortgage backed securities
• Aug 9th 2007: Debt, due to defaults by subprime mortgage payers,
results in the European Central Bank injecting 95 billion euros into
the European banking Markets
• Aug 10: The United States Federal Reserve (Fed) injects 43 billion US
Dollars
• Sep 2007: US Interest rates lowered
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3. • Jan 2008: Downturn in Stock Markets and House prices continue to fall
and jobs are cut
• March 16, 2008: Bear Stearns acquired by JPMorgan Chase avoiding
bankruptcy
• Sept 14, 2008: Merrill Lynch sold to Bank of America
• Lehman Brothers went bankrupt
• Nov 2008: The US government agrees to rescue Citigroup
• Dec 2008: The US recession is officially declared by the National Bureau
of Economics Research
• Dec 29, 2008: The US Treasury unveils a $6bn bail-out for GMAC
(General Motors Car Loans)
• Global stock markets report the biggest annual falls for 24 years
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4. After The Crisis!!
• By 2009 crises had stabilized
• 2010 analysts were able to raise the questions o the cause and
consequences
• Government was more concerned about how to exit the current
unique fiscal and monetary policy
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5. What Are The Causes And
Consequences That Leads To
This Credit Crunch
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6. Can New Laws Prevent Unethical Behaviour
• Legal Fraud: mortgage providers offered mortgages to borrowers who could not afford
them
• The mortgage lenders then sold these sub-prime assets to banks that securitized them
and then sold them to other investors with the pretence that these were safe
investments
• Ratings Agencies had also placed a high rating on these investments
• The US IT that allowed the deductibility of mortgage interest, incentivised people to go
for more mortgages
• The Central Issue with this Chain Of Misinformation is
 General business culture
 Specific corporate culture
that permitted their employees to engage in unethical behaviour
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7. Impact Of Global Imbalances
• Huge US Fiscal Deficit & BOP meant the exchange rate of US dollar
would fluctuate
• China & major oil producing countries exported more than they
imported, creating a huge volumes of foreign exchange
• These large volumes were channels into UD bonds because of their low
saving rates & US started depending on these inflows to maintain low
interest rates
• Huge increase in commodity prices
• Investors were able to borrow in countries with low interest rates and
lens in countries with high interest rates.
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8. Risks Accompanying Massive Debts & Money
Supply
• Adopted Keynesian Fiscal Policies, which greatly increase govt. spending
on infrastructure projects
• Govt. cut taxes to stimulate private sectors spending
• Govt. increased country’s money supply by buying bonds from the
private sectors
• Exiting from this fiscal stimulus was a problem
• US’s Federal debt had raised from 35% of GDP in 1990’s to 100% of GDP
by 2012
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9. US’s Dilemma About Reserves
• US had more than $1 trillion in excess reserves
• With economic recovery these reserves would be the
basis of huge loans that would fuel inflation
• HOW TO REDUCE THESE RESERVES????
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10. Dark Side Of Capital Requirement Regulations
• The capital of banks had started to slip to zero
• By 2010 banks were busy trying to sell their assets and maintain the CRR
• CRR requirement according to BASEL Accord II was 8% during the
recession, but analysts suggested to make it 12% in good times to allow
banks have an extra cushioning during bad times
• Securitized investments were of balance sheet items, which made the bank
raise more loans technically without any alteration in their reserve
requirement
• An innovative instruments discussed was CoCo Bonds-contingent
Convertible Bonds
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11. Consumer Loan
Decision Regulated
• Loans to value ratio was reduced
from 100% to 95%
• Home owner’s debt service ratio
was raised from 40% to 45%
• The length of time to repay the
mortgages was reduced from 40
years to 35 years
• Huge tax on bonuses was imposed
• Limit on compensation was imposed
• Bonuses was made to decide on the
only on the current years profits but the
profits of several past years
• UK immediately imposed 50% super
tax on the bonuses of bankers
• Goldman Sachs announced that it
would pay its top 30 executives bonuses
in the form of shares which had a lock
in of 5 years
Limit On
Banker’s Pay
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12. Which Regulatory Reforms Should Be
Implemented
• India escaped the worst recession due to its restriction of FDI
investments into the financial sector
• High risk financial institution bought enormous benefits in terms of
financing innovations and entrepreneurship
• For monetary policy to be effective ad limit systematic risk new
regulations must cover all non-bank financial institutions.
• Regulatory reforms of US was of importance to the entire world, so the
whole world waited till Dec 2009 when a reform bill was sent to the
Senate
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13. Reform Bill Of Us
• The Federal Reserve would have a key
role in enforcing tougher regulation
on these large firms
• Regulators also had the power to
break up large firms that would have
become “too large to fail”
• Shareholders would have the right to
vote on corporate pay packages
• Consumer Financial Protection
Agency would ensure that consumers
had knowledge about their borrowing
terms
• The US’s TARP provided govt. loans to
major banks that faced liquidity
problems
• Provisions also included govt.
acquisition of shares if banks were not
able to repay their debts
• Manufacturing firms-
GM & Chrysler- govt. had both debt
and equity
• The exit strategy for govt. in firms in
which it had shares, was privatization
Use Of Public Money To
Bail Out Failing Institution
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14. Conclusion
• Regulation reforms would raise the ongoing costs of financial institutions and might
limit the pace of nation’s economic growth strategy
• Thus growth might be difficult to reach former levels
• High unemployment rates would persist
• Suggestion to create a new powerful body that would control, monitor & regulate
the international capital flows
• BOD should face new legal responsibilities for transparency & accountability
• As business cycle would recur in free market economies, legal frauds would likely
recur due to the complexity of modern financial instruments & human nature
• Sarbanes-Oxley might change reporting & make legal frauds illegal!!!
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15. Thank You
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