Beta Newsletter Vol1 Ed9

8/14/2019 Beta Newsletter Vol1 Ed9

1/12

Newsletter (Vo l: 1, Ed: 9) Oc tob er 19, 2008

Dhruv Dhand [email protected]

Ext: 6321ttp://stdwww.iimahd.ernet.in/bt a

Newso Business Wrap Week end ing Oc tober 9o Business Wrap Week end ing Oc tober 16o Ma rkets Summa ryo Ove rview of the C red it Crisiso Fed Says ECB, Others to Offer Unlimited Dollar Fundso U.S. Econom y: Sent iment Drop s by Rec ord , Housing Sta rts fa llo How a b anking c risis brought d own Iceland s ec onom yo Germany passes $675 billion bank bail-outo Bail out in Brita ino South Korea to gua rantee Banks foreign currenc y debto ICICI Lashed by Investo r Panic

Opiniono Think Long

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Business Wrap Week end ingOc tober 9

Pre-requisite: None

Difficulty Level:*

Stoc k ma rkets c rashed and fea rs grew ab out the

implications of the financial crisis on the wider

world economy, the Federal Reserve, the

Europ ea n Ce ntral Bank and the Bank of Englandcut interest rates by ha lf a p ercenta ge po int.

The c o-ordinate d eme rge ncy move to slashinterest rates, which took markets by surprise,

was joined bythe centralbanks of

Canada,Swe de n and

Switzerland.Soo n a fter,

Chinascentral bankreduced itsmain lendingrate by 27

basis points, the second decrease in the pastmo nth. Hong Kong , South Korea and Ta iwan a lsoshaved their rates, as did Australia earlier in theweek.

Britains government unveiled a broad bail-outfor the b anking sec to r. The p lan has three ma inelements: making 50 billion ($87 billion) ofpublic funds available to banks to boost theirTier-1 ca pital; doub ling the a mount of m oneyaccessible through the Bank of Englandsspecial liquidity scheme, to 200 billion; and

providing guarantees for banks new short- andmedium-term debt, which are expected tocove r around 250 b illion of fund ing.

Som e o f the money o n offe r to banks is linked tothe purchase by Brita ins Treasury of interest-paying but non-voting preference shares.America s Trea sury was sa id to be m oo ting asimilar idea of ta king eq uity sta kes in ba nks.

Earlier, the Fed had announce d a programm e tobuy large amounts of the short-term debt issued

by companies and others that enables day-to-day financing. It is the first time the Fed hasintervened in the commercial-paper marketsince the De pression.

Finance ministers from the European Union metto discuss their response to the crisis. Germanyspolitical pledge to guarantee all of itsconsumer bank deposits led to further grumblesfrom some ab out the effec t of such g uaranteeson comp etition.

Icelands government rushed throughemergency powers to nationalise banks andsack their c hief exec utives. The Ice land ic p rimeminister said he was negotiating a loan fromRussia because Icelands allies had refused tocome to its aid. Franc e a nd Spa in, amo ngothers, also too k steps to shore up the ir banks.

Americas government lent AmericanInternational Group an additional $37.8 billion.The insurer wa s seized last mo nth and lent $85b illion. The c om panys exec utives, mea nwhile,got a rough ride in Congress for spending$440,000 at a fancy resort the week after AIGwa s ba iled out.

A legal tussle broke out over Wachovia.Citigroup thought it had secured an agreementto take over Wachovias banking assets in adeal backed by the Federal Deposit InsuranceCorporation, but in a surprise move, Wachoviasboard approved a higher offer from Wells Fargo.

Bank of America reached a settlement withthose states, including California and Illinois thathad brought lawsuits against the lendingpractices of Countrywide Financial, a strickenlende r boug ht b y BofA this yea r. The sett lementre-jigs the mortgages (through reduced interest-rate and principal payments) of around 400,000homeowners and could cost up to $8.6 billion.Sep ara te ly, BofA ra ised $10 b illion in a sha re sa le

and said it w ould ha lve its divide nd.

There wa s mixed evidenc e o f a slowdo wn intec hnolog y-related spe nd ing. SAP, the world slargest maker of software for business, said it hadexperienced a very sudden and unexpecteddrop in demand. And figures showed that therate of growth in revenue from online advertisingin America in the first half of 2008 wasconsiderably lower than in the same periods in2007 and 2006. IBM, however, reported a 22%increase in qua rte rly profit.

Advanc ed Micro Devices said it w ould spin off itscostly manufacturing business from its designop erations, plac ing the fa c tories in a new

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venture backed by Abu Dhabis technologyinvestme nt c om pa ny. The c hipma ker is finding ithard to compete with Intel, its arch-rival, whichdominates the microprocessor markets for PCsand servers and is moving ahead in the race to

design chips for othe r devices.

The p rice of o il c losed below $90 a b arrel for thefirst time since Feb ruary.

Tata Motors chose a site in Gujarat to m ake theNano. The c ompa ny wa s due to roll-out thewo rld s chea pe st m ass-prod uced car this monthat a factory in West Bengal, but violent protestsby farmers there forced the company to move.Gujarat is one of Indias leading industrial states.

General Motors decided to stop production fora short time at several European plants, as partof its effort to red uce c ap ac ity. Other ca rma kersare also c utting b ac k in Europ e a s they ada pt t oa sharp drop in dema nd.

From The Econom ist p rint ed ition, Oc t 9th 2008

Business Wrap Week end ingOc tober 16

Pre-requisite: NoneDifficulty Level: *

Governments around the world tookextraordinary steps to shore up their bankingsystems. Britain led the way, unveiling a planpartially to nat ionalise some of its b igge st b anks:20 billion ($35 billion) of public money will beinjec ted into Roya l Bank of Scotland a nd 17b illion into HBOS and Lloyd sTSB (which haveannounced a merger) in return for substantialstakesaround 60% in RBS and 40% in Lloyds TSB-HBOS.

America followed suit by providing $250 billionfor bank recapitalisation; half will go to ninebanks, including Bank of America, JP MorganCha se, Citigroup, Go ldma n Sac hs and Morga nSta nley. In return the g ove rnment g ets non-voting preference shares that pay a 5%dividend, rising to 9% after five years. HankPaulson, the treasury secretary, acknowledgedthat most Americans found it objectionablethat the government had to take stakes in thebanks, but said the alternative of leavingbusinesses and consumers without access tofinancing is totally unacceptable.

Governments in the euro zone also took action.Germa ny said it would gua rantee ba nk debt tothe tune of 400 billion ($540 billion) and supplyan extra 100 billion to stabilise financial markets;France unveiled a 360 billion package of

measures, inc luding 40 b illion of capita l fundingfor banks; and the Netherlands guaranteed 200b illion in inte rbank lend ing. Austria, Ita ly, Spa inand others also produced proposals.

UBS a lso g ot a ba il-out. The Swiss governme nttook a 9% stake in the bank and created a fundtha t a llow s UBS to off load $60 b illion in toxicassets.

The b oa rd o f the Bank of Japan he ld a nemergency meeting and decided to loosen up

companies access to cash. Hong Kongprovided a blanket guarantee on all bankdeposits. And Australias prime ministerintrod uced a stimulus bill to b oost the ec onom y,including fund ing fo r first-time hom eb uyers.

The United Arab Emira tes pledg ed an extra $19billion for its banks. Qatar said it would takestakes of up to 20% in banks so that they couldcontinue to fund regional infrastructure projects.Some q uestioned whe ther the G ulf sta tessovereign-wealth funds still had an appetite to

invest abroad, a lifeline to many earlier in thec redit c runch.

Morga n Sta nley fina lised a dea l in which it w illsell a 21% stake for $9 billion to Japans MitsubishiUFJ. Concerns that the transaction would beheld up had caused Morgan Stanley s shareprice to d ive.

Federal regulators expedited their approval ofWells Fargo s ac quisition o f Wachovia . The dea lis not dependent on public money, unlike theagreement that Citigroup thought it hadob ta ined in Sep tembe r to ta ke over Wac hovia,only to b e to ld tha t the p refe rred suitor wa s WellsFargo. Citi vowed to pursue vigorously its legalclaims against the pair for billions of dollars.

Ind ia s finance m iniste r rea ssured investo rs tha tICICI wa s sa fe. The countrys sec ond-la rgestlende r wa s hit by another rush of w ithd rawa lsamid rumo urs tha t it was insolvent. The ba nk hasasked p olice to investiga te w hat it alleg es is anattemp t to smea r its nam e and c ause a run.

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4/12

With trust e roding in the sta te of t he Russianbanking system , Glob ex stopp ed customers fromwithdrawing the ir funds afte r a run on the b ank.

There we re more indica tions that the financ ial

crisis and recessionary fears were affectingtec hnolog y c om pa nies. Ind ia s Infosys slashed itsea rnings forec ast fo r the yea r (it de rives a largechunk o f its business from d ata services toAmerica s financ ial comp an ies). PhilipsElec tronics said d emand had dropp ed . AndSamsung Electronics red uced its outp ut o f flat-panel sc reens. Intel reported tha t b usinessremained buo yant, but that it would issue a nupd ate in the fourth qua rter.

From The Econom ist p rint e d ition, Oc t 16th 2008

Markets Summary

Pre-requisite: None

Difficulty Level:*

Key Benc hmark Indice sAt c lose

10/ 17

Day

Change

% Day

change

Dow Jones IA USA 8,852.22 -127.04 -1.41%

S&P 500 USA 940.55 -5.88 -0.62%

FTSE 100 Brita in 4,063.01 +201.62 +5.22%

DAX Germany 4,781.33 +158.52 +3.43%CAC 40 Franc e 3,329.92 +148.92 +4.68%

Nikkei 225 Japan 8,693.82 +235.37 +2.78%

Hang Seng Hong Kong 14,554.21 676.31 4.44%Shangha i Comp China 1,930.65 +20.71 +1.08%

NSE Ind ia 3,074.80 -194.95 -5. 96%

KOSPI Korea 1,180.67 -33.11 -2.73%

STI Singa po re 1,878.51 -72.69 -3.73%

BSE India 9,975.35 -606.14 -5.73%

http://markets.on.nytimes.com/research/markets/usm

arkets/usmarkets.asp/

Key Exc hang e Rates

GB Pound-US Dollar 1.728

Euro-US Dollar 1.3406

Swiss Franc -US Dollar 0.8796

US Dollar-Jap anese Yen 101.64

US Dolla r-Chinese Yua n 6.834

US Dolla r- Indian Rup ee 48.70

http://markets.on.nytimes.com/research/mark

ets/ currenc ies/ c urrenc ies.asp

New York Times, Oc to ber 19, 2008

Overview of the Cred it Crisis

Pre-requisite: None

Difficulty Level:*

In the fall of 2008, the credit crunch, which hademerged a little more than a year before,

ballooned into Wall Streets biggest crisis since

the Great Depression. As hundreds of billions in

mortgage-related investments went bad, mighty

investment banks that once ruled high finance

have crumbled or reinvented themselves as

humd rum c ommerc ial banks. The na tions

largest insurance company and largest savings

and loan both were seized by the government.

The c hannels of c red it, the a rteries of the glob al

financ ial system, have be en c onstric ted , cuttingoff crucial funds to consumers and businesses

small and large.

In response, the federal government adopted a

$700 billion bailout plan meant to reassure the

markets and get credit flowing again. But the

crisis began to spread to Europe, where

governments scrambled to prop up banks,

broaden guarantees for deposits and agree on

a coordinated respo nse.

The roo ts of the c red it crisis stretc h bac k toanother notable boom-and-bust: the tech

bubble of the late 1990s. When the stock

market began a steep decline in 2000 and the

nation slipped into recession the next year, the

Federal Reserve sharply lowered interest rates to

limit the e conomic da mag e.

Lower interest rates make mortgage payments

cheap er, and dem and for homes beg an to rise,

sending prices up. In addition, millions of

homeowners took advantage of the rate drop

to refinance their existing mortgages. As the

industry ramped up, the quality of the

mortgage s went d own.

And turn sour they did, when home buyers had

to leverage themselves to the hilt to make a

purchase. Default and delinquency rates began

to rise in 2006, but the pace of lending did not

slow. Banks and other investors had devised a

p lethora o f com plex financ ia l instruments to slice

up and resell the mortgage-backed securities

and to hedge against any risks or so theythought.

http://markets.on.nytimes.com/research/markets/usmarkets/usmarkets.asp/http://markets.on.nytimes.com/research/markets/usmarkets/usmarkets.asp/http://markets.on.nytimes.com/research/markets/currencies/currencies.asphttp://markets.on.nytimes.com/research/markets/currencies/currencies.asphttp://markets.on.nytimes.com/research/markets/currencies/currencies.asphttp://markets.on.nytimes.com/research/markets/currencies/currencies.asphttp://markets.on.nytimes.com/research/markets/usmarkets/usmarkets.asp/http://markets.on.nytimes.com/research/markets/usmarkets/usmarkets.asp/


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The first shoe to d rop was the collap se in June

2007 of tw o hedge funds owned by Bea r Stea rns

that had invested heavily in the sub prime

ma rket. As the year went on, more ba nks found

that securities they thought were safe were

tainted with what came to be called toxic

mortgages. At the same time, the rising number

of foreclosures helped speed the fall of housing

prices, and the number of prime mortgages in

de fault b ega n to increase.

The Fed eral Reserve took unp rec ed ente d steps

to bolste r Wall Stree t. But still the losses mounted ,

and in March 2008 the Fed staved off a Bear

Stearns bankruptcy by assuming $30 billion in

liabilities and engineering a sale to JP Morgan

Cha se for a p rice that wa s less than the w orth ofBea r s Ma nhatta n skysc rape r.

In August, government officials began to

become concerned as the stock prices of

Fannie Mae and Freddie Mac, government-

sponsored entities that were linchpins of the

housing market, slid sharply. On Sept. 7, the

Trea sury Department a nnounc ed it was ta king

them over.

Events be ga n to m ove even faste r. On Sep t. 12,

top government and finance officials gatheredfor talks to fend off bankruptcy for Lehman

Brothe rs. The ta lks b roke dow n, and the

government refused to step in and salvage

Lehman as it had for Bear. Merrill Lynch, which

had not been previously thought to be in

danger, sold itself to the Bank of America to

avoid a similar fate.

On Sep t. 16, America n Internat ional Group, an

insurance giant on the verge of failure because

of its exposure to exotic securities known as

credit default swaps, was bailed out by the Fedin an $85 billion d ea l. Stoc ks d rop ped anywa y,

fa lling nea rly 500 po ints.

The b leed ing in the stoc k ma rket stop pe d only

after rumors trickled out about a huge bailout

plan be ing readied b y the fede ral government.

On Sep t. 18, Treasury Sec reta ry Henry M. Paulson

Jr. publicly announced a three-page, $700 billion

proposal that would allow the government to

buy toxic assets from the nations biggest banks,

a move aimed at shoring up balance sheetsand restoring confidence within the financial

system.

Congress eventually amended the plan to add

new structures for oversight, limits on executive

pa y and the op tion of the go vernment taking a

sta ke in the c om panies it ba ils out. Still, many

Americans were angered by the idea of a

proposal that provided billions of dollars in

ta xpayer money to Wall Street b anks, wh ich

many believed had caused the crisis in the first

place. Lawmakers with strong beliefs in free

markets also opposed the bill, which they said

am ounted to soc ialism.

President Bush pleaded with lawmakers to pass

the b ill, but on Sep t. 29, the House rejec ted the

proposal, 228 to 205, with an insurgent group of

Rep ub licans lead ing the opp osition. Stocks

p lunged , with the Sta nda rd & Poors 500-stockindex losing nearly 9 percent, its worst day since

Oct. 19, 1987.

Negotiations began anew on Capitol Hill. A

series of tax breaks were added to the

legislation, among other compromises and

ea rma rks, and the Sena te pa ssed a revised

version Oct. 1 by a large margin, 74 to 25. On

Oct. 3, the House followed suit, by a vote of 263

to 171.

When the bill passed, it was still unclear howeffective the bailout plan would be in resolving

the credit crisis, although many analysts and

economists believed it would offer at least a

temporary aid. Federal officials promised

increased regulation of the financial industry,

whose structure was vastly different than it had

been just weeks be fore.

The first reac tions we re not positive. Banks in

England and Europe had invested heavily in

mortgage-backed securities offered by Wall

Street , and England had go ne through ahousing boom and bust of its own. Losses from

those investments and the effect of the same

tighte ning c red it spira l be ing felt o n Wall Street

began to put a growing number of European

institutions in danger. Over the weekend that

followed the bailouts passage, the German

government moved to guarantee all private

savings accounts in the country, and bailouts

were a rrang ed for a large Germa n lender and a

ma jor Europ ea n financ ial co mp any.

When stock ma rkets in the United Sta tes, Europe

and Asia continued to plunge, the worlds



6/12

lead ing c entral banks on Oc t. 8 took the d rastic

step of a coordinated cut in interest rates, with

the Fed eral Reserve c utting its two m a in ra tes by

half a point.

And after a week in which stocks declineda lmost 20 percent on Wall Street, Europ ea n and

American officials announced coordinated

actions that included taking equity stakes in

ma jor ba nks. The a c tion promp ted a wo rldw ide

stock rally, with the Dow rising 11 percent on

Oct. 13.

http://topics.nytimes.com/top/reference/timesto

pic s/ subjec ts/ c / c redit_c risis/ index.html

Co mp iled by New York Times, Oc tober 13, 2008

Fed Says ECB, Others to Offer

Unlimited Dollar Funds

Pre-requisite: None

Difficulty Level:*

The U.S. Fed era l Reserve led an unp rec ed ented

push by c entral banks to flood financ ial ma rkets

with dollars, backing up government efforts to

restore confidence in the banking system.

The ECB, the Bank o f Eng land and the Swisscentral bank will offer unlimited dollar funds in

auctions with maturities of seven days, 28 days

and 84 days at a fixed interest rate, the

Washington-based Fed said on Oc tobe r 13. The

Bank of Japan may introduce ``similar

me asures.'' The dolla r dec lined and some

mo ney-ma rket rates fell.

Polic y ma kers from the Group of Seve n na tions

pledg ed at the we ekend to take ``all nece ssary

steps'' to stem a m arket pan ic a fter the MSCI

World stock index plunged 20 percent last week.

Central banks last week cut interest rates in

tandem for the first time since 2001, the U.S.

plans to buy $700 billion in distressed assets from

banks and in Europe, the U.K. is leading a push

to keep lenders afloat with taxpayers' money.

``By providing unlimited dollar funds they are

ac ting on the ba ck of the G-7 plan to ensure the

system is fully liquid ized ,'' sa id Lena Kom ileva , an

ec onom ist a t Tullet Prebon Plc in London. ``We're

going to see even more liquidity provided andmo re a gg ressive ra te c uts a re c oming.''

The do llar drop pe d a fter the announceme nt,

fa lling a s much a s 0.9 pe rcent to $1.3671. The

cost of borrowing in euros for three months

declined to 5.32 percent today from 5.38

percent, according to the European Banking

Fed eration. Stocks ra llied wo rldwide, w ith the

MSCI World Index c limb ing 2 percent .

The Lond on inte rbank offered ra te, o r Libor, that

banks charge each other to borrow dollars for

three months last week soared to 4.82 percent,

the highest level this year.

Central banks are expanding their toolkits to

push do wn m oney-market rates. The Fed on Oc t.

7 sa id it w ill crea te a spec ial fund to b uy U.S.

commerc ial pa pe r and the ECB last week said it

would offer financial institutions unlimited euro

fund s. The Bank of Eng land is sched uled to

announce a revamp of its own money-market

op erations late r this we ek.

The ECB, the BOE and the Swiss Nationa l Bank

``can p rovide U.S. do lla r fund ing in qua ntities

sufficient to meet their demand'' into 2009, the

Fed said today. ``Central banks will continue to

work together and are prepared to take

whatever measures are necessary to provide

sufficient liquidity in short- term funding markets.''All of the previous dollar swap arrangements

between the Fed and other central banks were

capped.

G-7 finance chiefs pledged Oct. 10 to take

``urgent and exceptional action'' after stocks

plunged and as a global recession looms.

European leaders agreed to guarantee new

bank debt and use taxpayer money to keep

d istressed lenders a floa t. Roya l Bank of Scot land

Group Plc, HBOS Plc, and Lloyd s TSB Group willget an unprecedented 37 billion-pound ($64

b illion) b a ilout from the U.K. government .

The w orld 's largest financ ial co mp anies have

posted more than $635 billion in writedowns and

credit losses since the start of last year after the

U.S. housing market collap sed .

http://www.bloomberg.com/apps/news?pid=20

601068&sid=a6ALnE8yLZoQ&refer=home

Bloombe rg, Oc tob er 13, 2008

http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/index.htmlhttp://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/index.htmlhttp://www.bloomberg.com/apps/news?pid=20601068&sid=a6ALnE8yLZoQ&refer=homehttp://www.bloomberg.com/apps/news?pid=20601068&sid=a6ALnE8yLZoQ&refer=homehttp://www.bloomberg.com/apps/news?pid=20601068&sid=a6ALnE8yLZoQ&refer=homehttp://www.bloomberg.com/apps/news?pid=20601068&sid=a6ALnE8yLZoQ&refer=homehttp://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/index.htmlhttp://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/index.html


7/12

U.S. Ec onomy: Sentiment Drops byRec ord; Housing Sta rts Fa ll

Pre-requisite: Basic understanding of Consumer

Indices & flow of US Housing d ata

Difficulty Level:**

Confidence among Americans fell by the moston record and single-family housing starts hit a26-year low, posing an increasing threat toconsumer spending that accounts for morethan tw o-thirds of the ec onom y.

The Reuters/ University o f Michiga n p relimina ryindex of consumer sentiment fell to 57.5 thismonth from 70.3 in Sep temb er. The m ea sure

averag ed 85.6 last year. Construction of single-fam ily home s dropp ed 12 pe rcent last mo nth toa 544,000 annual rate, the CommerceDep artment sa id in Washington.

October 17th figures show that the tighteningcredit crunch has spurred a further step downin the three-year real-estate recession. Fallingproperty values, along with the crash in stocks,threa ten to cause the first d ec line in c onsumerspending since 1991, and put pressure on theFederal Reserve to cut interest rates again this

month. Trea suries rose a nd stocks d ropped .Benchmark 10-year note yields fell to 3.91percent.

Its gauge of current conditions, which reflectsAmericans' perceptions of their financialsituations and whether it is a good time to buybig-ticket items like cars, slumped to 58.9, thelowest level ever, from 75.

Shoppers a re paring exp enses. Sa les at U.S.stores open at least a year rose 1 percent last

week from a year earlier, slowing for the eighthtime in nine weeks, the International Council ofShop p ing Centers and G oldm an Sachs GroupInc . said in a sta tem ent o n Oc t. 14.

There wa s mixed news on p rice expe c ta tions.Consumers said they projected an inflation rateof 4.5 percent over the next 12 months,c ompa red w ith 4.3 pe rcent in the Sep tembe rsurvey. Over the next five years, the figurestracked by Fed policy makers, Americansexpected a 2.8 percent rate of inflation, down

from the prior month and the slowest estimatein a yea r.

http:/ / www.bloomberg.com / app s/ news?pid=2

0601087&sid=aDdPW6jDDSsQ&refer=home

Bloombe rg, Oc tob er 17, 2008

How a banking c risis b roughtdown Ic eland s ec onomy

Pre-requisite: None

Difficulty Level:**

One word on every tongue in Iceland these

days is kreppa. Normally it means to be in a

pinch or to get into a scrape, but when it is

applied to the economy, it becomes financial

c risis . In time , kreppa may become the word

that conjures up the disastrous meltdown that isnow taking p lac e in the c ountrys ec onomy.

Icelands kreppa has been long in the making

and, a t least for some, wide ly anticipa ted . The

economy has wobbled a few times in recent

years. But few could have predicted the speed

or ferocity with which the countrys banking

system, credit rating and currency collapsed

und er the p ressure of the c redit c risis.

Iceland has been growing smartly in recent

yea rs. The c ount ry has low unemp loyment a ndincome per person is somewhat above the

average in the European Union. Huge

investments in green energy and aluminum

smelting have drawn inflows of foreign

investment and promise to underpin exports for

years to come. But on these sound foundations,

Iceland has a lso b uilt a financ ial house o f cards.

The count rys three largest b anks have

expanded headlong abroad since two of them

were p riva tized in 2003, ama ssing a ssets of a bout

125 billion ($180 billion) by the end of 2007,compa red with an ec onom y of just 14.5 billion.

Many of these assets were funded by lenders in

fickle wholesale markets. In early 2006 less than

30 cents in every loan issued was backed by

deposits. Icelands households also racked up

debts amounting to 213% of disposable income.

Britons and Americans owed just 169% and 140%

of disposable income respectivelyfigures that

ma ke them seem almost sob er by c omp arison.

After a wobble in markets in 2006, when themain banks struggled to finance themselves,

both the banks and the country have been

http://www.bloomberg.com/apps/news?pid=20601087&sid=aDdPW6jDDSsQ&refer=homehttp://www.bloomberg.com/apps/news?pid=20601087&sid=aDdPW6jDDSsQ&refer=homehttp://www.bloomberg.com/apps/news?pid=20601087&sid=aDdPW6jDDSsQ&refer=homehttp://www.bloomberg.com/apps/news?pid=20601087&sid=aDdPW6jDDSsQ&refer=home


8/12

trying to stee r back to sa fer shoresthe b anks by

gaining foreign deposits to back their assets

abroad and the country by raising interest rates

to try to co ol the ec onomy.

In the end, however, the banks could not makeit to sa fety. Stymied b y the frozen c red it markets,

they were unable to roll over their debts. Panic

spread after the government stepped in and

partly nationalized Glitnir, the third-largest bank.

Its currency tumbled and the cost of insuring its

national debt against default soared. Having

tried to prop up one bank, it soon had to seize

the others, Landsbanki and Kaupthing. And its

initial responsewhich included announcing

efforts to peg the currency to the euro, despite

lacking the reserves to defend it, and trying tosecure a loan from Russiaserved mainly to

confuse.

Icelands rapid rise and even faster fall has been

viewed from afar as a parable of greed and

hubris, in which a nation of farmers and

fishermen borrowed too much and are paying

the price. But that is to draw false comfort.

Although Iceland rep resents an extreme c ase of

a huge financial system towering over a small

economy, other states suffer from similar

imba lanc es. They d iffer only in sca le, but not

substance. Kreppa may be an Icelandic term,

but it translates.

The Econom ist, Oc tober 9, 2008

http://www.economist.com/finance/displaystory

.c fm?story_id=12382011

Germany p asses $675 b illion b ankbail-out

Pre-requisite: Sta te of the Europea n Crisis

Difficulty Level:*

Germany's parliament has overwhelmingly

approved a $675bn rescue package for the

count ry's financ ial ma rkets.

The plan, which was hand ed to the lowe r

parliament after its approval on Monday by

Germany's cabinet, was voted for under a fast-

track procedure, with 476 politicians in favor, 99

aga inst and o ne a bsten tion. The up per housethen ap proved the p ac kage una nimously.

Pete r Struck, parliamenta ry leader for the Soc ial

Democ rats, which ma kes up ha lf of the c oa lition

go vernment, said: "We ho pe that the law pa ssed

today will hinder the worst from happening to

the financ ial ma rkets".

The mea sure is pa rt of a coo rd inated Europ ea n

bailout effort in the face of nervous, volatile

markets.

Earlier, European and Asian stocks had gained

ground, with many investors picking up battered

financial stocks, including many which will now

be nefit from the German ba ilout, as they sought

bargains.

Frankfurt's DAX 30 index was up 1.75 per cent

while Lond on's FTSE 100 ind ex of lea d ing sha reshad gained 2.91 per cent by Friday afternoon.

French stocks rose 1.86 per cent on the CAC 40

index after two days of heavy falls, mirroring

Tokyo's stoc k market which had bo unce d b ac k

earlier.

Earlier this week, Angela Merkel, the German

chancellor, had warned that the danger for

financial market instability had not been

banished.

The German pa ckag e foresees up to $540bn inlending guarantees for banks. On top of that

comes as much as $108bn to recapitalize banks

and, if necessary, buy up risky assets, with

ano ther $27bn t o b ac k up the gua rante es. The

sums are c onside red a ma ximum, a nd might not

a ll be spent if the financ ial c risis ea ses.

Merkel has stressed that there will be "no

payment without a trade-off". Banks seeking

capital help will have to comply with

government-set conditions that could include

limits on managers' pay and directions onlend ing p olic y.

Following the votes, Horst Koehler, Germany's

president, formally signed it into law, and

Merkel's cab inet ha s alrea dy arrang ed a spe c ial

mee ting for Monday to discuss imp lementing the

plan.

The pa ckage c omes a d ay a fter Germany,

Europe's biggest economy, lowered its GDP

growth estimate for 2009 by a full percentage

po int to 0.2 pe r cent.

http://www.economist.com/finance/displaystory.cfm?story_id=12382011http://www.economist.com/finance/displaystory.cfm?story_id=12382011http://www.economist.com/finance/displaystory.cfm?story_id=12382011http://www.economist.com/finance/displaystory.cfm?story_id=12382011


9/12

On the floor of the Frankfurt stock exchange on

Friday, Robert Halver, the head of market

research for Baader Wertpapierhandelsbank

AG, remained skeptical. He said most private

banks in Germany will probably carefully

consider taking on the government's funds

because it will mean more oversight.

"Every bank will consider three or four times

be fore a ccep ting this involvement," he said.

http:/ / english.aljazeera.net/ news/ europe / 2008/ 1

0/ 20081017152115123883.htm l

Bail-out in Brita in

Pre-requisite: None

Difficulty Level:*

On O ctob er 8th, when the Trea sury announced

its bail-out plan for British banks, Alistair Darling

had been due to deliver a speech on how he

intended to p atc h up the gove rnments alread y

frayed fisca l frame wo rk. The lec ture wa s

cancelled when the Chancellor of the

Exchequer decided that this was too much

excitement for one day. If nothing else, the

Trea sury need ed to w ork out the full budge ta ry

implications of its rescue package.

At first sight these are horrendousand rising.

When Mr. Darling set out the plan, he envisaged

having to inject up to 50 billion ($87 billion) of

public money to bolster banks capital, with an

initial outlay of 25 billion. But by October 13th

the first tranche was already as much as 37

billionthe amount needed to recapitalize just

three b anks, Roya l Bank of Scot land (RBS20

billion), HBOS (11.5 billion) and Lloyds TSB (5.5

billion), assuming shareholders made no

contribution. Whereas the initial plan hadenvisaged the state acquiring safer interest-

bearing preference shares, 28 billion out of the

37 b illion would now be in riskier ordinary sha res.

On October 16th details of the plan were under

revision, after a fall in banks share prices

provoked a plea from their bosses for scope to

pay dividends on ordinary shares before

preferenc e shares are redee med. Whatever the

fine print p rove s to b e, the b ail-out , as a financ ial

transac tion, will not a dd to the usual me asure of

the budget deficit, but it will certainly push up

pub lic deb t. The f irst insta llme nt a lone will ra ise

deb t b y 2.5% of GDP, as the Treasury bo rrows to

finance its recapitalization of the three banks

(which will become two if the planned ta keover

of HBOS by Lloyds TSB goes through).

The resc ue is the latest b low to G ordon Brow nscommitment to keep public debt at a

susta inab le level, long defined by the Trea sury as

below 40% of GDP. In 2006-07, the fiscal year

before the banking crisis, the government was

abiding by this rule: net debt stood at 36.5% of

GDP. But in 2007-08 it jumped to 43.4%, mainly

bec ause o f the inclusion of a round 100 billion of

liabilities at Northern Rock, the first mortgage

lend er to end up in sta te ha nds.

This mo nth s banking rescue, to ge ther with the

recent nationalization of Bradford & Bingley,

another stricken mortgage lender, will take net

debt to around 50% of GDP, the highest for over

30 years, according to the Institute for Fiscal

Stud ies (IFS), a think-ta nk. Yet debt w ill shoot up

farther stillto wartime levelsif official

statisticians decide to include the huge liabilities

of the three b anks the Treasury is recap italizing.

Tha t see ms quite likely fo r RBS, of which the sta te

may end up owning around 60%, although

under national-accounting rules, the judgment

hinges not on public ownership but on whether

the sta te c ont rols corpo ra te polic y. This bank

alone would raise public debt by more than

100% of GDP.

Such a b a llooning in the g ove rnme nt s liab ilities

ma y seem ominous, but this is to look a t only one

side of the public balance-sheet now that the

Treasury has turned banker: on the other side

stand the assets. As David Miles, an economist at

Morga n Sta nley, a bank, sugg ests, the deb t

measure that matters is one excluding thebanks liab ilities. The rea l risk to taxpa yers is that

loan losses will destroy some of the capital

supplied to the three banks and the support

provided for Northern Rock and Bradford &

Bingley. In 40 banking rescues studied by Luc

Laeven, an economist at the IMF, the taxpayer

typically rec ouped some b ut not a ll of their cost.

Set aga inst this, the sta kes a re intend ed to be

temporary, and the public purse could profit

whe n the shares are eventua lly sold. Taxpa yers

could also make running gains from the overallpackage, says Ben Broadbent, an economist at

Go ldma n Sachs, a b ank. Although t he Trea sury



10/12

will have to pa y interest on the new gilts it issues

to fund the recapitalization, it will recoup over

half of this from the 12% interest its preference

shares in the banks will earn. It will also charge

fees for the guarantees it is providing on 250

billion of new debt issued by British banks

ano ther pa rt of the rescue p ac kage . Putting it all

together, Mr. Broadbent estimates that the net

gain to the exchequerassuming it does not

have to pay out on the guaranteescould be

nearly 3 billion a year.

But although the direct fiscal effects of the

banking rescue may be surprisingly small, the

ove rall budg eta ry outlook ha s taken a sharp turn

for the worse. Even before the financial woes of

the past month, the economy was sliding intorecession. It is a worrying sign that the jobless

rate jumped to an average of 5.7% between

June and August, from 5.2% in the previous three

months. The IMF now expects British GDP to

c ont rac t (a lbe it by o nly 0.1%) in 2009, the f irst full-

yea r dec line since 1991.

Recessions wreak havoc on the public finances

by both cutting tax revenues and raising

unemployment-related spending. For every

percentage point that GDP is lower than

expected, public borrowing will be roughly 7.5

billion higher than forecast in the first year, rising

to 10 billion higher in the second year,

according to the Trea sury s rea dy rec koner. If

the economy were simply to stall in 2008-09 and

2009-10, this could double planned borrowing of

38 billion next year; if output were to contract

over the period the outcome would be costlier

yet.

Making matters worse, the shape of the

probable recession is likely to inflict particularfisca l pa in. In recent yea rs the Treasury has

reaped a rich harvest from a flourishing City, as

the financ ial sec tor has pa id a round a q uarter of

corporation tax. It has also done well out of the

housing boom through rising stamp duties

incurred on home purchases. Now both these

sources of revenue are drying up in a downturn

that is concentrated in banking and property.

And, unhelpfully, higher-than-expected retail-

p rice inflat ion of 5% in the yea r to Sep tem ber

the figure used to ad just w elfare b ene fits in 2009-

10will add 3 billion to spending in the next

financ ial year.

If Mr. Brown had done a better job of looking

after the countrys finances while he was

chancellor, the fiscal outlook now would be lessdire. But he allowed deficits to persist even in

years when the economy was growing strongly,

as in 2006-07. As a result, forecasters are now

sha rpening the ir red penc ils. The IFS expec ts the

budget deficit to rise to 4.4% of GDP in 2008-09.

Go ldman Sachs thinks it will rea ch som e 6% in

2009-10.

These estimates a re g loomy, but the y would be

much worse had an attemp t not been mad e to

stabilize the banking system and avert a more

severe rec ession. In th is sense, the rescue will pay

for itself, even if it does result in losses for the

taxpayer.

http:// www.ec onom ist.com / display story.c fm?sto

ry_id=12432313

The Ec onom ist, Oc tober 16, 2008

South Korea to guarantee Banks

foreign c urrenc y de b t

Pre-requisite: Should b e a wa re a bo ut the FortisBailout

Difficulty Level:*

South Korea announc ed me asures to shore up its

banks by guaranteeing their external debt and

pumping more money into the financial system

amid the g loba l cred it crisis.

The g ove rnment sa id it will provide up to $100

billion to secure banks' maturing foreign

currenc y d eb t for three yea rs on loans taken out

from Oc t. 20 this yea r until June 30, 2009.

''The g ove rnme nt a nd the Bank of Korea

together will further provide enough additional

dollar liquidity to the bank sector,'' Minister of

Strategy a nd Financ e Kang Man-soo told

reporters.

The go vernment a nd Bank of Korea will a lso

provide additional liquidity equivalent to $30

billion to the banking sector by utilizing foreign

exchange reserves, according to a statement

the three offic ials issued.

http://www.economist.com/displaystory.cfm?story_id=12432313http://www.economist.com/displaystory.cfm?story_id=12432313http://www.economist.com/displaystory.cfm?story_id=12432313http://www.economist.com/displaystory.cfm?story_id=12432313


11/12

The mea sures req uire a pp rova l by the Nationa l

Assembly. Until that can be secured, either the

Korea Deve lopm ent Bank or Korea Eximb ank will

provide the guarantees beginning Monday, the

statement said.

The offic ials a lso announc ed other steps,

including tax incentives for investors, but

stopp ed short of d rastic measures taken in som e

othe r countries. The a nnouncement c am e as

ana lysts have questioned South Korean b anks'

ability to acquire dollars to pay off maturing

foreign loa ns am id the globa l cred it c runch.

The government ha s rep ea ted ly said tha t the re

are no problems with the banking system or

financial sector and that it has more than

enough firepower in the form of its $240 billion in

foreign currency reserves to see the country

through the g loba l liquidity crunch.

The g ove rnment a lso reitera ted its sta nce tha t

fea rs about South Korea b eing vulnerab le to the

crisis, were overblown. ''Korea's real economy

and its financial sector are sound,'' the

sta tement sa id. South Korea 's be nchma rk stock

index has fallen 38 percent in 2008, while the

country's currency, the won, has declined almost

30 pe rcent this yea r aga inst the dolla r.http:// www.nytimes.com / ap online/ business/ AP-

AS-SKorea-Credit-Crisis.html?ref=business

New York Times, Oc to ber 19, 2008

ICICI Lashed by Investo r Panic

Pre-requisite: None

Difficulty Level:*

Global worries about the solvency of financial

institutions have a rrived in Ind ia, buffe ting a bankthat is regarded as one of the country's

strongest.

In recent days, ICICI Bank Ltd. has taken a series

of extraordinary steps to calm its depositors and

reassure jitte ry investors. On Saturday, it sent text

messages to hundreds of thousands of

depositors telling them it was healthy. A central

bank circular posted on its thousands of

automatic teller machines said the same thing

ea rlier in the we ek. On Sunday, ICICI went on

the offensive, filing complaints to the police in

Mumbai and elsewhere charging that some

small brokers were spreading negative rumors

ab out the bank.

Still, sha res of the c ountry's largest non-sta te

bank and sec ond -la rge st in terms of a ssets (after

the Sta te Bank of India Ltd .), are dow n 66% so fa rthis year. They lost 20% on Friday b efore

bouncing back 17% Monday to close at 425.10

rupees ($8.79). ICICI wouldn't disclose recent

withd rawa l figures.

"The stock price ha s go ne way be low

fundamentals," said Vaibhav Agarwal, banking

ana lyst a t Ang el Broking in Mumb ai.

The Indian stoc k ma rket ha s been hit hard d uring

the global crisis, even though there are few

companies with any direct exposure to subprime lend ing or failed mo rtgag es. The

benc hma rk Bom bay Stock Excha nge 30-Share

Sensitive Index, or Sensex, ha s fa llen mo re than

40% so fa r this year, as inc reasingly risk-averse

foreign investors pull out of Indian stocks. As

Indian investors and depositors worry about the

global problems, their attention has focused on

ICICI.

Ind ia's Financ e Ministe r P. Chida mb aram tried to

calm markets Monday. He said the country is

putting together a plan to address the concernsof Ind ia's banking custom ers.

"We are working on more measures that will

infuse liquidity, make credit intermediation

smoother and increase the confidence of

depositors and investors," he told reporters in

New Delhi. "We hop e t o a nnounce them shortly."

On Mo nday, Sta ndard & Poo r's reiterate d its

strong rating for ICICI Bank. While its U.K.

subsidiary has a $3.5 billion international

investment portfolio -- of which around $80million w as invested Lehma n Brothe rs -- ICICI has

more than enough assets to cover any future

losses, the c red it rat ing age ncy sa id in a release.

Some of the volatility of ICICI's shares is likely

linked to its popularity among foreign investors,

ma ny of whom ha ve be en pulling money out o f

India recently. More than two-thirds of ICICI's

shares are held by foreign investors, which is

likely to m ea n more turbulent trad ing lay a head.

As ICICI is one of India's largest consumer

lenders, its shares could also suffer from the

bank's exposure to India's fast-growing middle

http://www.nytimes.com/aponline/business/AP-AS-SKorea-Credit-Crisis.html?ref=businesshttp://www.nytimes.com/aponline/business/AP-AS-SKorea-Credit-Crisis.html?ref=businesshttp://www.nytimes.com/aponline/business/AP-AS-SKorea-Credit-Crisis.html?ref=businesshttp://www.nytimes.com/aponline/business/AP-AS-SKorea-Credit-Crisis.html?ref=business


12/12

c lass -- and fe ars tha t c red it defa ults might beg in

roiling the Indian ec onom y.

http:/ / online.wsj.com / article / SB12239209593652

9259.html?mod=googlenews_wsj

The Wall Stree t Journal, Oc tober 14, 2008

Think Long

Pre-requisite: Basic Understanding of the Equity

Markets

Difficulty Level:**

When the dotcom bubble was in full swing in

1999 and early 2000, commentators wrote in

vain about the absurdity of stock markets

yielding 1-2% and trading on a price-earnings

ra tio of 30-40. The world ha d m oved o n, we were

told, and old me asures of va lue d id no t ma tter.

It w as an illustration tha t va luation, by itself, does

not cause m arkets to turn. So seeking an end to

the current bear market by appealing to

valuation measures may not work. Clearly, a lot

of p eople a re fo rced sellers, reg ard less of p rice .

Nevertheless, for long-term investors who can

screw up the courage to enter the stockmarket,

the odds are looking more and more

favo urab le. This column mentioned a coup le o f

weeks ago that British equities were yielding

mo re tha n go vernment bond s. They still do b ut

never mind thatthey now yield more than

official interest rates.

As of the

close on

Oc tob er 9,

the FTSE

100 indexyielded

5.3%, almost a full percentage point higher than

the 4.5% level of base rates. This is

unprecedented in the 43 years for which

Datastream has the sta tistics (see cha rt).

The cha rt used British num bers bec ause

Datastream has the best history for those figures.

But the same story applies elsewhere. The FTSE

North America Large Cap index yields 3.1%,

more than d oub le the Fed -funds rate . The FTSEEurofirst (Eurozone) index yields 5.7%, two

percentage points above short rates in the

eurozone.

Of course, dividends will be cut, particularly in

the banking sector. But the level of dividend

cover is respectable, more than two in Britain (inother words, there are enough earnings to pay

dividends twice over). Even if one forgets

dividends and looks at the price-earnings ratio,

things look fa irly a tt rac tive . The FTSE 100 is on a n

histo ric P/E of nine, which eq uates to an ea rnings

yield of 11%. That ought to give a fa ir deg ree of

protection against the inevitable falls in

forecasts.

It is also possible to see bargains at the individual

stock level. Both BP and Shell have a d ividend

yield equal to, or higher than, their P/E: an old

rule o f thumb for va lue investo rs. True, the oil

price is falling sharply, but shares in oil

comp anies lag ged well behind the c rude p rices

whe n it was soa ring to $147 a barrel.

James Montier of Dresdner Kleinwort uses a

value screen developed by Ben Graham, the

pa tron saint of va lue investing and the m entor of

Warren Buffett. He found 35 stocks in Europe that

me t the c rite riaam ong them BP, Tota l, Ericsson

and Nokiaand 125 in Jap an, inc luding Sharpand Pana sonic . This, says Mr Mo ntier, do es not

make him bullish on the overall market but on a

ba sket o f d eep -value stoc ks.

A note of caution is needed. Montier finds just

two stocks that meet his valuation criteria on

Wall Street. And me asures based on profits ma y

be distorted because companies have enjoyed

fantastic earnings growth in recent years.

Smithers & Co ha s a m ea sure c a lled cyc lica lly-

ad justed p/ e, which a verage s ea rnings ove r the

last 10 years. In America, that has fallen sharplyin recent weeks and is now around the historical

norm of 15. But in deep bear markets, the

botto m wa s five.

Valuation measures may be a great guide for

five or ten years. But they are not much help

ove r six mo nths, let a lone over the ne xt da y. And

that is one reason why markets are struggling to

find a bo ttom.

http://www.economist.com/finance/displaystory

.c fm?story_id=12405861&fsrc=rss

Economist.com , Oc tober 12, 2008

http://online.wsj.com/article/SB122392095936529259.html?mod=googlenews_wsjhttp://online.wsj.com/article/SB122392095936529259.html?mod=googlenews_wsjhttp://www.economist.com/finance/displaystory.cfm?story_id=12405861&fsrc=rsshttp://www.economist.com/finance/displaystory.cfm?story_id=12405861&fsrc=rsshttp://www.economist.com/finance/displaystory.cfm?story_id=12405861&fsrc=rsshttp://www.economist.com/finance/displaystory.cfm?story_id=12405861&fsrc=rsshttp://online.wsj.com/article/SB122392095936529259.html?mod=googlenews_wsjhttp://online.wsj.com/article/SB122392095936529259.html?mod=googlenews_wsj

Beta Newsletter Vol1 Ed9

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