The Financial Tsunami Credit Crisis
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Transcript of The Financial Tsunami Credit Crisis
MERCHANT BANKERS MERCHANT BANKERS MELTDOWNMELTDOWN
A GLOBAL FINANCIAL A GLOBAL FINANCIAL TSUNAMITSUNAMI
ORIGINATED FROM ORIGINATED FROM MANHATTANMANHATTAN
StarringStarring
Merchant BankersMerchant Bankers
Uncle Sam’s Federal ReserveUncle Sam’s Federal Reserve
Lehman Bros.Lehman Bros.
Merrill LynchMerrill Lynch
AIG, FM & FMAIG, FM & FM
Morgan StanleyMorgan Stanley
Story written byStory written by
SUB PRIME MORTAGES IN SUB PRIME MORTAGES IN
UNITED STATES OF AMERICAUNITED STATES OF AMERICA
Directed byDirected by
WALL STREETWALL STREET
Merchant BankersMerchant Bankers
““Masters of the Universe” ( to quote best Masters of the Universe” ( to quote best selling author ‘Tom Wolfe’ )selling author ‘Tom Wolfe’ )
Don’t like our PSBs or private banksDon’t like our PSBs or private banks
Assess different financial proposals for Assess different financial proposals for investments worldwideinvestments worldwide
International portfolio investmentsInternational portfolio investments
Global & corporate strategies formulationGlobal & corporate strategies formulation
Measure & manage political risks Measure & manage political risks involvedinvolved
The Devil Behind the The Devil Behind the SceneScene
US Mortgage US Mortgage Crisis A Crisis A
Sub primerSub primer
What is it?What is it? Two Types of US BorrowersTwo Types of US Borrowers
Prime & SubprimePrime & Subprime Loans by subsidiaries in 2002-07 to SP Loans by subsidiaries in 2002-07 to SP
BorrowersBorrowers Due to Real Estate boomDue to Real Estate boom Rising of home price to more than double Rising of home price to more than double
since 1997since 1997 Encouragement by Govt. to lend SPB to Encouragement by Govt. to lend SPB to
help poor & younghelp poor & young
With stock mkt. booming & system With stock mkt. booming & system flush with liquidity, big fund investors flush with liquidity, big fund investors like Hedge funds & MFs saw SP loan like Hedge funds & MFs saw SP loan portfolios as attractive investmentportfolios as attractive investment
Bought such portfolios from original Bought such portfolios from original lenderslenders
Lenders had fresh funds to lendLenders had fresh funds to lend
Typically 2% higher interest rate Typically 2% higher interest rate than Prime because of higher default than Prime because of higher default risk, resulting in higher EMIsrisk, resulting in higher EMIs
Only added to risk of SPB defaulting Only added to risk of SPB defaulting raterate
Lenders compromised with Lenders compromised with prudential norms & devise new prudential norms & devise new instrumentsinstruments
Turning into a CrisisTurning into a Crisis
US Housing boom bubble busted in 2007US Housing boom bubble busted in 2007
Boom had led to a massive housing supplyBoom had led to a massive housing supply
Prices fell downPrices fell down
Default rate shoot upDefault rate shoot up
SPB no longer ready to pay through their SPB no longer ready to pay through their nosenose
Collateral was typically the home being Collateral was typically the home being bought, again this vicious cycle startedbought, again this vicious cycle started
Coincidence with US Economy Coincidence with US Economy slowdown made the matter worseslowdown made the matter worse
Price dropped to 50% of their peak in Price dropped to 50% of their peak in 20062006
Lenders left with less the value of Lenders left with less the value of their loans to book hefty lossestheir loans to book hefty losses
Turning into a systematic Turning into a systematic crisiscrisis
Original lenders had further sold their Original lenders had further sold their portfolios to other playersportfolios to other players
Some complex derivatives were also Some complex derivatives were also developed based on the loan developed based on the loan portfolios which sold further, one portfolios which sold further, one after anotherafter another
As a result, nobody is quite sure As a result, nobody is quite sure about the exact sizes of losses & who about the exact sizes of losses & who had taken how much hithad taken how much hit
Fannie Mae & Freddi Mac owned half Fannie Mae & Freddi Mac owned half of roughly $12 trillion outstanding in of roughly $12 trillion outstanding in home mortgagehome mortgage
Suffered $14bn in last 4 QsSuffered $14bn in last 4 Qs
Forced retreat of these two giants Forced retreat of these two giants from market created ripples of fear from market created ripples of fear across the playersacross the players
Impact of crisis: on USAImpact of crisis: on USA
Global banks & brokerages had to Global banks & brokerages had to write off an estimated $512 bnwrite off an estimated $512 bn
Heaviest punch on CITI group Heaviest punch on CITI group ($55.1bn) & Merrill Lynch ($52.2bn)($55.1bn) & Merrill Lynch ($52.2bn)
More than half of total losses are More than half of total losses are suffered by US based firms ($260bn)suffered by US based firms ($260bn)
European firms tanks $227bnEuropean firms tanks $227bn
Relatively modest $24bn hit on Asian Relatively modest $24bn hit on Asian firmsfirms
Bear Sterns, one of the largest Bear Sterns, one of the largest investment bank & securities traders investment bank & securities traders collapsedcollapsed
Bought up by JP Morgan Chase with Bought up by JP Morgan Chase with help of Federal Reservehelp of Federal Reserve
Lehman went bankruptLehman went bankrupt
ML bought by Bank of AmericaML bought by Bank of America
Nationalization of FM & FMNationalization of FM & FM
On global frontOn global front
US being the biggest borrower in the US being the biggest borrower in the world since most countries hold their world since most countries hold their foreign exchange reserve in dollars & foreign exchange reserve in dollars & invest them in US Securities, any invest them in US Securities, any crisis in US has a direct bearing on crisis in US has a direct bearing on themthemCountries with large reserves like Countries with large reserves like Japan China and India are at high riskJapan China and India are at high riskGlobal interconnectivity of financial Global interconnectivity of financial markets makes the situation worsemarkets makes the situation worse
NOW WE NOW WE COMECOME
TO THE POINTTO THE POINT
Lehman BrothersLehman Brothers
158 years old158 years oldHQ in ManhattanHQ in ManhattanCEO Richard Fuld CEO Richard Fuld 44thth largest investment bank largest investment bank26,000 employees worldwide26,000 employees worldwideMarket value in Feb. 2007 was $45.5bnMarket value in Feb. 2007 was $45.5bnPosted $4bn losses in Q4Posted $4bn losses in Q4File for Bankruptcy under chapter 11File for Bankruptcy under chapter 11Barclays to buy its core capital mkt. business for Barclays to buy its core capital mkt. business for $1.75bn, a paltry$1.75bn, a paltryCould save 10,000 jobs of LehmannitesCould save 10,000 jobs of Lehmannites
Merrill LynchMerrill Lynch
94 years old94 years old
60,000 employees 60,000 employees
HQ in ManhattanHQ in Manhattan
Market value in Feb.2007 was $86bnMarket value in Feb.2007 was $86bn
Bought by Bank of America for $50bn Bought by Bank of America for $50bn in a all stock transactionin a all stock transaction
Other banks on saleOther banks on sale
Morgan Stanley, 2Morgan Stanley, 2ndnd largest largest investment bank across the globeinvestment bank across the globe
Mutual WashingtonMutual Washington
Some others are also in the pipelineSome others are also in the pipeline
Lehman Bros meltdown shakes world's markets - 15 Sep 08.flv
Rescue Measures by Central Rescue Measures by Central banksbanks
SEC Securities & SEC Securities & Exchange Exchange Commission, a US Commission, a US Regulator banned Regulator banned short selling in 799 short selling in 799 financial financial companies stockscompanies stocks
$800 bn pumped in $800 bn pumped in worldwideworldwide
US Federal US Federal ReserveReserve
$180bn$180bn
Russian Govt.Russian Govt. $130bn$130bn
Bank of JapanBank of Japan $108bn$108bn
US Federal US Federal guarantorsguarantors
$50bn$50bn
Bank of Bank of EnglandEngland
$40bn$40bn
ECBECB $40bn$40bn
RBIRBI $18bn$18bn
AIG’s Adoption by Uncle SAMAIG’s Adoption by Uncle SAM
World’s largest InsurerWorld’s largest Insurer
Lost $13.2bn in first 6 months of Lost $13.2bn in first 6 months of 20082008
Sought to raise $40bn to avoid Sought to raise $40bn to avoid crippling credit rating downgradecrippling credit rating downgrade
Was also in talks with Warren BuffetsWas also in talks with Warren Buffets
US take it over for $86bn, ½ of US take it over for $86bn, ½ of India’s Annual BudgetIndia’s Annual Budget
Other Bailouts by USAOther Bailouts by USA
So far $900bn So far $900bn bailed out by US in bailed out by US in 20082008
Federal’s Federal’s housing housing administratoradministrator
$300b$300bnn
Federal’s term Federal’s term auction facilityauction facility
$200b$200bnn
FM & FMFM & FM $200b$200bnn
JP Morgan JP Morgan ChaseChase
$87bn$87bn
AIGAIG $85bn$85bn
Bear SternBear Stern $29bn$29bn
Grant to local Grant to local gov.gov.
$4bn$4bn
International StampedeInternational Stampede
Race against time to prevent global Race against time to prevent global financial collapsefinancial collapse
Domino’s effectDomino’s effect
Bank to sit on cashBank to sit on cash
Interbanking relations and faith Interbanking relations and faith touched a new lowtouched a new low
Several commit suicide across the Several commit suicide across the worldworld
RTS (Russia), Hangseng (Singapore), RTS (Russia), Hangseng (Singapore), Shanghai comp, FTSE 100 (UK), Shanghai comp, FTSE 100 (UK), Sensex, DAX 30 (Germany), S&P 500, Sensex, DAX 30 (Germany), S&P 500, Nikkei (Japan), Dow Jones (USA), Nikkei (Japan), Dow Jones (USA), NASDAQ comp, CAC40 (France), NASDAQ comp, CAC40 (France), KOSPI (S.Korea) all crashed like a KOSPI (S.Korea) all crashed like a planeplaneDow Jones tanks 500 pts within 10 Dow Jones tanks 500 pts within 10 min of opening on Mondaymin of opening on Monday10 major banks in US to create 10 major banks in US to create $70bn emergency crisis fund$70bn emergency crisis fund
Ripples in IndiaRipples in India
Rupee hit a 10 year low to Rs.47 A dollarRupee hit a 10 year low to Rs.47 A dollar
FIIs withdraw $800 million on Monday, the FIIs withdraw $800 million on Monday, the biggest withdrawal on a single day after biggest withdrawal on a single day after 9/119/11
RBI not to increase CRR in its Oct. RBI not to increase CRR in its Oct. Monetary ReviewMonetary Review
RBI to cut SLR (statutory liquidity ratio) by RBI to cut SLR (statutory liquidity ratio) by 1% to 24%1% to 24%
RBI to go for 2 LAF (liquidity adjustment RBI to go for 2 LAF (liquidity adjustment facility) in a single dayfacility) in a single day
Call money rates up to 15-17% from Call money rates up to 15-17% from 6-8% of one week ago6-8% of one week agoICICI worst hit as its London ICICI worst hit as its London subsidiary Had purchased Lehman subsidiary Had purchased Lehman bonds to the tune of Rs. 375 crorebonds to the tune of Rs. 375 croreIRDA asks TATA-AIG to submit IRDA asks TATA-AIG to submit reports on solvencyreports on solvencyReal estate sector, Hardest hitReal estate sector, Hardest hitCould loose 26,000 jobs across the Could loose 26,000 jobs across the sectorssectors
Blessings in DisguiseBlessings in Disguise
Every tunnels has a ray of hope at its endEvery tunnels has a ray of hope at its end
Crude price dippingCrude price dipping
Service sector growing at double digitService sector growing at double digit
Comparatively insulated Indian mkt. as 2/3 Comparatively insulated Indian mkt. as 2/3 of Indian economy is domestically drivenof Indian economy is domestically driven
More local investors in equity as a More local investors in equity as a replacement of global onereplacement of global one
Talent crunched A- Indians can now seek Talent crunched A- Indians can now seek to hire A+ talentto hire A+ talent
My QuestionMy Question
Is it good to dwell out taxpayers hard Is it good to dwell out taxpayers hard earned money for the losses of those earned money for the losses of those who were playing ROULETTE for who were playing ROULETTE for long?long?
Is it not the “ privatisation of profits Is it not the “ privatisation of profits and civilisation of losses? ”and civilisation of losses? ”
Presented By:Presented By:
GUNADITYA GUNADITYA SHARMASHARMA