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20100629

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  • 1. Global Financial Crisis: Implications for Future Business Education Stephen Y L CHEUNG Professor (Chair) of Finance Dean, School of Business Hong Kong Baptist University
  • 2. Contents
    • Causes of sub-prime crisis
    • Consequences
    • China and India
    • Policy implications
    • Sovereign Crisis
    • Consequences
    • Future Business Education
  • 3. Origins
    • Financial crisis derives from t he US housing market
    • Housing market in US
      • An unparalleled boom in 2007
      • Negative real interest rates in US
      • E xcess liquidity offered by financial innovation
      • High leverage
    • Causes of sub-prime crisis
    • Consequences
    • China and India
    • Policy implications
  • 4.
    • Graph
    Real interest rate
    • Causes of sub-prime crisis
    • Consequences
    • China and India
    • Policy implications
  • 5. Financial Innovation
    • Housing loans offered at back loaded teaser interest rates
    • Assuming that borrowers could refinance the sub prime loans through gains in home equity
    • But loan originating banks were smart …
    • Causes of sub-prime crisis
    • Consequences
    • China and India
    • Policy implications
    Structured Derivatives Housing Loans Sub-prime borrows
  • 6. What is Sub-prime loans?
    • Causes of sub-prime crisis
    • Consequences
    • China and India
    • Policy implications
      • (1) low credit scores
      • (2) No 20 % down-payment for a home
      • (3) Unable to fully document their income
    • No C onventional mortgages
    • No B est market interest rates
  • 7. What did the banks do?
    • Offloaded the sub - prime loans through i nstruments like
    • Collateralized Debt Obligations
    • Modus Operandi of banks (loan originators)
      • Pool together mortgages, including sub prime loans, into CDO s
      • Get top notch credit ratings for senior tranches
      • Retain the highly rated senior derivatives through SIVS
      • Repackage the lower rated derivatives to transform them into synthetic CDOs
    • Investors : Hedge funds, money market and pension funds
    • Causes of sub-prime crisis
    • Consequences
    • China and India
    • Policy implications
  • 8.  
  • 9. The boom begins to unravel from 2004
    • US Fed reacts to rising consumer and asset prices by monetary tightening from second half of 2004
    • Housing prices begin to fall by end of 2006
    • Rising interest rates and falling housing prices lead to
    • r ise in subprime mortgage delinquencies & foreclosures
    • Causes of sub-prime crisis
    • Consequences
    • China and India
    • Policy implications
  • 10.
    • Causes of sub-prime crisis
    • Consequences
    • China and India
    • Policy implications
    Overloading…
  • 11. Suffering…
    • Causes of sub-prime crisis
    • Consequences
    • China and India
    • Policy implications
  • 12.
    • “ Do you know the true balance sheet of US Investment banks?”
    There are two sides on the balance sheet: the left side and the right side. On the left side, there is nothing right. and on the right side, there is nothing left .
    • Causes of sub-prime crisis
    • Consequences
    • China and India
    • Policy implications
  • 13.
    • “ Yes, it’s true that the Chinese have been selling us toxic toothpaste, toxic pet food, toys with toxic lead paint —”
    • “ but all the while US was selling them toxic investments.”
    • Causes of sub-prime crisis
    • Consequences
    • China and India
    • Policy implications
  • 14. China and India are the Saver
    • Causes of sub-prime crisis
    • Consequences
    • China and India
    • Policy implications
  • 15. Policy implications
    • More hazard
    • A new financial order
      • Financial innovations
      • Credit rating agencies
    • Regulatory framework
      • Highly leveraged institutions
      • Regulator quality
    • Causes of sub-prime crisis
    • Consequences
    • China and India
    • Policy implications
  • 16. Next Phrase in the Financial Crisis
    • Let us not be overly optimistic because of the buoyant world trade, stock market and GDP growth;
    • Financial crisis still among us;
    • Next phrase in the financial crisis (after subprime, banking & economic crisis);
    • Sovereign crisis
  • 17. Government Budget Deficits, Percent of GDP, 2009 Budget deficits have exploded all over with the worst affected being in the advanced industrial world 0 2 4 6 8 10 12 14 16 18 Iceland Greece UK Spain Ireland USA Portugal France Japan Czeck Belgium Russia Turkey Italy Netherlands Canada
  • 18. Advanced Economies: Gross Debt-to-GDP Ratios, 2010 IMF Projections Debt-GDP ratios have been rumped up dramatically in many countries Strategies for Fiscal Consolidation in the Post-Crisis World, IMF, February 4, 2010 0 25 50 75 100 125 150 175 200 225 250 Percent (%) of GDP Japan Iceland Greece Italy Belgium USA France Canada Portugal Israel UK Germany Ireland Austria Netherl Spain
  • 19. Is the Greek Crisis Coming to America ?
  • 20. Consequences
    • Contagion risk
    • Condition of spending costs and tax hikes
    • Market confidence & panic
  • 21. Consequences
    • Liquidity squeeze => Excessive liquidity
    • Asset bubbles; stock and property prices
    • Commodity prices up
    • Inflation?
  • 22. Consequences
    • Economy not recovered yet
    • High interest rates, negative impact on the fragile economy
  • 23. Day after tomorrow:
    • Incentive system; how to compensate senior management?
    • Exit strategy?
    • Financial markets will be different
    • Risk management
    • Corporate governance
  • 24. Future Business Education
    • The existing criteria for business school selection
      • Easy to get a job
      • How much the student can earn
  • 25. More important
    • Professionalism
    • Integrity
    • Accountability
    • Ethic
  • 26. Emphasis on:
    • Business Ethics
    • Corporate Governance
    • Corporate Social Responsibilities
  • 27. 發財立品
    • 未” 發財 ”先” 立品 ”
  • 28. The End