Global Financial Crisis: Implications for Future Business Education Stephen Y L CHEUNG Professor  (Chair)  of Finance Dean...
Contents <ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and India </li></ul><ul...
Origins <ul><li>Financial crisis derives from t he US housing market </li></ul><ul><li>Housing market  in US </li></ul><ul...
<ul><li>Graph </li></ul>Real interest rate <ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul...
Financial Innovation <ul><li>Housing loans offered at back loaded teaser interest rates </li></ul><ul><li>Assuming that bo...
What is Sub-prime loans? <ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and Ind...
What did the banks do? <ul><li>Offloaded the sub - prime loans through  i nstruments like </li></ul><ul><li>Collateralized...
 
The boom begins to unravel from 2004 <ul><li>US Fed reacts to rising consumer and asset prices by  monetary tightening fro...
<ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and India </li></ul><ul><li>Poli...
Suffering… <ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and India </li></ul><...
<ul><li>“ Do you know the true balance sheet of US Investment banks?”   </li></ul>There are two sides on the balance sheet...
<ul><li>“ Yes, it’s true that the Chinese have been selling us toxic toothpaste, toxic pet food, toys with toxic lead pain...
China and India  are the Saver <ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China a...
Policy implications <ul><li>More hazard </li></ul><ul><li>A new financial order </li></ul><ul><ul><li>Financial innovation...
Next Phrase in the Financial Crisis <ul><li>Let us not be overly optimistic because of the buoyant world trade, stock mark...
Government Budget Deficits, Percent of GDP, 2009 Budget deficits have exploded all over with the worst affected being in t...
Advanced Economies: Gross Debt-to-GDP Ratios, 2010 IMF Projections Debt-GDP ratios have been rumped up dramatically in man...
Is the Greek Crisis Coming to America  ?
Consequences <ul><li>Contagion risk </li></ul><ul><li>Condition of spending costs and tax hikes </li></ul><ul><li>Market c...
Consequences <ul><li>Liquidity squeeze => Excessive liquidity </li></ul><ul><li>Asset bubbles; stock and property prices <...
Consequences <ul><li>Economy not recovered yet </li></ul><ul><li>High interest rates, negative impact on the fragile econo...
Day after tomorrow: <ul><li>Incentive system; how to compensate senior management? </li></ul><ul><li>Exit strategy? </li><...
Future Business Education <ul><li>The existing criteria for business school selection </li></ul><ul><ul><li>Easy to get a ...
More important <ul><li>Professionalism </li></ul><ul><li>Integrity </li></ul><ul><li>Accountability </li></ul><ul><li>Ethi...
Emphasis on: <ul><li>Business Ethics </li></ul><ul><li>Corporate Governance </li></ul><ul><li>Corporate Social Responsibil...
發財立品 <ul><li>未” 發財   ”先” 立品   ” </li></ul>
The End
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20100629

  1. 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. 2. Contents <ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and India </li></ul><ul><li>Policy implications </li></ul><ul><li>Sovereign Crisis </li></ul><ul><li>Consequences </li></ul><ul><li>Future Business Education </li></ul>
  3. 3. Origins <ul><li>Financial crisis derives from t he US housing market </li></ul><ul><li>Housing market in US </li></ul><ul><ul><li>An unparalleled boom in 2007 </li></ul></ul><ul><ul><li>Negative real interest rates in US </li></ul></ul><ul><ul><li>E xcess liquidity offered by financial innovation </li></ul></ul><ul><ul><li>High leverage </li></ul></ul><ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and India </li></ul><ul><li>Policy implications </li></ul>
  4. 4. <ul><li>Graph </li></ul>Real interest rate <ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and India </li></ul><ul><li>Policy implications </li></ul>
  5. 5. Financial Innovation <ul><li>Housing loans offered at back loaded teaser interest rates </li></ul><ul><li>Assuming that borrowers could refinance the sub prime loans through gains in home equity </li></ul><ul><li>But loan originating banks were smart … </li></ul><ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and India </li></ul><ul><li>Policy implications </li></ul>Structured Derivatives Housing Loans Sub-prime borrows
  6. 6. What is Sub-prime loans? <ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and India </li></ul><ul><li>Policy implications </li></ul><ul><ul><li>(1) low credit scores </li></ul></ul><ul><ul><li>(2) No 20 % down-payment for a home </li></ul></ul><ul><ul><li>(3) Unable to fully document their income </li></ul></ul><ul><li>No C onventional mortgages </li></ul><ul><li>No B est market interest rates </li></ul>
  7. 7. What did the banks do? <ul><li>Offloaded the sub - prime loans through i nstruments like </li></ul><ul><li>Collateralized Debt Obligations </li></ul><ul><li>Modus Operandi of banks (loan originators) </li></ul><ul><ul><li>Pool together mortgages, including sub prime loans, into CDO s </li></ul></ul><ul><ul><li>Get top notch credit ratings for senior tranches </li></ul></ul><ul><ul><li>Retain the highly rated senior derivatives through SIVS </li></ul></ul><ul><ul><li>Repackage the lower rated derivatives to transform them into synthetic CDOs </li></ul></ul><ul><li>Investors : Hedge funds, money market and pension funds </li></ul><ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and India </li></ul><ul><li>Policy implications </li></ul>
  8. 9. The boom begins to unravel from 2004 <ul><li>US Fed reacts to rising consumer and asset prices by monetary tightening from second half of 2004 </li></ul><ul><li>Housing prices begin to fall by end of 2006 </li></ul><ul><li>Rising interest rates and falling housing prices lead to </li></ul><ul><li>r ise in subprime mortgage delinquencies & foreclosures </li></ul><ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and India </li></ul><ul><li>Policy implications </li></ul>
  9. 10. <ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and India </li></ul><ul><li>Policy implications </li></ul>Overloading…
  10. 11. Suffering… <ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and India </li></ul><ul><li>Policy implications </li></ul>
  11. 12. <ul><li>“ Do you know the true balance sheet of US Investment banks?” </li></ul>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 . <ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and India </li></ul><ul><li>Policy implications </li></ul>
  12. 13. <ul><li>“ Yes, it’s true that the Chinese have been selling us toxic toothpaste, toxic pet food, toys with toxic lead paint —” </li></ul><ul><li>“ but all the while US was selling them toxic investments.” </li></ul><ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and India </li></ul><ul><li>Policy implications </li></ul>
  13. 14. China and India are the Saver <ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and India </li></ul><ul><li>Policy implications </li></ul>
  14. 15. Policy implications <ul><li>More hazard </li></ul><ul><li>A new financial order </li></ul><ul><ul><li>Financial innovations </li></ul></ul><ul><ul><li>Credit rating agencies </li></ul></ul><ul><li>Regulatory framework </li></ul><ul><ul><li>Highly leveraged institutions </li></ul></ul><ul><ul><li>Regulator quality </li></ul></ul><ul><li>Causes of sub-prime crisis </li></ul><ul><li>Consequences </li></ul><ul><li>China and India </li></ul><ul><li>Policy implications </li></ul>
  15. 16. Next Phrase in the Financial Crisis <ul><li>Let us not be overly optimistic because of the buoyant world trade, stock market and GDP growth; </li></ul><ul><li>Financial crisis still among us; </li></ul><ul><li>Next phrase in the financial crisis (after subprime, banking & economic crisis); </li></ul><ul><li>Sovereign crisis </li></ul>
  16. 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
  17. 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
  18. 19. Is the Greek Crisis Coming to America ?
  19. 20. Consequences <ul><li>Contagion risk </li></ul><ul><li>Condition of spending costs and tax hikes </li></ul><ul><li>Market confidence & panic </li></ul>
  20. 21. Consequences <ul><li>Liquidity squeeze => Excessive liquidity </li></ul><ul><li>Asset bubbles; stock and property prices </li></ul><ul><li>Commodity prices up </li></ul><ul><li>Inflation? </li></ul>
  21. 22. Consequences <ul><li>Economy not recovered yet </li></ul><ul><li>High interest rates, negative impact on the fragile economy </li></ul>
  22. 23. Day after tomorrow: <ul><li>Incentive system; how to compensate senior management? </li></ul><ul><li>Exit strategy? </li></ul><ul><li>Financial markets will be different </li></ul><ul><li>Risk management </li></ul><ul><li>Corporate governance </li></ul>
  23. 24. Future Business Education <ul><li>The existing criteria for business school selection </li></ul><ul><ul><li>Easy to get a job </li></ul></ul><ul><ul><li>How much the student can earn </li></ul></ul>
  24. 25. More important <ul><li>Professionalism </li></ul><ul><li>Integrity </li></ul><ul><li>Accountability </li></ul><ul><li>Ethic </li></ul>
  25. 26. Emphasis on: <ul><li>Business Ethics </li></ul><ul><li>Corporate Governance </li></ul><ul><li>Corporate Social Responsibilities </li></ul>
  26. 27. 發財立品 <ul><li>未” 發財 ”先” 立品 ” </li></ul>
  27. 28. The End
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