Global Financial Crisis Simplified

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This is an effort to simplify the Global Financial Crisis. I use this to teach MBA students at MDI, Gurgaon (www.mdi.ac.in)

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  • The chief features of the Bretton Woods system were an obligation for each country to adopt a  monetary policy  that maintained the  exchange rate  of its  currency  within a fixed value—plus or minus one percent—in terms of  gold  and the ability of the IMF to bridge temporary  imbalances of payments . In the face of increasing financial strain, the system collapsed in 1971, after the United States  unilaterally   terminated   convertibility  of the  dollars  to gold. This action caused considerable financial stress in the world economy and created the unique situation whereby the United States dollar became the " reserve currency " for the states which had signed the agreement. The 1944 Bretton Woods Agreement established the International Monetary Fund and an international monetary system based on convertibility of the various national currencies into a U.S. dollar that was in turn convertible into gold. It also prevented countries from manipulating their currency's value to gain an edge in international trade.
  • Leverage: Borrowing more money than your capital, borrowing on the basis of your assets
  • Negative Equity – House Prices less than the outstanding balance on the loan
  • 1 Barrel= 159 litres approx.
  • Global Financial Crisis Simplified

    1. 1. GLOBAL CREDIT CRISIS GLOBAL FINANCIAL CRISIS Simplified By CA Avik Kedia Founder , Sanchayan Society [ www.SanchayanSociety.org] Visiting Faculty , MDI Gurgaon [ www.mdi.ac.in]
    2. 2. What we will discuss today <ul><li>Globalization </li></ul><ul><li>Interconnected World Economy </li></ul><ul><li>Global Financial Crisis </li></ul><ul><li>Oil Economics </li></ul><ul><li>Dollar Trade </li></ul><ul><li>The Great Depression </li></ul><ul><li>Future Outlook </li></ul>
    3. 3. Some images from the crisis….
    4. 7. Before we start- ‘ some basics ’
    5. 8. $1 US = Rs.50 (approx.) 1 Billion = 100 crores $ 1 Billion = Rs.5000 crores 1000 Billion = 1 Trillion
    6. 9. India vs. China vs. United States 2008 GDP data as per IMF Figures in Trillion US Dollars India China United States $ 1.3 $ 4.4 $ 14.2 GDP Rank 12 3 1
    7. 10. GDP defined <ul><li>In economics, GDP means Gross Domestic Product. GDP is defined as the value of all goods and services produced within the geographic territory of an economy in a given interval, such as a year. </li></ul><ul><li>GDP = consumption + investment + government </li></ul><ul><li>spending + (exports − imports) </li></ul>
    8. 11. Monetary Authority <ul><li>India </li></ul><ul><li>RBI </li></ul><ul><li>Monitors Interest Rates & Manage Govt. Finances </li></ul>United States Federal Reserve (Fed) Monitors Interest Rates
    9. 12. Importance of Interest rates <ul><li>Interest rates determine money supply and demand, </li></ul><ul><li>Expansion & Investment plans are decided by interest rates </li></ul><ul><li>Interest rate changes affect the flow of funds globally </li></ul>
    10. 13. Value of a Company <ul><li>Value = No. of shares x Share Price </li></ul>
    11. 14. Global Financial Crisis <ul><li>Causes of the Global Crisis </li></ul><ul><li>Effects of the Global Crisis </li></ul><ul><li>Measures/ Actions taken to combat global crisis </li></ul>
    12. 15. <ul><li>A. Causes of the Global Crisis </li></ul>
    13. 16. Origins of the crisis – Collapse of Bretton Woods Monetary system, <ul><li>Gold Standard </li></ul><ul><li>IMF and World Bank set up in 1944 </li></ul><ul><li>Fixed exchange rates : $35 per ounce (28 gms) of gold </li></ul><ul><li>US eliminates the fixed gold price in 1971 </li></ul>
    14. 17. 2000-2001 Dot-com Bubble Company 3/10/2000 price 3/05/2001 price* % change Yahoo $178.06 $22.19 -88% Gateway $62.50 $16.07 -74% Cisco Systems $68.19 $23.08 -66 % eBay $96.63 $38.00 -61 % Hewlett-Packard $73.47 $30.38 -59 % Oracle $40.81 $17.00 -58 % Sun Microsystems $47.09 $20.94 -56 % Dell $51.25 $23.44 -54 % Intel $60.00 $30.38 -49 % Microsoft $101.00 $57.44 -43 % Compaq $28.44 $20.07 -29 % America Online $58.63 $43.80 -25 % * adjusted for splits Source: CNET Investor
    15. 18. Alan Greenspan’s Policies <ul><li>Federal Reserve Governor from 1987 to 2006 </li></ul><ul><li>Reduced interest rates to 1% </li></ul><ul><li>Cheap Money Supply </li></ul><ul><li>Excessive Leverage </li></ul>
    16. 19. Housing Bubble <ul><li>House Prices increase globally due to speculation </li></ul><ul><li>Fannie Mae and Feddie Mac bailout </li></ul><ul><li>‘ House as an Investment’ </li></ul><ul><li>“ Negative Equity” </li></ul>
    17. 22. Real home price vs. Rent
    18. 23. Commodities and Oil speculation <ul><li>Crude Oil price goes to $147/barrel </li></ul><ul><li>Crude Oil price falls to $35/barrel </li></ul><ul><li>Huge demand from China & India </li></ul><ul><li>Boom in Copper, Iron ore, Steel prices </li></ul>
    19. 24. Oil Price chart
    20. 26. Greed of Investment Banks, Wall Street brokers, Credit Rating Agencies and Bonus Culture <ul><li>‘ Investment Banking’ becomes hottest sector </li></ul><ul><li>Banks provided cheap liquidity </li></ul><ul><li>Excessive risk taking </li></ul><ul><li>Banks indulge in speculation </li></ul><ul><li>Weak regulatory environment : creation of complex financial derivatives – CDS, CDO </li></ul><ul><li>Lehman Brothers & Bear Sterns goes Bankrupt </li></ul><ul><li>AIG - world’s largest insurer goes bankrupt </li></ul>
    21. 27. China
    22. 28. China’s Trade Surplus US-China Trade Statistics Figures in US $ Billion 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 US Exports to China 13.1 16.3 19.2 22.1 28.4 34.7 41.8 55.2 65.2 71.5 US Imports from China 81.8 100 102.3 125.2 152.4 196.7 243.5 287.8 321.5 337.8 US Balance -68.7 -83.7 -83 -103.1 -124 -162 -201.6 -232.5 -256.3 -266.3
    23. 29. Petrodollars <ul><li>Dollar is the main currency used to buy petrol </li></ul><ul><li>Petrodollars reinvested in US bonds leading to cheap money supply for US banks, </li></ul>
    24. 30. World Oil Reserves
    25. 31. <ul><li>B. Effects of the Global Crisis </li></ul>
    26. 32. Stock Markets Crash….
    27. 33. Collapse of Housing Bubble <ul><li>Housing Prices fall sharply, </li></ul><ul><li>House bought as investments hit hardest, </li></ul><ul><li>Boom in construction and heavy machinery bursts, </li></ul>
    28. 34. Collapse of Commodities bubble and Oil speculation <ul><li>Boom in commodities and raw materials comes to an end as economies contract and companies cut back on expansion plans, </li></ul><ul><li>Raw materials exporters see huge decline in exports, </li></ul><ul><li>Oil falls sharply from $147 to $35, </li></ul>
    29. 35. Unemployment and Global Poverty <ul><li>Worldwide unemployment </li></ul><ul><li>Funding for poverty programs reduced sharply </li></ul><ul><li>Sharp reduction in salary packages </li></ul>
    30. 36. Corporate Bankruptcy & Bailouts <ul><li>Lehman Brothers </li></ul><ul><li>Bear Sterns </li></ul><ul><li>AIG </li></ul><ul><li>Circuit City </li></ul><ul><li>Nortel </li></ul><ul><li>Fannie Mae </li></ul><ul><li>Countrywide Financial </li></ul><ul><li>Freddie Mac </li></ul><ul><li>General Motors </li></ul><ul><li>Chrysler </li></ul>
    31. 37. Auto Industry – GM, Chrysler bankrupt <ul><li>Major auto companies go bankrupt worldwide, </li></ul><ul><li>TATA buys JLR from Ford, </li></ul><ul><li>Many auto components suppliers and auto dealerships shut down, </li></ul><ul><li>Auto sector sales fall sharply, </li></ul>
    32. 38. Impact on India – IT, Outsourcing, Gems and Jewellery, and Textiles sectors hit hardest <ul><li>India, largest exporter of gems and jewellery to United States, suffers due to recession in US, </li></ul><ul><li>Millions of unorganized workers in gems and jewellery sector lost jobs, </li></ul><ul><li>IT sector, dependent on the US, suffers due to cutbacks in technology spending by the US. </li></ul>
    33. 39. Effect on Exports of Emerging Economies and Protectionism <ul><li>Export driven emerging economies like Brazil, China, India suffer due to decreased demand from US and Europe, </li></ul><ul><li>Protectionism rears its ugly head, as countries strive to stimulate demand for their own products, </li></ul>
    34. 40. <ul><li>C. Measures / Actions to combat Global Crisis </li></ul>
    35. 41. International Stimulus Packages
    36. 42. US TARP, Toxic Assets, Geithner Plan <ul><li>$1 Trillion Geithner Toxic Assets Plan </li></ul><ul><li>$ 700 billion bailout </li></ul><ul><li>$ 185 - AIG </li></ul><ul><li>$ 45 - Citibank </li></ul>
    37. 43. US Bailout and Guarantees
    38. 44. Interest Rates Cut worldwide by ECB, US FED, Australia, Japan, India <ul><li>Interest rates cut to unfreeze credit markets and stimulate borrowing & demand, </li></ul><ul><li>Interest rates in US reduced to 0.25% </li></ul><ul><li>Home loans made cheaper in India, </li></ul>
    39. 45. Stricter Government Regulation <ul><li>Governments worldwide call for monitoring banking system and illegal tax havens, </li></ul><ul><li>United States Government regulates wall street pay and bonus, </li></ul><ul><li>IMF regains authority and gets funds for lending to developing countries, </li></ul>
    40. 46. Lehman Brothers <ul><li>4 th largest US Investment Bank </li></ul><ul><li>Bankrupt on 15 th September 2008 </li></ul><ul><li>DEBT = $613 Billion </li></ul><ul><li>BOND DEBT = $ 155 Billion </li></ul><ul><li>EQUITY = $ 22 Billion </li></ul><ul><li>Assets = $639 Billion </li></ul><ul><li>Revenue = $59 Billion </li></ul><ul><li>Net Profit = $6.7 Billion </li></ul><ul><li>Employees = 26,200 </li></ul>
    41. 47. CONCLUSION <ul><li>Future Outlook </li></ul><ul><li>Worsening Macro Economy </li></ul><ul><li>Increasing Fiscal Deficit </li></ul><ul><li>Booming Stock Markets once again </li></ul>
    42. 48. How to stay updated <ul><li>Read Financial Newspapers </li></ul><ul><li>Read Wikipedia, Wikinvest, other sites regularly </li></ul><ul><li>Read magazines like The Economist, BusinessWeek, Business Today </li></ul><ul><li>INVEST YOUR TIME before YOUR MONEY </li></ul>
    43. 49. <ul><li>Thank You </li></ul>

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