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  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