Global Recession?


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Abridged version of presentation I gave on Friday on credit crisis and its effects.

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  • Global Recession?

    1. 1. <ul><li>Fact or fiction, causes and indicators </li></ul>CK
    2. 2. <ul><li>A period of general and sustained economic decline </li></ul>CK
    3. 3. <ul><li>a stage of business cycle in which economic activity is in slow decline. A Recession usually follows a boom, and precedes a depression </li></ul>CK
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    10. 10. <ul><li>Jan 11 - Bank of America buys Countrywide Financial for $4 billion in an all-stock deal. </li></ul><ul><li>March 16 - JP Morgan Chase buys Bear Stearns . </li></ul><ul><li>July 11 - IndyMac is 12 th to be seized by the FDIC after depositors withdraw $1.3 billion in 11 days. </li></ul><ul><li>July 13 - Fannie Mae and Freddie Mac are nationalized </li></ul>CK
    11. 11. <ul><li>September 15 </li></ul><ul><ul><li>Investment bank Lehman Brothers files for Chapter 11 bankruptcy protection. </li></ul></ul><ul><ul><li>Rival Merrill Lynch agrees to be taken over by Bank of America . </li></ul></ul><ul><ul><li>The Dow Jones fell 504 points, the index’s worst since the 2001 terrorist attacks. </li></ul></ul><ul><li>September 16 - Insurer American International Group (AIG) is rescued by the federal government through an $85 billion loan package </li></ul>CK
    12. 12. <ul><li>September 21 - Goldman Sachs Group Inc. and Morgan Stanley become bank holding companies regulated by the Fed, essentially ending Wall Street's investment banking model. </li></ul><ul><li>September 25 </li></ul><ul><ul><li>Washington Mutual is seized by the FDIC, making it the largest U.S. bank failure, with $307 billion in assets. </li></ul></ul><ul><ul><li>JPMorgan Chase buys WaMu’s banking assets for $1.9 billion. </li></ul></ul>CK
    13. 13. CK
    14. 14. <ul><li>Liquidity Crunch - A crisis that occurs when a business experiences a lack of cash required to grow the business, pay for day-to-day operations, or meet its debt obligations when they are due, causing it to default. </li></ul><ul><li>Credit Crunch - a sudden reduction in the availability of loans (or &quot;credit&quot;) or a sudden increase in the cost of obtaining a loan from the banks, and interest rates are high </li></ul>CK
    15. 15. <ul><li>Subprime Mortgage – offered/issued at a higher interest rate to persons who do not qualify for prime rate loans. With the following perks: </li></ul><ul><ul><li>No down payment required </li></ul></ul><ul><ul><li>Credit Rating Ignored </li></ul></ul><ul><ul><li>Credit history Ignored </li></ul></ul><ul><ul><li>No proof of employment required </li></ul></ul><ul><ul><li>No proof of ability to pay mortgage (income) </li></ul></ul>CK
    16. 16. <ul><li>HOW and WHY </li></ul><ul><ul><li>Long term trend of rising house prices (so your purchase will increase in value) </li></ul></ul><ul><ul><li>Interest rates start of small but increase with time. </li></ul></ul><ul><ul><li>Mortgage Brokers </li></ul></ul><ul><ul><ul><li>Competition for commissions </li></ul></ul></ul><ul><ul><ul><li>Did not actually lend any money </li></ul></ul></ul>CK
    17. 17. <ul><li>Next </li></ul><ul><ul><li>Large number of subprime mortgages put together into a RBMS - Residential Mortgage-Backed </li></ul></ul><ul><ul><li>Security </li></ul></ul>CK
    18. 18. <ul><li>Next </li></ul><ul><ul><li>RBMS split into 4 parts each with a different rating, risk and return. </li></ul></ul>CK
    19. 19. <ul><li>Next </li></ul><ul><ul><li>as many as 150 of each part put into a CDO </li></ul></ul>CK
    20. 20. <ul><li>Next </li></ul><ul><ul><li>CDO rated and sold to large investors </li></ul></ul>CK
    21. 21. CK
    22. 22. <ul><li>“ When the United States Sneezes, the rest of world may well catch a cold” </li></ul><ul><li>-By Rich Miller </li></ul>
    23. 23. CK
    24. 24. <ul><li>Biggest economy in the world </li></ul><ul><li>Constitutes 27% of Global GDP </li></ul><ul><li>World’s biggest debtor country </li></ul><ul><li>Biggest Importer of Oil 27% in 2007 </li></ul>
    25. 25. <ul><li>700 Billion Bailout </li></ul><ul><ul><li>To prevent the total collapse of U.S. economy and Wall Street </li></ul></ul><ul><ul><li>To restore confidence and stability </li></ul></ul><ul><ul><li>Money goes to the largest banks </li></ul></ul><ul><ul><li>Money comes from other countries but paid for ultimately by taxpayers </li></ul></ul>CK 700,000,000,000,
    26. 26. <ul><li>Rich people got it good in this country ... </li></ul><ul><li>Broke people are about to bailout rich people... It's welfare for the rich. </li></ul><ul><li>-Wanda Sykes </li></ul>CK
    27. 27. <ul><li>You could buy 438 pounds of rice for every single person in Africa. </li></ul><ul><li>14 times the budget of Trinidad and Tobago (08-09) </li></ul><ul><li>It is more than $100 for every person in the world. </li></ul><ul><li>$668,577 dollars for every Trinidadian and Tobagonian. </li></ul><ul><li>You can buy a country - Denmark, Peru, Nepal, or Iceland </li></ul>CK
    28. 28. <ul><li>Cost to bring every delinquent mortgage to par: $11 billion </li></ul><ul><li>Cost to restore every foreclosed home (2 years): $ 60 billion </li></ul><ul><li>Just take three of the major Banks bonuses ‘07 </li></ul><ul><ul><li>a. Goldman Sachs paid 30 billion </li></ul></ul><ul><ul><li>b. Morgan Stanley paid 30.7 billion </li></ul></ul><ul><ul><li>c. Lehman Brothers paid 10.9 billion </li></ul></ul>CK
    29. 29. <ul><li>Nationalisation of some banks </li></ul><ul><li>Fiscal Policy </li></ul><ul><ul><li>Tax cuts/rebates </li></ul></ul><ul><ul><li>Establishment of new govt jobs </li></ul></ul><ul><ul><li>Unemployment insurance </li></ul></ul><ul><li>Monetary Policy </li></ul><ul><ul><li>Reduce the reserve ratio </li></ul></ul><ul><ul><li>Lower the federal funds rate </li></ul></ul><ul><ul><li>Lower the discount rate </li></ul></ul><ul><ul><li>Use its own reserve money to buy government bonds </li></ul></ul><ul><ul><li>Changes in who can borrow </li></ul></ul>CK
    30. 30. CK <ul><li>Market Continues to be volatile </li></ul><ul><li>Stocks expected lower today because of sagging housing market </li></ul><ul><li>Bush to give pep talk to anxious country </li></ul><ul><li>G7 to meet on world financial crisis (Fri & Sat) </li></ul>