The document summarizes the major events of the 2007-2010 global financial crisis. It begins by describing how the crisis originated from the subprime mortgage crisis in the US housing market in 2007. It then discusses how the crisis spread globally and the actions taken by central banks to inject liquidity. Key events that unfolded over the next years included bank failures, government bailouts, and the official declaration of a recession. The document also examines various causes of the crisis such as unethical behavior in the financial industry and risky lending practices. Finally, it discusses regulatory reforms proposed in response to the crisis.

1. The Great Crises
2007-2010
Mayank Garg
Roll No. 466
Sec: FA

2. Events That Caused Credit Crunch!
• July 2007: Credit Crunch begins with the subprime mortgage crises in
the United states
• Aug 2007: US Credit Crunch goes Global due to the interaction of the
world banks who also have subprime mortgage backed securities
• Aug 9th 2007: Debt, due to defaults by subprime mortgage payers,
results in the European Central Bank injecting 95 billion euros into
the European banking Markets
• Aug 10: The United States Federal Reserve (Fed) injects 43 billion US
Dollars
• Sep 2007: US Interest rates lowered
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3. • Jan 2008: Downturn in Stock Markets and House prices continue to fall
and jobs are cut
• March 16, 2008: Bear Stearns acquired by JPMorgan Chase avoiding
bankruptcy
• Sept 14, 2008: Merrill Lynch sold to Bank of America
• Lehman Brothers went bankrupt
• Nov 2008: The US government agrees to rescue Citigroup
• Dec 2008: The US recession is officially declared by the National Bureau
of Economics Research
• Dec 29, 2008: The US Treasury unveils a $6bn bail-out for GMAC
(General Motors Car Loans)
• Global stock markets report the biggest annual falls for 24 years
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4. After The Crisis!!
• By 2009 crises had stabilized
• 2010 analysts were able to raise the questions o the cause and
consequences
• Government was more concerned about how to exit the current
unique fiscal and monetary policy
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5. What Are The Causes And
Consequences That Leads To
This Credit Crunch
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6. Can New Laws Prevent Unethical Behaviour
• Legal Fraud: mortgage providers offered mortgages to borrowers who could not afford
them
• The mortgage lenders then sold these sub-prime assets to banks that securitized them
and then sold them to other investors with the pretence that these were safe
investments
• Ratings Agencies had also placed a high rating on these investments
• The US IT that allowed the deductibility of mortgage interest, incentivised people to go
for more mortgages
• The Central Issue with this Chain Of Misinformation is
 General business culture
 Specific corporate culture
that permitted their employees to engage in unethical behaviour
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7. Impact Of Global Imbalances
• Huge US Fiscal Deficit & BOP meant the exchange rate of US dollar
would fluctuate
• China & major oil producing countries exported more than they
imported, creating a huge volumes of foreign exchange
• These large volumes were channels into UD bonds because of their low
saving rates & US started depending on these inflows to maintain low
interest rates
• Huge increase in commodity prices
• Investors were able to borrow in countries with low interest rates and
lens in countries with high interest rates.
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8. Risks Accompanying Massive Debts & Money
Supply
• Adopted Keynesian Fiscal Policies, which greatly increase govt. spending
on infrastructure projects
• Govt. cut taxes to stimulate private sectors spending
• Govt. increased country’s money supply by buying bonds from the
private sectors
• Exiting from this fiscal stimulus was a problem
• US’s Federal debt had raised from 35% of GDP in 1990’s to 100% of GDP
by 2012
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9. US’s Dilemma About Reserves
• US had more than $1 trillion in excess reserves
• With economic recovery these reserves would be the
basis of huge loans that would fuel inflation
• HOW TO REDUCE THESE RESERVES????
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10. Dark Side Of Capital Requirement Regulations
• The capital of banks had started to slip to zero
• By 2010 banks were busy trying to sell their assets and maintain the CRR
• CRR requirement according to BASEL Accord II was 8% during the
recession, but analysts suggested to make it 12% in good times to allow
banks have an extra cushioning during bad times
• Securitized investments were of balance sheet items, which made the bank
raise more loans technically without any alteration in their reserve
requirement
• An innovative instruments discussed was CoCo Bonds-contingent
Convertible Bonds
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11. Consumer Loan
Decision Regulated
• Loans to value ratio was reduced
from 100% to 95%
• Home owner’s debt service ratio
was raised from 40% to 45%
• The length of time to repay the
mortgages was reduced from 40
years to 35 years
• Huge tax on bonuses was imposed
• Limit on compensation was imposed
• Bonuses was made to decide on the
only on the current years profits but the
profits of several past years
• UK immediately imposed 50% super
tax on the bonuses of bankers
• Goldman Sachs announced that it
would pay its top 30 executives bonuses
in the form of shares which had a lock
in of 5 years
Limit On
Banker’s Pay
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12. Which Regulatory Reforms Should Be
Implemented
• India escaped the worst recession due to its restriction of FDI
investments into the financial sector
• High risk financial institution bought enormous benefits in terms of
financing innovations and entrepreneurship
• For monetary policy to be effective ad limit systematic risk new
regulations must cover all non-bank financial institutions.
• Regulatory reforms of US was of importance to the entire world, so the
whole world waited till Dec 2009 when a reform bill was sent to the
Senate
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13. Reform Bill Of Us
• The Federal Reserve would have a key
role in enforcing tougher regulation
on these large firms
• Regulators also had the power to
break up large firms that would have
become “too large to fail”
• Shareholders would have the right to
vote on corporate pay packages
• Consumer Financial Protection
Agency would ensure that consumers
had knowledge about their borrowing
terms
• The US’s TARP provided govt. loans to
major banks that faced liquidity
problems
• Provisions also included govt.
acquisition of shares if banks were not
able to repay their debts
• Manufacturing firms-
GM & Chrysler- govt. had both debt
and equity
• The exit strategy for govt. in firms in
which it had shares, was privatization
Use Of Public Money To
Bail Out Failing Institution
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14. Conclusion
• Regulation reforms would raise the ongoing costs of financial institutions and might
limit the pace of nation’s economic growth strategy
• Thus growth might be difficult to reach former levels
• High unemployment rates would persist
• Suggestion to create a new powerful body that would control, monitor & regulate
the international capital flows
• BOD should face new legal responsibilities for transparency & accountability
• As business cycle would recur in free market economies, legal frauds would likely
recur due to the complexity of modern financial instruments & human nature
• Sarbanes-Oxley might change reporting & make legal frauds illegal!!!
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15. Thank You
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