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Global financial crisis 2008

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Global financial crisis 2008

  1. 1. Presented byValliappan P (128939)SOM NIT Warangal
  2. 2. Why the financial crisis of 2008 happened?The answer is simple: The housing bubbleburst (U.S. subprime mortgage crisis )What is subprime lending?Subprime lending means giving loans to people who may havedifficulty in maintaining the repayment schedule. These loans arecharacterized by higher interest rates, poor quality collateral, andless favorable terms in order to compensate for higher credit risk.Example: Student loans in India are considered to be subprime.
  3. 3. Lending decision by Financial Institutions Housing Bubble formation Borrowing decisions by individuals
  4. 4. Causes of crisis • Relaxation in lending regulations1 • Poor creditworthiness of borrowers • Rising EMI due to higher interest costs2 • Borrowers Unable to pay • Failure of Banks and Financial3 Institutions
  5. 5. Prime Asset Sub Prime Mortgage backedMortgage Securities
  6. 6. Lenders – the biggest culprits
  7. 7. 2006 2008 2009
  8. 8. Impacts of Subprime crisis1) Major banks suffered from huge losses.2) Lehman Brothers went out of business.3) Merrill Lynch had to sell itself to Bank of America for a fraction of its former value4) Countrywide Financial Corporation, the biggest U.S. mortgage lender, eventually gets taken over by Bank of America.5) In Sept 2008, AIG collapses as it could not afford to pay for all of these US mortgage defaults. The US government nationalises AIG by becoming 80% shareholder.
  9. 9. Direct Impacts of the CrisisFinancial Institutions – Bankruptcy  New Century Financial (USA)– Apr. 2, 2007  American Home Mortgage (USA) – Aug. 6, 2007  Sentinel management Group (USA) – Aug. 17, 2007  Ameriquest (USA) – Aug. 31, 2007  NetBank (USA) – Sept. 30, 2007  Terra Securities (Norway) – Nov. 28, 2007  American Freedom Mortgage Inc. (USA) – Jan. 30, 2007
  10. 10. Financial Institutions – Write-Downs  Citigroup (USA) - $24.1 bln  Merrill Lynch (USA) - $22.5 bln  UBS AG (Switzerland) - $16.7 bln  Morgan Stanley (USA) - $10.3  Credit Agricole (France) - $4.8 bln  HSBC (United Kingdom) - $3.4 bln  Bank of America (USA) - $5.28 bln  CIBC (Canada) – 3.2 bln  Deutsche Bank (Germany) - $3.1 bln Total Write downs and losses were around $300 - $350 billion US dollars
  11. 11. 1 • Sub Prime Mortgage Crisis2 • Collapse of Financial System3 • Economic Crisis4 • Job Loss5 • Low consumer spending6 • Recession  Low Economic activities7 • Very low GDP growth8 • Poor Prosperity of the countries
  12. 12. Global Impacts of the Crisis Investors lost confidence in the stock market. Consumer spending slowed down due to lack of cash/ unwillingness. U.S.A’s economic condition affected the global economy. World economy slipped into recession. Exports from China, Korea, Taiwan and India decreased.
  13. 13. Impact on India FIIs pulled out of money from the Indian stock market Public Sector Banks, viz State Bank Of India, Bank Of Baroda, Canara Bank, Punjab National Bank etc did not have major exposure to credit derivatives market due to their limited overseas operations. Stock market Crashed and BSE sensex crashed from 24000 level to 8000 level. ICICI Bank incurred a loss of close to Rs.1000 Crores because of exposure to international securities market
  14. 14. “If companies around the globe are unable to borrow, theyllbegin to cut jobs, cease investment, and default on their debtin larger numbers.“ - Peter Coy BW, Oct 3, 2008
  15. 15. References:1)www.worldbank.org2)World Bank (2008), World Development Indicators 20083)Blanchard, Olivier (2009), “Sustaining a Global Recovery”,Finance & Development, September, International Monetary Fund4)Calvo, Guillermo (1998), “Capital Flows and Capital-market Crises:The SimpleEconomics of Sudden Stops”, Journal of Applied Economics 1(1),pp 35-54.
  16. 16. Thank You..!

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