Description
recession and include explanation of recessions due to subprime crisis in USA, fall of lehman brothers, greece debt crisis, ireland crisis.
• H
• dfgdt
Recession ?
Flow of presentation
• • • • • • An analytical introduction Fall of Lehman Brothers Greece and Ireland Debt crisis Worldwide Impact Government intervention Social Benefits
Recession is defined as:-
“Significant decline in economic activity lasting for more than two quarters, which is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”.
Recap
• • • • • • • • • • USA – a Consumption Based Economy Easy loans Overconsumption Housing bubble (Subprime Crisis) Need to preserve capital, strict loans Oil price crossed $100 Dollar value declined, stock markets crashed Job loss, Layoffs(57, 000 jobs were in September) Market sentiments fell Reduced demand for imported items.
Subprime Mortgage Crisis - "Red September"
September 14, 2008: Merrill Lynch sold to Bank of America amidst fears of a liquidity crisis and Lehman Brothers collapse
September 15, 2008: Lehman Brothers files for bankruptcy protection September 19, 2008: Paulson financial rescue plan unveiled after a volatile week in stock and debt markets.
September 25, 2008: Washington Mutual was seized by the Federal Deposit Insurance Corporation, and its banking assets were sold to JP Morgan Chase for $1.9bn.
Sep-08 Oct-08
Sep-08
Sep-08
Sep-08
Sep-08
September 7, 2008: Federal takeover of Fannie Mae and Freddie Mac September 16, 2008: Moody's and Standard and Poor's downgrade ratings on AIG's credit on concerns over continuing losses to mortgagebacked securities, sending the company into fears of insolvency.
September 17, 2008: The US Federal Reserve loans $85 billion to American International Group (AIG) to avoid bankruptcy.
September 29, 2008: The House rejected bailout bill, DJIA down 7%
October 3,2008: The House pass the bail out bill
Created by Robin Thieu, 2008 Fall
What caused the financial industry crisis?
• Congress: for overzealously pushing homeownership • Fed: for keeping interest rate so low • Predatory lenders: for taking advantage of unqualified and vulnerable
home buyers
• Home buyers: for getting over the heads • White House: for letting banking regulations become too loose • Finance executives: for selling products they didn’t understand while
enjoying outsized profits • Rating agencies: for mischaracterizing paper
Source: Jack , Suzy Welch (2008, September 25). BusinessWeek
The Debt Trap
Source: The New York Times
Impact on India
• Indian companies have major outsourcing deals from the US. • India's exports to the US have also grown substantially over the years. • More people have sold the shares in the Indian share market than they bought in the recent weeks. This has added to the fall of Sensex. • Hospitality and Tourism Industry.
India v/s USA - Policies
• India used expansionary policy and US adopted protectionist policies • Comparing recession of 1930’s and that of 2008, in 1930’s India went for changes in Monetary Policies, while in 2008 it went for Fiscal Policies.
Company Lehman Brothers Holdings Washington Mutual WorldCom
Date 9/15/08 9/26/08 7/21/02
Assets worth ($billion) 691 327.9 103.9
General Motors
Enron Conseco Chrysler Thornburg Mortgage Pacific Gas and Electric Co. Texaco
6/1/09
12/02/01 12/17/02 4/30/09 5/1/09 4/6/01 4/12/87
91
65.5 61 39 36.5 36 34.9
Fact File
• In 2003 and 2004 Lehman acquired five mortgage lenders, including subprime lender BNC Mortgage and Aurora Loan Services, which specialized in Alt-A loans. • In 2007, Lehman underwrote more mortgage-backed securities than any other firm, accumulating an $85-billion portfolio, or four times its shareholders' equity which was $ 21 billion.
•Lehman's high degree of leverage - the ratio of total assets to shareholders equity was 31.
• On September 10, The firm reported a loss of $3.9 billion, including a write-down of $5.6 billion, and also announced a sweeping strategic restructuring of its businesses. •September 15, Lehman declared bankruptcy leading more than $46 billion of its market value wiped out. •It had a bank debt of $613 billion, $155 billion in bond debt, and assets worth $639 billion. •Lehman's collapse greatly intensified the 2008 crisis and contributed to the erosion of close to $10 trillion in market capitalization from global equity markets in October 2008.
The Whole Cycle
House Bubble
Conditions on Takeovers
GREEK DEBT CRISIS
• The housing bubble bursted in U.K., Ireland and other euro zone countries as well. • Greece already had higher inflation than other eurozone members.
• Consumption and Investment boom ----- > Low interest
rates, high govt. salaries and lucrative pension and health schemes ----- > Goods became highly expensive and hence incompetitive thus further reducing the revenues. • To meet the payments of high salaries the govt. took external debts for consumption and not for investment.
Contd …
• The Greek Debt-G.D.P. ratio reached 113% in 2009 • Foreign bondholders became doubtful that Greece could continue to roll over its increasing debt, forced interest rates higher. • EU faced choice between Greek default and bailout with tough conditions. • IMF and EU agreed to lend Greece up to $146 billion over three years. • Greece to increase sales taxes, reduce public sector salaries, pensions, eliminate bonuses.
Ireland Crisis
• Caused due to the bursting of real estate bubble just as in the
U.S.
•
Transformation from an agricultural economy to a service sector based economy. • Reckless lending by banks to the property developers and then the defaulting on their part caused the crisis to take place. • Deep Recession ----- > 14 percent.
Flow of foreign funds
• From 2000 to 2003, the Federal Reserve lowered the federal funds rate to soften the effects of the collapse of the dot-com bubble and of the September 2001 terrorist attacks, and to combat the perceived risk of deflation. • USA's high and rising current account (trade) deficit required them to borrow money from abroad, which bid up bond prices and lowered interest rates. • USA borrowed mostly from European countries and the emerging economies in Asia and oil-exporting nations. • This created demand for various types of financial assets, raising the prices of those assets while lowering interest rates. • Financial institutions wanted to take advantage of this high inflow of foreign capital and devised complex mortgage-backed securities to attract foreign investors.
Flow of foreign funds
Effect on other countries
• Europe
– Banks from UK and Europe actively invested in riskier stocks, corporate bonds, MBSs, and CDOs in the United States. – Many banks in the United States and Europe saw an immediate deterioration of their assets, leading to the impairment of their capital. – For example, the German Deutsche bank faced large losses from exposure to US subprime mortgage-related assets in July 2007. In September 2007, the British bank Northern Rock, which had raised short-term funds from the wholesale market to finance longer-term residential mortgages, encountered funding difficulties and which was finally nationalized in February 2008. – AXA, a French insurance company and CommerzBank, a German Financial Services company were also major buyers of Wall Street’s CDS and subprime AAA rated debt and suffered the consequences for so doing.
Effect on other countries
• Asia
– Investors in East Asia could be regarded as risk-averse, as they invested largely in US treasury securities and agencyrelated bonds and had very small exposure in instruments like MBS and CDS. – East Asian countries like China and India were affected due to recession in US and Europe because of the sudden fall in imports of goods and services. – But due to high savings and domestic consumption, these countries were able to fight the recession.
Effect on other countries
Write-downs by Major Financial Institutions (As at Oct. 2008, Billions of US Dollars) The total amount of world-wide write-downs: $965 billion USA - $525 billion, Europe - $299 billion, East Asia - $46 billion
Effect on other countries
Amount of Foreign Stocks Held by US Investors (at the End of 2007)
Government Intervention
•The Federal government put up $30 bn to guarantee the Bear Stern's riskiest investments as a part of an agreement in which J.P. Morgan Chase bought the firm for $1.2 bn •Fannie Mae and Freddie Mac were nationalized and their liabilities taken over •The government took over an 80% equity position in AIG in return for a $85 bn loan •It proposed to buy $700 bn worth of unknown assets held by the banking system in return for equity claims in US banks
Government Intervention
• It announced a bailout of $306 bn for Citigroup in return for $7bn of preferred stock and wide operational powers • Other bailouts- General Motors, Chrysler , Bank Of America • Meltdown Monday- Lehman Brothers and Merrill Lynch
LEGAL BATTLES
Minor paperwork slipups can be enough to get a "rescission" (basically, a loan cancellation) based on the Truth in Lending Act(The Truth in Lending Disclosure Statements mislead the Class of Plaintiffs into thinking their loans have a “fixed” interest rate feature. The Truth in Lending Disclosure Statements contain inaccurate payment schedules which do not represent the total principal and interest being imposed on the loans each month). On the documents entitled "Federal Truth-in-Lending Disclosure Statement,” the preliminary document differs substantially from the final document when there is no change in the loan program being sold.
TYPES OF FEDERAL FILINGS
• • • • Borrower/Employee Class Actions Securities Contract Claims Bankruptcy Related
• Thanks……..
doc_570581576.pptx
recession and include explanation of recessions due to subprime crisis in USA, fall of lehman brothers, greece debt crisis, ireland crisis.
• H
• dfgdt
Recession ?
Flow of presentation
• • • • • • An analytical introduction Fall of Lehman Brothers Greece and Ireland Debt crisis Worldwide Impact Government intervention Social Benefits
Recession is defined as:-
“Significant decline in economic activity lasting for more than two quarters, which is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”.
Recap
• • • • • • • • • • USA – a Consumption Based Economy Easy loans Overconsumption Housing bubble (Subprime Crisis) Need to preserve capital, strict loans Oil price crossed $100 Dollar value declined, stock markets crashed Job loss, Layoffs(57, 000 jobs were in September) Market sentiments fell Reduced demand for imported items.
Subprime Mortgage Crisis - "Red September"
September 14, 2008: Merrill Lynch sold to Bank of America amidst fears of a liquidity crisis and Lehman Brothers collapse
September 15, 2008: Lehman Brothers files for bankruptcy protection September 19, 2008: Paulson financial rescue plan unveiled after a volatile week in stock and debt markets.
September 25, 2008: Washington Mutual was seized by the Federal Deposit Insurance Corporation, and its banking assets were sold to JP Morgan Chase for $1.9bn.
Sep-08 Oct-08
Sep-08
Sep-08
Sep-08
Sep-08
September 7, 2008: Federal takeover of Fannie Mae and Freddie Mac September 16, 2008: Moody's and Standard and Poor's downgrade ratings on AIG's credit on concerns over continuing losses to mortgagebacked securities, sending the company into fears of insolvency.
September 17, 2008: The US Federal Reserve loans $85 billion to American International Group (AIG) to avoid bankruptcy.
September 29, 2008: The House rejected bailout bill, DJIA down 7%
October 3,2008: The House pass the bail out bill
Created by Robin Thieu, 2008 Fall
What caused the financial industry crisis?
• Congress: for overzealously pushing homeownership • Fed: for keeping interest rate so low • Predatory lenders: for taking advantage of unqualified and vulnerable
home buyers
• Home buyers: for getting over the heads • White House: for letting banking regulations become too loose • Finance executives: for selling products they didn’t understand while
enjoying outsized profits • Rating agencies: for mischaracterizing paper
Source: Jack , Suzy Welch (2008, September 25). BusinessWeek
The Debt Trap
Source: The New York Times
Impact on India
• Indian companies have major outsourcing deals from the US. • India's exports to the US have also grown substantially over the years. • More people have sold the shares in the Indian share market than they bought in the recent weeks. This has added to the fall of Sensex. • Hospitality and Tourism Industry.
India v/s USA - Policies
• India used expansionary policy and US adopted protectionist policies • Comparing recession of 1930’s and that of 2008, in 1930’s India went for changes in Monetary Policies, while in 2008 it went for Fiscal Policies.
Company Lehman Brothers Holdings Washington Mutual WorldCom
Date 9/15/08 9/26/08 7/21/02
Assets worth ($billion) 691 327.9 103.9
General Motors
Enron Conseco Chrysler Thornburg Mortgage Pacific Gas and Electric Co. Texaco
6/1/09
12/02/01 12/17/02 4/30/09 5/1/09 4/6/01 4/12/87
91
65.5 61 39 36.5 36 34.9
Fact File
• In 2003 and 2004 Lehman acquired five mortgage lenders, including subprime lender BNC Mortgage and Aurora Loan Services, which specialized in Alt-A loans. • In 2007, Lehman underwrote more mortgage-backed securities than any other firm, accumulating an $85-billion portfolio, or four times its shareholders' equity which was $ 21 billion.
•Lehman's high degree of leverage - the ratio of total assets to shareholders equity was 31.
• On September 10, The firm reported a loss of $3.9 billion, including a write-down of $5.6 billion, and also announced a sweeping strategic restructuring of its businesses. •September 15, Lehman declared bankruptcy leading more than $46 billion of its market value wiped out. •It had a bank debt of $613 billion, $155 billion in bond debt, and assets worth $639 billion. •Lehman's collapse greatly intensified the 2008 crisis and contributed to the erosion of close to $10 trillion in market capitalization from global equity markets in October 2008.
The Whole Cycle
House Bubble
Conditions on Takeovers
GREEK DEBT CRISIS
• The housing bubble bursted in U.K., Ireland and other euro zone countries as well. • Greece already had higher inflation than other eurozone members.
• Consumption and Investment boom ----- > Low interest
rates, high govt. salaries and lucrative pension and health schemes ----- > Goods became highly expensive and hence incompetitive thus further reducing the revenues. • To meet the payments of high salaries the govt. took external debts for consumption and not for investment.
Contd …
• The Greek Debt-G.D.P. ratio reached 113% in 2009 • Foreign bondholders became doubtful that Greece could continue to roll over its increasing debt, forced interest rates higher. • EU faced choice between Greek default and bailout with tough conditions. • IMF and EU agreed to lend Greece up to $146 billion over three years. • Greece to increase sales taxes, reduce public sector salaries, pensions, eliminate bonuses.
Ireland Crisis
• Caused due to the bursting of real estate bubble just as in the
U.S.
•
Transformation from an agricultural economy to a service sector based economy. • Reckless lending by banks to the property developers and then the defaulting on their part caused the crisis to take place. • Deep Recession ----- > 14 percent.
Flow of foreign funds
• From 2000 to 2003, the Federal Reserve lowered the federal funds rate to soften the effects of the collapse of the dot-com bubble and of the September 2001 terrorist attacks, and to combat the perceived risk of deflation. • USA's high and rising current account (trade) deficit required them to borrow money from abroad, which bid up bond prices and lowered interest rates. • USA borrowed mostly from European countries and the emerging economies in Asia and oil-exporting nations. • This created demand for various types of financial assets, raising the prices of those assets while lowering interest rates. • Financial institutions wanted to take advantage of this high inflow of foreign capital and devised complex mortgage-backed securities to attract foreign investors.
Flow of foreign funds
Effect on other countries
• Europe
– Banks from UK and Europe actively invested in riskier stocks, corporate bonds, MBSs, and CDOs in the United States. – Many banks in the United States and Europe saw an immediate deterioration of their assets, leading to the impairment of their capital. – For example, the German Deutsche bank faced large losses from exposure to US subprime mortgage-related assets in July 2007. In September 2007, the British bank Northern Rock, which had raised short-term funds from the wholesale market to finance longer-term residential mortgages, encountered funding difficulties and which was finally nationalized in February 2008. – AXA, a French insurance company and CommerzBank, a German Financial Services company were also major buyers of Wall Street’s CDS and subprime AAA rated debt and suffered the consequences for so doing.
Effect on other countries
• Asia
– Investors in East Asia could be regarded as risk-averse, as they invested largely in US treasury securities and agencyrelated bonds and had very small exposure in instruments like MBS and CDS. – East Asian countries like China and India were affected due to recession in US and Europe because of the sudden fall in imports of goods and services. – But due to high savings and domestic consumption, these countries were able to fight the recession.
Effect on other countries
Write-downs by Major Financial Institutions (As at Oct. 2008, Billions of US Dollars) The total amount of world-wide write-downs: $965 billion USA - $525 billion, Europe - $299 billion, East Asia - $46 billion
Effect on other countries
Amount of Foreign Stocks Held by US Investors (at the End of 2007)
Government Intervention
•The Federal government put up $30 bn to guarantee the Bear Stern's riskiest investments as a part of an agreement in which J.P. Morgan Chase bought the firm for $1.2 bn •Fannie Mae and Freddie Mac were nationalized and their liabilities taken over •The government took over an 80% equity position in AIG in return for a $85 bn loan •It proposed to buy $700 bn worth of unknown assets held by the banking system in return for equity claims in US banks
Government Intervention
• It announced a bailout of $306 bn for Citigroup in return for $7bn of preferred stock and wide operational powers • Other bailouts- General Motors, Chrysler , Bank Of America • Meltdown Monday- Lehman Brothers and Merrill Lynch
LEGAL BATTLES
Minor paperwork slipups can be enough to get a "rescission" (basically, a loan cancellation) based on the Truth in Lending Act(The Truth in Lending Disclosure Statements mislead the Class of Plaintiffs into thinking their loans have a “fixed” interest rate feature. The Truth in Lending Disclosure Statements contain inaccurate payment schedules which do not represent the total principal and interest being imposed on the loans each month). On the documents entitled "Federal Truth-in-Lending Disclosure Statement,” the preliminary document differs substantially from the final document when there is no change in the loan program being sold.
TYPES OF FEDERAL FILINGS
• • • • Borrower/Employee Class Actions Securities Contract Claims Bankruptcy Related
• Thanks……..
doc_570581576.pptx