us recession and india

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Group MembersName Roll No.

Adinarayan Gummalla 14

Sneha Mehta 25

Vishaka Parmar 33

Rahul Rajagopalan 35

Shruti Shetty 45

Neshel Ashok 54


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Financial Crisis

Applied broadly to a variety of situations in which somefinancial institutions or assets suddenly lose a large partof their value

Associated with banking panics, and many recessionscoincided with these panics

Stock market crashes and the bursting of other financialbubbles, currency crises, and sovereign defaults are theother situations of financial crises

Do not directly result in changes in the real economyunless a recession or depression follows


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Recession In economics, a recession is a business

cycle contraction, a general slowdown in economicactivity.

It occurs when there is a widespread drop in spending,often following an adverse supply shock or the burstingof an economic bubble.

Governments usually respond to recessions by adopting

expansionary macroeconomic policies, suchas increasing money supply, increasing governmentspending and decreasing taxation.


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Abstract In 2008, a series of bank and insurance company failed

Fannie Mae (FNM) and Freddie Mac (FRE) were both takenover by the government

On September 14th Lehman Brothers declared bankruptcy

Bank of America agreed to purchase Merrill Lynch (MER), andAmerican International Group (AIG) was saved by the federalgovernment

On September 25th, J P Morgan Chase (JPM) agreed topurchase the assets of Washington Mutual (WM) in what wasthe biggest bank failure in history

On September 17, 2008, more public corporations had filed for

bankruptcy in the U.S. than in all of 2007


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During booming years banks advanced housing loans topeople with low credit worthiness

The financial institutions repackaged these debts into

financial instruments called Collateralized DebtObligations

Surplus inventory of houses and the subsequent rise ininterest rates led to the decline of housing prices in theyear 2006-07

Unaffordable mortgage payments and many peopledefaulted or undertook foreclosure

The house prices crashed and affected many banks,mortgage companies and investment firms world-wide


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Contd Different reasons of the crisis include:

o Boom in the housing market

o Speculation

o High-risk mortgage loanso Securitization practices

o Poor regulation of the financial institutions

The financial crisis has not only affected United States of

America, but also European Union, U.K and Asia


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Part I(How it Started)

After the great depression, the USA had 40 years of economicgrowth without single crisis

In 1980s the financial industry exploded and the investment

banks went public

By late 1990s the financial sector had consolidated into fewgigantic firms, each of them so large that their failure couldthreaten the whole system

The next crisis came at the end of 90s, the IBs fueled massivebubble in internet stocks, which had a crash in 2001 thatcaused 5 trillion dollar losses


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In 2001, the USA financial

sector was dominatedby:

o 5 IBs- Goldman Sachs,Morgan Stanley, Lehman

Brothers, Merrill Lynch, BearSteans

o 2 Financial Conglomerates-Citigroup, JP Morgan

o 3 Securities Insurancecompany: AIG, MBIA,

AMBACo 3 Rating Agencies:

Moodys, S and P, Fitch


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Securitization Food Chain


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Contd Between 2000 and 2003, the number of mortgage

loans made each year nearly quadrupled


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Contd IBs actually preferred subprime loans because they

carried higher interest rates

Many loans were given to people who could notrepay them


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Part II(The Bubble)

Biggest Financial Bubble In The History

From 1996- real home prices effectively doubled


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Goldman Sachs, Bear Stearns, Lehman Brothers, MerrillLynch, was all in on Subprime Lending

The subprime lending alone increased from 30 billion ayear in funding to over 600 billion a year, in 10 years

Countrywide Financial- the largest subprime lender,

issued 97 billiondollars

worth of loans Lehman Brothers was a top underwriter of subprime

lending


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Leverage

During the bubble, IBs were borrowing heavily

The ratio between borrowed money and the banks' own

money was called leverage


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Credit Default Swap AIG was selling huge quantities of derivatives, called

credit default swaps

It worked like an Insurance Policy


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Rating Agencies The CDOs were sold to customers as safeinvestments

Moody's, the largest rating agency, quadrupled its profitsbetween 2000 and 2007


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Part III(The Crisis)

2004 - FBI was already warning about an epidemic ofmortgage fraud

2005 - The IMF's chief economist, Raghuram Rajan,

warned that dangerous incentives could lead to a crisis

2006 - Nouriel Roubinis warnings

2007 - Allan Sloan's articles in Fortune magazine and the

Washington Post in 2007, and repeated warnings fromthe IMF

2008 - Securitization food chain imploded


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Market for CDOs Collapsed March 2008- the investment bank Bear Stearns ran out of

cash, and was acquired for two dollars a share by JPMorgan Chase

September 2008- Henry Paulson announced the federaltakeover of Fannie Mae and Freddie Mac, two giant

mortgage lenders on the brink of collapse


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Contd Bear Stearns was rated A2, a month before it went bankrupt.

Lehman Brothers, A2 within days of failing

AIG AA, within days of being bailed out

Fannie Mae and Freddie Mac were AAA when they wererescued

Citigroup, Merrill, all of them had high investment-grade ratings September 12th - Lehman Brothers had run out of cash, and the

entire investment banking industry was sinking fast. HenryPaulson and Timothy Geithner, president of the New YorkFederal Reserve, called an emergency meeting with the CEOsof the major banks

Merrill Lynch, another major investment bank had also failedand acquired by Bank of America. The only bank interested inbuying Lehman was British firm Barclays

Neither Lehman nor the Federal Reserve had done anyplanning for the bankruptcy


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Contd All transactions came to a halt. The hedge funds who

had assets with Lehman, in London discovered that theycouldn't get those assets back

The oldest money market fund in the nation wrote off

roughly three quarters of a billion dollars in bad debtissued by the now-bankrupt Lehman Brothers

Lehman's failure also caused a collapse in thecommercial paper market

AIG owed 13 billion dollars to holders of credit defaultswaps; and it didn't have the money

Paulson and Bernanke ask Congress for 700 billion dollarsto bail out the banks


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Contd When AIG was bailed out, the owners of its credit default

swaps, the most prominent of which was GoldmanSachs, were paid 61 billion dollars the next day. Ahundred and sixty billion dollars went through AIG; 14billion went to Goldman Sachs

October 4th, 2008- President Bush signs a 700-billion-dollar bailout bill


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Contd The recession accelerates, and spreads globally

Unemployment in the United States and Europe quicklyrises to 10%

Chinese manufacturers see sales cut. Over 10 millionmigrant workers in China lose their jobs

Singapore was growing at about 20 percent. And thensuddenly it went to minus nine in the particular quarter

Exports collapsed

People were living, day to day, paycheck to paycheck

P IV


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Part IV(Accountability)

The men who destroyed their own companies , &plunged the world into crisis , walked away from, thewreckage with their fortunes intact

Very few economic experts warned about crisis , manyof them opposed reforms

A lot of smaller banks have

been taken over by big ones

P V


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Part V(Present Scenario)

US has become a more unequal society and itseconomic dominance have declined

US Companies outsources its jobs in countries like China

As the middle class fell, there is a political urge torespond by making it easier to get credit

The financial industry is a service industry and it should

serve others, before it serves itself

I f i i k


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Impact of crisis on stockmarket

FIIs had been heavy buyers in the Indian stock markets in thepast few years

They invested heavily i.e. in millions of $ and bought out stocksof India's famous companies

Once the subprime crisis started looming, the US financialplayers and other companies got stuck with bad debt

Companies like Lehman which were unable to raise enoughcapital were declared bankrupt

Since almost all FIIs opted to sell out their holdings

simultaneously the prices of shares of companies that wereonce considered invincible came down like a rocket that ranout of gas

The BSE Index or Sensex was somewhere around 21000 duringJan 08 and it was hoverin at about 8000 to 10000 marks duringoct,08


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I t f i i l


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Impact of crisis on realestate

Real estate was badly affected by the current financialdownturn

RBI has already increased the interest rates to control

inflation

The crisis has forced many of the global majors to eitherpostpone or cut the expansion plan

With the large investment banks going bankrupt, theprojects have to be discounted, leading to the slump inthe real estate market as well

I t f i i


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Impact of crisis onemployment

From the beginning of summer 2008 there has been aslew of bad news in US that caused ripple effects acrossthe globe

Current slow down in US will make the Indian IT and BPO

companies to reduce their dependency to US and startmarketing their services to other countries like APAC(Asia-pacific) and Latin America and EMEA (Europe,middle east and Africa)

In wall street all the investment banks are convertingthemselves to commercial banks, mergers andacquisitions of financial institutions will take place soon

This means there will be no more lavish IT and BPObudgets for them to spend and this will significantly

reduce the profit margin for the Indian IT companies


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Conclusion The financial industry turned its back on society,

corrupted the political system and plunged the worldeconomy into crisis

Banks play a critical role in current economy, hence if alarge bank suffers a loss, the entire economy getsaffected

This crisis has shown the loopholes of financial system

and working of the Govt. to global economy

Precaution is better than cure


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us recession and india

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