Major Financial Crisis

1. 1929 Stock Market Crash ( Black Tues 29/10 ) 2. 1987 Stock Market Crash ( Black Monday 19/10 ) 1997 Asia Financial Crisis 1998 LTCM Bailout 2001 Dom Com Crisis 2008 Global Financial Crisis

1929 Stock Market Crash

1. Roaring economy after World War 1 Irrational exuberance DJIA 60^400 1921-29 (market cap est USD130 b ) Margin Financing 90% ( DJIA 230 ,1929;41 1932) Investors used mortgages to invest in stocks Causes: hike in interest rates; bank runs Damage over 2000 banks collapsed; USD14 b lost in market; USD140 billion deposits gone. Great recession. Market recovered after 26 years.

1987 Stock Market Crash

DJIA 2722 (25/8) down 36-7% (19/10);22.6% in one day. Causes: irrational exuberance ( stock over valued ) ( Dow ^ 44% in one year ); US economy slowing down .;no liquidity ( sold >bought ); program trading; Impact global markets HK ( -45%); Australia (-41%); UK (-265%);US (-22.7%) Damage control- new computer systems to handle data;standard margin for futures and options; market closed if Dow falls by 250 ( 1 hr ) and 400 ( 2 hrs ) Program trading 1. Portfolio Insurance ( hedging by buying/selling futures ) 2. Index Arbitrage ( between stock price and future contract . Computer cant handle volume, also investors may sell stocks and futures same time. No major long term damage. Market recovered after few months.

Asia Financial crisis 1997-98(I)

5 dragons enjoyed healthy GDP growth prior to the crisis ( Indonesia 7.5%, Malaysia 9%, Korea 8-9%, Thailand 8-9%, Singapore above 7.5%) External debts Thailand USD90 B ( 25/75 ); Indonesia USD 136B (50/50 );Korea USD151 B ( 14/86);Malaysia 45 B Over 45 % were short term borrowing ;Foreign debts increased from 100% to 165% 1993-96. Thailand stock market 850 to 350 Jan 97 Nov 97. In flow of hot money USD14 B. Stock market up 175% and property market 395%.Curreny down by 20% ( 20 to 29 ) after flexible exchange rate introduced in July 97. The currency eventually dropped to 48.8 in Dec. Recession 6%.. Indonesia most unexpected. High foreign currency loans. Currency collapsed from 2000 to 16,000 by Jan 1998;recovered to 12,000 in May 98.Both Indonesia and Thailand crisis were caused by high foreign currency debts and weakness in banking sector. Inflation 65% and recession 14% .

Asia Financial Crisis (II)

Factors Influx of funds from Europe due to low interest rate Liberalization of banking system Short term funds for long term projects International speculators Over confidence in Asia miracle IMF Rescue Package Allowing banks /companies to go bankrupt Govt tightening budget Raise interest rate

LTCM Crash 1998

Hedge Fund founded in 1993 with 2 Nobel economists and a former Vice Chairman of Fed Hedging in relative value trading ( treasury , bonds ) with low profit margin hence requires big amount and leverage ,low credit risk ( missed price sovereign bonds ) High return 20-40% Total portfolio over USD100 billion with USD7 Billion equity which dropped to USD600M in 1998 due to Russia crisis ( 70% devaluation and moratorium ) Fed organized rescue package of USD3.5 Billion by consortium to take over. Total Loss $4.6 B. Leverage 250:1 Banks losses including UBS ( USD 700 M)

Dot Com Bubble

March 2000 Oct 2002 Internet users 1 B (95); 2B (10 ); 2.7 B (13-39% of population ) Business model based on market share not profit ( more than 60% of companies listed were unprofitable ) Price/Dream ratio ( of 457 IPOs, 117 doubled in price in first day ) Fraud companies reported false financials Market ahead of technology advancement Nasdaq crashed 78% from 5000 to 1114. Market lost USD5 trillion Yahoo IPO $13^$200; Amazon $13 ^ $90 Mild recession after the crash

2008 Global Financial Crisis Players

Investment Banks ( issuers ,investors ,borrowers, CDS) Commercial Banks (investors ,lenders ,CDS) Hedge Funds (investors, borrowers ) Credit Rating Agencies Prime Brokers (exposure to banks )

Insurance Company ( AIA) Mortgaged Back Securities (CDS $441B/SubPrime $58B)

Govt Agencies, Fannie Mae and Freddie Mac ( issuers, guarantor ) Public/Pension/University Funds ( investors )

Lehman Brothers
Est 1850; 4th largest US investment bank Assets $639 B; Debts 619 B ( leverage 32 ) Market Cap ( Feb 07 $86 B);48% down by March 08 Further 42% on 11/9 after downgrading. Bank insolvent with cash $1 B.

Global Financial Crisis ( II )

Causes Glass Stegall Act ( 1932-1998 ) Home ownership Economic slowdown 911 Alan Greenspan monetary policy and laissez-faire policies Growth in CDO, CLO, credit default swaps and other derivatives Structured Investment Vehicles Leverage Inadequate govt supervision Systemic banking crisis ( liquidity vs insolvency ) ( counter party risk )

Global Financial Crisis (III)

Rescue operation ( Sept 2008 ) Fed providing short term liquidity to market Govt involved in helping troubled banks in finding white knights TARP $700M Govt rescue package for AIG USD$ 85 Billion.( taking over 85% equity ) Govt taking over Fanny Mae and Freddie Mac ( exposure $5 trillion ;loss $15 B );Treasury support $200 B. QE 1 $600 Billion - 2008 QE2 $600 Billion 2010 QE 85 Billion per month 2012

Global Financial Crisis ( IV)

Conclusion Main market rescuing Wall Street Too Big to Fail Major impact on global banking industries ( UK rescue package 500 B pounds ) Unemployment as economy cant be supported by banks capital inadequacy Global equity loss $10 trillion Global asset inflation caused by Fed monetary policy Currency war Dudd Frank Act/ Vocker Rule Morale issues ( use of rescue funds; equity vs client interest