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1
Total write downs and credit losses since Jan 2007 ($bn)
Worldwide :US$ 586.2 billion and still counting
Source: Financial Times
Finance & Economy
The collapse of an enormous financial institution stirs uncertainty,
and uncertainty rattles Wall Street. Lenders are happiest when they
are confident they will be repaid. If they think there's a chance that
borrowers will default, they simply don't make loans. Their refusal, in
turn, can shut down the economy and the financial system.
Financial system is what provides the funding for all the other
sectors of the economy, and if you have a broken financial system,
you have a broken economy
Investments devalued across the Globe
Source: BBC News, http://news.bbc.co.uk/2/hi/talking_point/7644574.stm
Subprime impact across globe
Source: Financial Times
Impact of Financial crisis-felt across the globe
Source: Reuters, http://www.reuters.com/news/globalcoverage/creditcrisis
Thanks
Market share shifted from 2003 to mid 2006
76
43
24
57
0
20
40
60
80
100
2003 mid-2006
%
Year
Mortgage market % share
Government sponsered Private( Wall Street firms)
Government share fell by 43%
where as private share rose
sharply by 138% over a period of 3
years
Between sub-prime and prime
Subprime lending increased by
massive 205% over 3 years
AlternativeA similarly expanded
by 384%
Increase in Prime was mere
16.7%
Global pool of money
Source:http://www.rbnz.govt.nz/speeches/2968727.html
After 1997/98 financial crisis Developing countries focus on export-
driven growth and the associated accumulation of foreign exchange
reserves
The strength of exports relative to domestic demand has seen saving
outstrip investment in most of these economies
Accordingly, we have the ironic situation whereby a range of developing
countries are (in net terms) the providers of capital to some of the worlds
most developed economies.
This rapidly rising savings glut has been a principal source of increased
global liquidity.
Rise of Global Liquidity (1998 onwards)
Source:http://www.rbnz.govt.nz/speeches/2968727.html
The flow of increased global liquidity through markets has provided the impetus for many changes
To generate a return on this liquidity has spurred massive growth in securitization of debt and the
development of a vast array of derivatives. The propagation of these instruments can itself be seen as a
source of liquidity growth. From a monetary policy perspective, this implies a very big increase in the
liquidity that is not directly controlled by central banks.
Bank for International Settlements, highlighted a number of important new features:
the unbundling and re-pricing of risk through major advances in financial engineering, resulting in
improved ability to lever lending via new markets such as for credit transfer products;
the emergence of new financial players such as hedge funds and private equity firms that have not
been traditional intermediaries;
more reliance of financial firms on markets to handle growing complexity;
a reliance on market liquidity even in stress situations; and
a surge in volume and value of transactions.
FED interest rate
To catch up with dot com boom
FED kept interest rate low for long
This indirectly resulted in
investors looking for other safe
heavens
They got attracted to housing
market
High Banks leverage ratios to fund MBS/CDO
Building up of the housing bubble
Housing prices and Income
Source: http://varbuzz.com/meltdown/
Housing
prices were
increasing
Income slope
was almost flat
Starting 2006 housing bubble busted
LIBOR rate
Credit rating of complex financial instruments
Source: IMF and WSJ
Speedy Foreclosures
Top 10 Bankruptcies
The American way of debt
Source: http://www.nytimes.com/interactive/2008/07/20/business/20debt-trap.html?ei=5070
Average debt of American in 2004
Source: http://www.nytimes.com/interactive/2008/07/20/business/20debt-trap.html?ei=5070