1

Group members
Anika
Ashwini
Rahana
Siji
Zubair

Contents
Great Recession 2008

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2008 Financial Crisis Timeline

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Causes of the financial crisis

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American Dream

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Subprime mortgage crisis

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Impact of the global financial crisis

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Impact on US

12/26

Impact on India

15/26

India: safe from crisis

18/26

Global power shift

20/26

Chinas response

21/26

Ethical preconditions for necessary healthy market

22/26

Learnings

24/26

Conclusion

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Reference

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Great Recession 2008

The Great Recession was related to the financial crisis of 200708 and
U.S. subprime mortgage crisis of 200709. Also known as the US
Meltdown - Worst Financial Crisis since the Great Depression of 1930s .

The emergence of sub-prime loan losses in 2007 began the crisis and
exposed other risky loans and over-inflated asset prices.

The impact of this crisis was so severe that it led to the collapse of top
investment firms like Lehman Brothers, Bears Sterns while others such
as Citi Group, JP Morgan were rescued by the government and AIG.

Weakening of the American economy was bad news, not just India, but
also rest of the world.

The global recession that followed resulted in a sharp drop

in international trade, rising unemployment and slumping commodity
prices.
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2008 Financial Crisis Timeline

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Causes of the Financial Crisis

Subprime Loans

Deregulation of Financial Markets

Financial Innovations(Credit default swap)

Executive Compensation

Low Interest Rates

Speculation

Government policies

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American Dream

Owning a home is part of the 'American Dream'. It allows people to

take pride in a property and engage in a community for the long
term.

However, homes are expensive and most people need to borrow

money to get one. The conditions were right for people to achieve
that dream.

In the early 2000s, mortgage interest rates were low, which allow
you to borrow more money with a lower monthly payment. In
addition, home prices increased dramatically, so buying a home
seemed like a sure bet.

Lenders understood that homes make good collateral so they were

willing to participate.

The mortgage crisis was triggered as this situation built momentum.

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Subprime Mortgage Crisis

What is subprime loan?

A Subprime mortgage is a type of loan

granted to individuals with poor credit histories, who, as
a result of deficient credit ratings, would not be able to
qualify for conventional mortgages. Because subprime
borrowers present a higher risk for lenders, subprime
mortgages charges interest rates above the prime lending
rates.

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Subprime Crisis Brief

The US subprime mortgage crisis was a set of events and conditions

that led to a financial crisis and subsequent recession that began in
2008

Characterized by a rise in the inability to pay housing mortgages

resulting in the decline of securities backed by mortgages

These mortgage-backed securities (MBS) initially offered attractive

rates of return. However, the lower credit quality ultimately caused
massive defaults

The money was sucked out of several banks, financial institutions

and the economy as a whole in September 2008

Several European and developing countries had invested heavily in

American banks. The subsequent loss of funds resulted in the
Global Recession of 2008
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Impact of the Global Financial Crisis

The global financial crisis affected virtually all areas,

including the process of globalization.

Housing prices crashed

Foreclosures became common place

Unemployment reached 10 percent in the United States and

higher levels in Europe

Manufacturing declined
automotive industry.

Students were faced with higher costs and colleges suffered

financial losses

Finding jobs after college became more challenging

sharply,

especially

in

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the

Impact on US

Initial impact was felt in March 2008, when investment

bank, Bear Stearns was acquired by J.P. Morgan Chase,
a commercial bank, for US$1.2 billion September
2008, witnessed major shakeouts in the US financial
sector.

The drama began with Lehman Brothers declaring

bankruptcy on 15 September 2008, facing a refusal by
the federal government to bail it out

Washington Mutual is closed by the US government in

the largest failure of a US bank. Its banking assets are
sold to J.P. Morgan Chase for US$1.9 billion.
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Impact on US

US Federal Reserve provided an emergency loan of US$85

billion to insurance major, American International Group
(AIG), which will be repaid by selling off assets of AIG

Investment bank, Merill Lynch was acquired by Bank of

America in September 2008 for $50 billion

US Federal Reserve granted approval to investment banks,

Goldman Sachs and Morgan Stanley to convert themselves
into commercial banks

US Treasury Department confirmed that both Fannie Mae and

Freddie Mac , would be placed into conservatorship with the
government taking over their management
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Impact on US

Wachovia Corp agrees to sell most of its assets to Citigroup

Inc in a deal brokered by regulators. However, Wells Fargo,
a commercial bank, drafted an agreement to acquire assets
of Wachovia for US$15.1 bln

The deal forced Wachovia to backtrack from the Citigroup

deal worth US$2.2 billion which was backed by the US
Government

US Government releases a US$700 billion bailout package

for its financial industry

Dow Jones posts its largest point decline ever while the
S&P 500 had its worst day since 1987 with an 8.8% drop
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Impact on India

Stock Exchanges based on US and Europe (FIIs)

Sudden sale of Stocks Stock Market Crash & industries in

general(no WC). Manufacturing sectors like leather, textile,
gems and jewellery got hit hard.

Exports come down: 15 per cent of total export in 2006-07 was

directed toward USA. Official statistics released on the first day
of the New Year, showed that exports had dropped to $1.5
billion in November 2008, from $12.7 billion a year ago

Layoffs and Work long for less salary

Rupee weakening against dollars

Banks on severe Cash Crunch

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Impact on Indias GDP Export

Growth Rate
Export Growth Rate

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Impact on Indias GDP Growth Rate

Economic growth decelerated in 2008-09 to

6.7 percent. This represented a decline of 2.1
percent from the average growth rate of 8.8
percent in the previous five years (2003-04
to 2007-08).

The current account deficit during 2008-09

shot up to 2.6 percent of GDP from 1.5
percent of GDP in 2007-08

The capital account surplus dropped from a

record high of 9.3 percent of GDP in 200708 to 0.9 percent of GDP. And this is lowest
level of capital account surplus since 198182

GDP Growth Rate

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India: Safe from Crisis

In sharp contrast to the policies adopted by the U.S. Federal

Reserve under Chairman Alan Greenspan, the Reserve Bank of
India, led by Yaga Venugobal Reddy, rejected many financial
innovations and limited the participation of foreign investors in
Indias financial system.

Instead of believing that markets are self-regulating, as many

Americans do, the Indian government favoured regulations and
was quick to recognize financial bubbles.

Reddy restricted bank lending to real estate developers,

increased the amount of money banks had to set aside as
reserves, and blocked the use of some derivatives.

This conservative approach enabled India to largely avoid the

global financial crisis.
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Why Were We Effected?

Increased globalization.

Indias two-way trade (merchandize exports plus imports),

as a proportion of GDP, grew from 21.2 per cent in 1997-98, the year of
the Asian crisis, to 34.7 per cent in 2007-08.

Increased financial integration.

Ratio of total external transactions (gross current account

flows plus gross capital flows) to GDP, this ratio has more than doubled
from 46.8 per cent in 1997-98 to 117.4 per cent in 2007-08.

Increased reliance of corporate sector on external financing

In 2007-08, India received capital inflows amounting to

over 9 per cent of GDP as against a current account deficit in the
balance of payments of just 1.5 per cent of GDP, which shows the
importance of external financing.
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Global Power Shift

Crisis presents both dangers and opportunities. Another major

impact of the global financial crisis is a global power shift.

Although most countries were negatively affected by the financial

crisis and global recession, some emerged stronger than others.

Brazil, Russia, India, and China, also known as the BRIC countries,
enhanced their power vis--vis the United States, Western Europe,
and Japan.

Another indication of a power shift is the growing role of foreign

banks in Americas financial system.

In 2011, when a new leader was being chosen for the IMF,
countries with emerging economies were called for the end of the
tradition of European leadership of the IMF.

Economic power has shifted from the G-7 to the G-20, the group
composed of countries with the largest economies, many of them in
the developing world.
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Chinas Response

Chinas response involved taking measures to strengthen its power vis--vis

the United States.

Unlike the United States, China regulates its financial institutions, has more
than $2 trillion in reserves, and continues to have economic growth rates in
excess of 7 percent, and the Chinese save more than 40 percent of their
income.

Despite rising unemployment and declining exports, China emerged from

the financial crisis in a strong position and is taking advantage of new
opportunities created by the crisis.

China is also acquiring European and American companies in the

automotive, textile, food, energy, machinery, electronics, and environmental
protection sectors.

One of the most visible acquisitions is the Hummer from General Motors.
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Ethical precondition for healthy market

Transparency: Misinformation leads to misinformed choices and

harmful consequences. Of course, how much information to disclose,
ignore, or obfuscate, even fabricate, and to whom are weighty moral
questions.

The rights of capital: Making a profit and maintaining competitive

advantage is always constrained by a basic moral duty to be
trustworthy and not manipulate others for personal gain

Fiduciary responsibility and gatekeeping: Certain stakeholders, as we

have seen with brokers and ratings agencies in the subprime case,
have additional duties to be accountable to specific parties (agentprinciple relationship) and society at large (gatekeeping).

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Contd..

The agent-principal relationship is defined as: A U.S.

common law concept that understands employees as
agents of employers (the principal). Agents are hired to
perform certain tasks and have duties to always act in the
best interests of their employer. These fiduciary duties
include loyalty, obedience, and confidentiality.

Risk and return: Determining a standard of

reasonableness is a critical skill of moral adjudication as
it relates to risk and return. Potential for a moral hazard
ought to be related to risk-and-return calculations,
although frequently is not.

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Learnings

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CONCLUSION

The crisis has serious implications for virtually all global issues
and for globalization itself.

Although financial crises seem to be an integral component of

capitalism, human beings are ultimately responsible for creating
them.

An emphasis on government deregulation, the growth of a

culture that encouraged quick profits and excessive executive
compensation, and the availability of low interest rates played
significant roles in creating the financial crisis.

But a crisis presents both dangers and opportunities.

While the United States has suffered severe setbacks, China has
gained, thereby shifting global power.
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Reference

Global Financial Crisis, its Impact on India and the

Policy Response: Nirupam Bajpai

http://
www.pearsonhighered.com/assets/hip/us/hip_us_pearso
nhighered/samplechapter/0205231527.pdf

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