Recession-2008 and its consequences
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The presentation summarizes the 2008 global financial crisis. It discusses how Iceland's deregulation of its banking sector led to excessive risk-taking and the collapse of its three largest banks. The presentation then outlines the role of US financial engineering and the growth of collateralized debt obligations in fueling the US housing bubble. It describes how risky mortgage lending practices, failures of large investment banks like Lehman Brothers, and the inability of AIG to pay out on insured debt obligations led to the crisis and subsequent global recession.
Recession-2008 and its consequences
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- 3. Presented to International Business Class Instructor: Sir Imran Bashir World Recession 2008 The Institute of Management Sciences 3
- 4. Presented by: Muhammad Asad Bin Asif ID: 113245 Muhammad Zeeshan Azam ID: 123220 Hassan Shafiq ID: 123218 The Institute of Management Sciences 4
- 5. Opening Case The Iceland Scenario Iceland was stable Multinational corporations: Alcoa installed their business Icelands various provision deregulations Privatization of banks Lax requirement on bank loans Three the largest banks combined to borrow 10 times Iceland's total GDP The Institute of Management Sciences 5
- 6. Operations of Banks Jon Asgeir Johannesson, Borrowing billions of dollars Jon purchased yacht and a private jet invested outside iceland Iceland being drained of financial resources Shock Banks got Bankrupt Market crashed The Institute of Management Sciences 6
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- 9. Background During the forty years of economic growth in the United States, investment banks were small Investment banks going public Financial sector progressed From 1978-2008, the average salary in investment banking increased The Institute of Management Sciences 9
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- 11. Reagan Administration of U.S. Financial deregulation U.S. in early 1980s In Late 1980s workers of financial sector were going to jail During 1990s,internet stocks worth to $5t - were lost. Eliot Spitzer, investigation internet crisis Investment banks promoting stocks likely to fail Ten investment banks outside settlement of $1.4b The Institute of Management Sciences 11
- 12. Financial Engineering A new field of study Derivatives developed A well-known derivative is an option Invest options trade options The Institute of Management Sciences 12
- 13. Collateral Debt Obligations There are five positions, in sequential order in the chain. Home buyers lenders Investment banks Investors Insurance companies The Institute of Management Sciences 13
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- 16. The largest financial bubble in history. Countrywide Financial issued nearly $100b in mortgage loans. Traded debts through securitization chain and earning massive sums The Lehman Brothers, Richard Fuld, given $500m in bonuses The Institute of Management Sciences 16
- 17. Martin Wolf, Chief Economics Commentator for The Financial Times adds It wasnt real profits, it wasnt real income.Two, three years down the road theres a default its all wiped out. I think, in recollection, its been a great bigglobal Ponzi scheme. The Institute of Management Sciences 17
- 18. The Investment Bankers and Insurance AIG promised to cover the costs on the insured CDOs They did not have the money to do so. Paying over $3b in corporate bonuses during this period. Investment bankers spent on luxury: jets, yachts, mansions, and vacation homes, as well as drugs. The Institute of Management Sciences 18
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- 20. The Crisis The Institute of Management Sciences 20
- 21. The Federal Reserve System ignored warnings from Raguram Rajan of the IMF Domnique Strauss-Kahn of the IMF, Nouriel Roubini of New York University Allan Sloan of Fortune Magazine. The Institute of Management Sciences 21
- 22. Accountability of the Loss recorded Lehman Brothers reports recorded losses and stock collapse. Numerous investment firms rated double and triple A before collapse The risky mortgages ripped to bankruptcies. Bear Stears acquired by J.P. Morgan: 2 dollars per share. Fannie Mae and Freddie Mac, acquired by the US government The Institute of Management Sciences 22
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- 24. After Crisis Effects: The United States declined, through wealth gaps and outsourcing. Manufacturing jobs were diminishing Chinas unemployment hiked Information technology jobs were abundant; but required educated people Tax policies in U.S. favored the wealthy Wealth inequality was the highest in the United States The Institute of Management Sciences 24
- 25. Resources Junk Mortgages under Microscope by Allan Sloan Fortune Magazine October 16, 2007 Has Financial Development made the world Riskier by Raghurar G. Rajan Why Central Banks Should Burst Bubbles by Nouriel Roubini Whos holding the Bag? May 2007 Pershing Square Capital Management, L.P. Inside Job a Documentary film by Andri Magnason The Institute of Management Sciences 25
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