financial crisis consolidated

7/27/2019 Financial Crisis Consolidated

1/12

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


2/12

1929 Stock Market Crash

1. Roaring economy after World War 1

Irrational exuberance DJIA 60^400 1921-29 (market cap estUSD130 b )

Margin Financing 90% ( DJIA 230 ,1929;41 1932) Investors used mortgages to invest in stocks

Causes: hike in interest rates; bank runs

Damageover 2000 banks collapsed; USD14 b lost inmarket; USD140 billion deposits gone. Great recession.

Market recovered after 26 years.


3/12

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;

Impactglobal marketsHK ( -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 trading1. 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.


4/12

Asia Financial crisis 1997-98(I)

5 dragons enjoyed healthy GDP growth prior to the crisis ( Indonesia 7.5%, Malaysia9%, Korea 8-9%, Thailand 8-9%, Singapore above 7.5%)

External debtsThailand USD90 B ( 25/75 ); Indonesia USD 136B (50/50 );KoreaUSD151 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. Stockmarket 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 48.8in Dec. Recession 6%..

Indonesiamost unexpected. High foreign currency loans. Currency collapsed from2000 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 bankingsector. Inflation 65% and recession 14% .


5/12

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


6/12

LTCM Crash 1998

Hedge Fund founded in 1993 with 2 Nobel economists and aformer Vice Chairman of Fed

Hedging in relativevalue trading ( treasury , bonds ) with low

profit margin hence requires big amount and leverage ,lowcredit risk ( missed price sovereign bonds )

High return 20-40%

Total portfolio over USD100 billion with USD7 Billion equitywhich 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)


7/12

Dot Com Bubble

March 2000Oct 2002

Internet users1 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 wereunprofitable )

Price/Dream ratio ( of 457 IPOs, 117 doubled in price in first day )

Fraudcompanies 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


8/12

2008 Global Financial Crisis Players

Investment Banks

( issuers ,investors ,borrowers, CDS)

Commercial Banks

(investors ,lenders ,CDS)

Hedge Funds

(investors, borrowers ) Insurance Company ( AIA) Mortgaged Back Securities

(CDS $441B/SubPrime $58B)

Credit Rating Agencies

Prime Brokers (exposure to banks )

Govt Agencies, Fannie Mae and Freddie Mac

( issuers, guarantor )

Public/Pension/University Funds ( investors )


9/12

Lehman Brothers

Est 1850; 4thlargest US investment bank

Assets $639 B; Debts 619 B ( leverage 32 )

Market Cap ( Feb 07 $86 B);48% down by March 08Further 42% on 11/9 after downgrading.

Bank insolvent with cash $1 B.


10/12

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 )


11/12

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 $200B.

QE 1 $600 Billion - 2008

QE2 $600 Billion 2010

QE 85 Billion per month 2012


12/12

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

financial crisis consolidated

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