us credit crisis and feds response
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The presentation about US Credit Crisis 2008 and Feds Response to it.TRANSCRIPT
US Credit Crisis and Fed’s Response
Presentation By:Giorgi NadareishviliGiorgi Gabatashvili
Guram ShvangiradzeIlia Imerlishvili
Table of Contents
• Banking System in US - FED• What were the main reasons of crisis• What was the impact on leading companies• How Fed responded
Banking System in US
The Federal Reserve System (informally The Fed) is the central banking system of the United States. The primary motivation for creating the Federal Reserve System was to address banking panics. Other purposes are to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States.
FED’s Functions• Primary purpose is to address banking panics• To strike a balance between private interests of banks and the centralized
responsibility of government– To supervise and regulate banking institutions– To protect the credit rights of consumers
• To manage the nation's money supply through monetary policy to achieve the sometimes conflicting goals of
– maximum employment– stable prices– moderate long-term interest rates
• To maintain the stability of the financial system and contain systemic risk in financial markets
• To provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system
– To facilitate the exchange of payments among regions– To respond to local liquidity needs
About the crisis… Post 2001, the US government had encouraged
US banks to lend money to people, to encourage spending & investing mainly for the purpose of buying houses
These banks granted loans to large number of borrowers despite having lower income levels, unsure employment status, unscrupulous credit history, etc.
Huge number of borrowers availed of bank credit without evaluating their repayment capacities. The economy was flush with liquidity & stock markets were booming
The bubble burst… A silent storm brewed in international financial
markets with origins in the US housing market, which witnessed an unprecedented boom since 2001
The boom was led by rising housing prices, low interest rates & aggravated by financial innovation viz. MBS, CDO and CDS
Housing prices in USA began to drop in 2006. Rising interest rates & falling housing prices led to rise in sub prime mortgage delinquencies & resultant foreclosure
Result: The housing bubble burst in Aug 2006
Sequence of events
During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79% from 2006. Major banks and other financial institutions around the world have reported losses of approximately US$435 billion as of 17 July 2008. During the week of September 14, 2008 the crisis accelerated, developing into a global financial crisis.resulting in the bankrupcy of some of the world’s biggest financial institutes..
Impact of Sub Prime Crisis in USA 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
Impact of Sub Prime Crisis in USA 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, Merrill 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
Impact of Sub Prime Crisis in USA 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 blln
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
Citigroup
• 11.7 billion wrote-off, in Q2 2008
• 55.1 billion write down in total asset
Top 10 Bankruptcies
What Steps Has the Federal Reserve
Taken to Address the Credit Crisis?
Term Auction Facility (TAF) Term Securities Lending Facility (TSLF) Primary Dealer Credit Facility (PDCF) Commercial Paper Funding Facility (CPFF) Swap Lines
What Steps Has the Federal Reserve
Taken to Address the Credit Crisis?
Term Auction Facility (TAF)
TAF was the first new facility - December 12, 2007Fed allows banks to annonymously borrow money from the TAF.
What Steps Has the Federal Reserve
Taken to Address the Credit Crisis?
Term Auction Facility (TAF) Term Securities Lending Facility (TSLF) Primary Dealer Credit Facility (PDCF) Commercial Paper Funding Facility (CPFF) Swap Lines
What Steps Has the Federal Reserve
Taken to Address the Credit Crisis?
Term Securities Lending Facility (TSLF)
The Term Securities Lending Facility (TSLF) was the second new facility created by the Fed. Fed established the TSLF to allow primary dealers to give their troubled assets to the Federal Reserve Bank of New York in exchange for more liquid Treasury Securities.
What Steps Has the Federal Reserve
Taken to Address the Credit Crisis?
Term Auction Facility (TAF) Term Securities Lending Facility (TSLF) Primary Dealer Credit Facility (PDCF) Commercial Paper Funding Facility (CPFF) Swap Lines
What Steps Has the Federal Reserve
Taken to Address the Credit Crisis?
Primary Dealer Credit Facility (PDCF)
PDCF allowed primary dealers to borrow directly from the Fed - like a bank would borrow from the discount window.
What Steps Has the Federal Reserve
Taken to Address the Credit Crisis?
Term Auction Facility (TAF) Term Securities Lending Facility (TSLF) Primary Dealer Credit Facility (PDCF) Commercial Paper Funding Facility (CPFF) Swap Lines
What Steps Has the Federal Reserve
Taken to Address the Credit Crisis?
The Commercial Paper Funding Facility (CPFF) - October 7, 2008To prevent the U.S. economy from coming to a grinding halt due to lack of cash, the Fed established the CPFF to buy short-term commercial paper from major corporations.
Commercial Paper Funding Facility (CPFF)
What Steps Has the Federal Reserve
Taken to Address the Credit Crisis?
Term Auction Facility (TAF) Term Securities Lending Facility (TSLF) Primary Dealer Credit Facility (PDCF) Commercial Paper Funding Facility (CPFF) Swap Lines
What Steps Has the Federal Reserve
Taken to Address the Credit Crisis?
Swap Lines
Fed has temporarily removed all limits on its swap lines with major central banks in Europe—the Bank of England (BOE), the European Central Bank (ECB), the Swiss National Bank (SNB) and others—and in other parts of the world.
Other Responses
• Between September 18, 2007 and April 30, 2008, the target for the Federal funds rate was lowered from 5.25% to 2% and the discount rate was lowered from 5.75% to 2.25%, through six separate actions.
• In addition, the term of loans was extended twice and changed from overnight to up to 90 days.
Summary
To response the serious credit crisis, the U.S. Federal Reserve (Fed) increased money supply, decreased interest rate, ease the condition for raising funds. The responses took by U.S. fed did ease the stress in financial market to reduced the liquidity risk faced by banks. Unlike the expectation, the U.S inflation was continuously stronger and U.S. dollar was depreciated. The outlook of economic is still pessimistic. Meanwhile, this strategy might increase the risk of moral hazard due to the survival of those banks with high credit risk investments.
