global meltdown project

8/8/2019 Global Meltdown Project

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S.No. Topic name

1 Introduction of global meltdown

2 8-year crash cycle of market

3 Pre-recession economic imbalances

4 Causes of global meltdown

5 Effect of global meltdown on world

6 Effect on Indian economy

7 Remedies

8 Conclusion

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MELTDOWN

A situation in which a rapid rise in the power level of a nuclear

reactor, as from a defect in the cooling system, results in the

melting of the fuel rods and the release of dangerous radiation and

may cause the core to sink into the earth

A decline or breakdown in a situation or condition

Ordered to disordered physical state without loss of material

Change of physical location

Let us take the example of snow and ice. When snow melts, there

is no loss of water. The internal ordering of water is lost in snow and it

becomes a liquid. Some work is done by the system with energy inputs

for heating. Heat is an input to melting; disorder is the result of

melting.

Global Meltdown

Fed Interest (Since 9/11)

Mortgages Cheap!!!

Sub Prime Borrowers Flock

Lenders- Collateralized Debt Obligations (CDO)

Sell to IBs / Banks / Funds

Meltdown Continues? Sub-Prime > 800 BLN

ALT-A > 1 TRLN

Flexible Option Mortgage = 122 BLN OUT= Rest

Undisclosed

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The financial crisis of 20072009 has been called the most serious

financial crisis since the Great Depression by leading economists, with its

global effects characterized by the failure of key businesses, declines in

consumer wealth estimated in the trillions of U.S. dollars, substantial

financial commitments incurred by governments, and a significant decline

in economic activity. Many causes have been proposed, with varying

weight assigned by experts. Both market-based and regulatory solutions

have been implemented or are under consideration, while significant risks

remain for the world economy.

In the years leading up to the start of the crisis in 2007, significant

amounts of foreign money flowed into the U.S. from fast-growing

economies in Asia and oil-producing countries. This inflow of funds

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http://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/File:800px-The_Great_Asset_Bubble.jpghttp://en.wikipedia.org/wiki/Great_Depression


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made it easier for the Federal Reserve to keep interest rates in the United

States too low from 20022006 which contributed to easy credit

conditions.

Recession

A recession is a contraction phase of business cycle

National bureau of economic research(NBER) is the official agency

in charge of declaring that the economy is in the state of

recession.

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http://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/Federal_Reserve


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5

In 1984

BHOPAL GAS TRAGEDY AND RIOTS

TAKES 15 MONTHS FOR RECOVERY

In 1992

HARSHAD MEHTA SCAMTAKE 27 MONTHS FOR RECOVERY

In 2000

KETAN PAREKH SCAMTAKES 46 MONTHS FOR RECONVERY


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6

In 2008

USA SUBPRIME MELTDOWN

RECOVERY IS IN PROCESS


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Among the various imbalances in which the US monetary policy

contributed by excessive money creation, leading to negative household

savings and a huge US trade deficit, dollar volatility and public deficits, a

focus can be made on the following ones:

Commodity boom

Further information: 2000s energy crisis and 20072008 world food price

crisis, 2008 Central Asia energy crisis and 2008 Bulgarian energy crisis.

The decade of the 2000s saw a global explosion in prices, focused

especially in commodities and housing, marking an end to the

commodities recession of 1980-2000. In 2008, the prices of many

commodities, notably oil and food, rose so high as to cause genuine

economic damage, threatening stagflation and a reversal of

globalization.

In January 2008, oil prices surpassed $100 a barrel for the first time,

the first of many price milestones to be passed in the course of the

year.

In July 2008, oil peaked at $147.30 a barrel and a gallon of gasoline

was more than $4 across most of the U.S.A.

These high prices caused a dramatic drop in demand and prices fell

below $35 a barrel at the end of 2008. Some believe that this oil

price spike was the product ofPeak Oil. There is concern that if the

economy was to improve, oil prices might return to pre-recession

levels.

The food and fuel crises were both discussed at the 34th G8 summit

in July 2008

Sulfuric acid (an important chemical commodity used in processes

such as steel processing, copper production and bioethanol

production) increased in price 3.5-fold in less than 1 year while

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http://en.wikipedia.org/wiki/2000s_energy_crisishttp://en.wikipedia.org/wiki/2007%E2%80%932008_world_food_price_crisishttp://en.wikipedia.org/wiki/2007%E2%80%932008_world_food_price_crisishttp://en.wikipedia.org/wiki/2008_Central_Asia_energy_crisishttp://en.wikipedia.org/wiki/2008_Bulgarian_energy_crisishttp://en.wikipedia.org/wiki/Commoditieshttp://en.wikipedia.org/wiki/Househttp://en.wikipedia.org/wiki/Late-twentieth_century_commodities_recessionhttp://en.wikipedia.org/wiki/Stagflationhttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Gasolinehttp://en.wikipedia.org/wiki/Peak_Oilhttp://en.wikipedia.org/wiki/34th_G8_summithttp://en.wikipedia.org/wiki/Sulfuric_acidhttp://en.wikipedia.org/wiki/Steel#Modern_production_methodshttp://en.wikipedia.org/wiki/Copper#Productionhttp://en.wikipedia.org/wiki/Bioethanol#Sourceshttp://en.wikipedia.org/wiki/Bioethanol#Sourceshttp://en.wikipedia.org/wiki/2000s_energy_crisishttp://en.wikipedia.org/wiki/2007%E2%80%932008_world_food_price_crisishttp://en.wikipedia.org/wiki/2007%E2%80%932008_world_food_price_crisishttp://en.wikipedia.org/wiki/2008_Central_Asia_energy_crisishttp://en.wikipedia.org/wiki/2008_Bulgarian_energy_crisishttp://en.wikipedia.org/wiki/Commoditieshttp://en.wikipedia.org/wiki/Househttp://en.wikipedia.org/wiki/Late-twentieth_century_commodities_recessionhttp://en.wikipedia.org/wiki/Stagflationhttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Gasolinehttp://en.wikipedia.org/wiki/Peak_Oilhttp://en.wikipedia.org/wiki/34th_G8_summithttp://en.wikipedia.org/wiki/Sulfuric_acidhttp://en.wikipedia.org/wiki/Steel#Modern_production_methodshttp://en.wikipedia.org/wiki/Copper#Productionhttp://en.wikipedia.org/wiki/Bioethanol#Sourceshttp://en.wikipedia.org/wiki/Bioethanol#Sources


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producers ofsodium hydroxide have declared force majeure due to

flooding, precipitating similarly steep price increases.

In the second half of 2008, the prices of most commodities fell

dramatically on expectations of diminished demand in a world

recession.

Housing bubble

UK house prices between 1975 and 2006.

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http://en.wikipedia.org/wiki/Sodium_hydroxidehttp://en.wikipedia.org/wiki/Force_majeurehttp://en.wikipedia.org/wiki/Sodium_hydroxidehttp://en.wikipedia.org/wiki/Force_majeure


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Real estate bubble

By 2007, real estate bubbles were still under way in many parts of the

world, especially in the United States, United Kingdom, United Arab

Emirates, Netherlands, Italy, Australia, New Zealand, Ireland, Spain,

France, Poland, South Africa, Israel, Greece, Bulgaria, Croatia,

Canada, Norway, Singapore, South Korea, Sweden, Finland,

Argentina, Baltic states, India, Romania, Russia, Ukraine and China.

U.S. Federal Reserve ChairmanAlan Greenspan said in mid-2005

that "at a minimum, there's a little 'froth' (in the U.S. housing market)

it's hard not to see that there are a lot of local bubbles"..

TheEconomistmagazine, writing at the same time, went further,

saying "the worldwide rise in house prices is the biggest bubble in

history."

Real estate bubbles are followed by a price decrease also

known as a housing price crash that can result in many owners holding

negative equity (a mortgage debt higher than the current value of the

property).

Inflation

In February 2008, Reuters reported that global inflation was at historic

levels, and that domestic inflation was at 10-20 year highs for many

nations. "Excess money supply around the globe, monetary easing by

the Fed to tame financial crisis, growth surge supported by easy

monetary policy in Asia, speculation in commodities, agricultural

failure, rising cost of imports from China and rising demand of food

and commodities in the fast growing emerging markets," have been

named as possible reasons for the inflation

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http://en.wikipedia.org/wiki/Real_estate_bubblehttp://en.wikipedia.org/wiki/United_States_housing_bubblehttp://en.wikipedia.org/wiki/British_property_bubblehttp://en.wikipedia.org/wiki/United_Arab_Emirateshttp://en.wikipedia.org/wiki/United_Arab_Emirateshttp://en.wikipedia.org/wiki/Netherlandshttp://en.wikipedia.org/wiki/Italyhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/New_Zealand_property_bubblehttp://en.wikipedia.org/wiki/Irish_property_bubblehttp://en.wikipedia.org/wiki/Spanish_property_bubblehttp://en.wikipedia.org/wiki/Francehttp://en.wikipedia.org/wiki/Polish_property_bubblehttp://en.wikipedia.org/wiki/South_Africahttp://en.wikipedia.org/wiki/Israelhttp://en.wikipedia.org/wiki/Greecehttp://en.wikipedia.org/wiki/Bulgariahttp://en.wikipedia.org/wiki/Croatiahttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Norwayhttp://en.wikipedia.org/wiki/Singaporehttp://en.wikipedia.org/wiki/South_Koreahttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Finlandhttp://en.wikipedia.org/wiki/Argentinahttp://en.wikipedia.org/wiki/Baltic_stateshttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Romaniahttp://en.wikipedia.org/wiki/Russiahttp://en.wikipedia.org/wiki/Ukrainehttp://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/Alan_Greenspanhttp://en.wikipedia.org/wiki/The_Economisthttp://en.wikipedia.org/wiki/Negative_equityhttp://en.wikipedia.org/wiki/Mortgagehttp://en.wikipedia.org/wiki/Real_estate_bubblehttp://en.wikipedia.org/wiki/United_States_housing_bubblehttp://en.wikipedia.org/wiki/British_property_bubblehttp://en.wikipedia.org/wiki/United_Arab_Emirateshttp://en.wikipedia.org/wiki/United_Arab_Emirateshttp://en.wikipedia.org/wiki/Netherlandshttp://en.wikipedia.org/wiki/Italyhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/New_Zealand_property_bubblehttp://en.wikipedia.org/wiki/Irish_property_bubblehttp://en.wikipedia.org/wiki/Spanish_property_bubblehttp://en.wikipedia.org/wiki/Francehttp://en.wikipedia.org/wiki/Polish_property_bubblehttp://en.wikipedia.org/wiki/South_Africahttp://en.wikipedia.org/wiki/Israelhttp://en.wikipedia.org/wiki/Greecehttp://en.wikipedia.org/wiki/Bulgariahttp://en.wikipedia.org/wiki/Croatiahttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Norwayhttp://en.wikipedia.org/wiki/Singaporehttp://en.wikipedia.org/wiki/South_Koreahttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Finlandhttp://en.wikipedia.org/wiki/Argentinahttp://en.wikipedia.org/wiki/Baltic_stateshttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Romaniahttp://en.wikipedia.org/wiki/Russiahttp://en.wikipedia.org/wiki/Ukrainehttp://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/Alan_Greenspanhttp://en.wikipedia.org/wiki/The_Economisthttp://en.wikipedia.org/wiki/Negative_equityhttp://en.wikipedia.org/wiki/Mortgage


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In mid-2007, IMF data indicated that inflation was highest in the

oil-exporting countries, largely due to the unsterilized growth of foreign

exchange reserves, the term unsterilized referring to a lack of

monetary policy operations that could offset such a foreign exchange

intervention in order to maintain a countrys monetary policy target.

However, inflation was also growing in countries classified by the IMF as

"non-oil-exporting LDCs" (Least Developed Countries) and "Developing

Asia", on account of the rise in oil and food prices.

Inflation was also increasing in the developed countries, but remained

low compared to the developing world.

Inflation In India

The Wholesale Price Index (WPI) and Consumer Price Index

measures the Inflation.

WPI is the measure of headline inflation in India

WPI preferred to CPI -wider commodity coverage available on

weekly basis computed at all-India basis

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http://en.wikipedia.org/wiki/Foreign_exchange_reserveshttp://en.wikipedia.org/wiki/Foreign_exchange_reserveshttp://en.wikipedia.org/wiki/Monetary_policy#Trends_in_central_bankinghttp://en.wikipedia.org/wiki/Monetary_policy#Trends_in_central_bankinghttp://en.wikipedia.org/wiki/Least_Developed_Countrieshttp://en.wikipedia.org/wiki/Developed_countryhttp://en.wikipedia.org/wiki/Foreign_exchange_reserveshttp://en.wikipedia.org/wiki/Foreign_exchange_reserveshttp://en.wikipedia.org/wiki/Monetary_policy#Trends_in_central_bankinghttp://en.wikipedia.org/wiki/Monetary_policy#Trends_in_central_bankinghttp://en.wikipedia.org/wiki/Least_Developed_Countrieshttp://en.wikipedia.org/wiki/Developed_country


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The main causes of global meltdown are:

I.TRIGGERING CAUSES:

Triggering in general sense means the main, the basic

causes. So in this topic it means from the main and basic causes of global

meltdown. These causes are as follows:

Interest rates:

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Triggering causes Leading causes

Interest rates Subprime


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US undergone a cycle of Interest rate reduction

Interest rates 17 times in a row to slow inflation

Interest rate

Borrowing Cost

Subprime

Based on the assumption that subprime lending precipitated the crisis,

some have argued that the Clinton Administration may be partially to

blame, while others have pointed to the passage of the Gramm-Leach-

Bliley Act by the 106th Congress, and over-leveraging by banks and

investors eager to achieve high returns on capital.

Some believe the roots of the crisis can be traced directly to subprime

lending by Fannie Mae and Freddie Mac, which are government

sponsored entities. The New York Times published an article that

reported the Clinton Administration pushed for subprime lending:"Fannie Mae, the nation's biggest underwriter of home mortgages, has

been under increasing pressure from the Clinton Administration to

expand mortgage loans among low and moderate income people" (NYT,

30 September 1999).

In 1995, the administration also tinkered with Carter's Community

Reinvestment Act of 1977 by regulating and strengthening the anti-redlining procedures. It is felt by many that this was done to help boost a

stagnated home ownership figure that had hovered around 65% for many

years. The result was a push by the administration for greater investment,

by financial institutions, into riskier loans. In a 2000 United States

Department of the Treasury study of lending trends for 305 cities from

1993 to 1998 it was shown that $467 billion of mortgage credit poured

out of CRA-covered lenders into low- and mid-level income borrowers

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http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Acthttp://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Acthttp://en.wikipedia.org/wiki/106th_United_States_Congresshttp://en.wikipedia.org/wiki/Fannie_Maehttp://en.wikipedia.org/wiki/Freddie_Machttp://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Acthttp://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Acthttp://en.wikipedia.org/wiki/106th_United_States_Congresshttp://en.wikipedia.org/wiki/Fannie_Maehttp://en.wikipedia.org/wiki/Freddie_Mac


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and neighborhoods. (See "The Community Reinvestment Act After

Financial Modernization," April 2000.)

Subprime is the cause of USA Economy melt down. It is the very

popular news among everyone and it is become very serious then

expected. It caused more damage to all the industries. Subprime crisis

caused big loss to the banks and now it is affecting the other industries

like AutoMobile companies (GM, Ford, etc.). In this blog I will write

about what exactly is the Subprime crisis and why USA banks created

such a big mistake in their era. Some experts comparing this disaster with

the 1930 Economy slow down in USA.

What is Subprime lending?

Subprime Mortgage Loans (or housing loans or junk loans) are very

risky. But since profits are high where the risk is high, a lot of lenders get

into this business to try and make a quick money.These loans are given to

people who have inability to repay the loan and they dont have stable

income.

For example, a person who is working on IT company

earns Rs.40000 per month and he doesnt have any other

income or assets. When the bank gives him loan of some

lakhs, the EMI for the month would be Rs.20000-Rs.30000.

If he lose the job, there is no possibility for him to pay the

EMI, he will just surrender the house to bank and go away.

This is the one simple example how Subprime problem starts.

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Who opt subprime lending?

Individuals who have experienced severe financial problems are usually

labeled as higher risk and therefore have greater difficulty obtaining

credit, especially for large purchases such as automobiles or real estate.

These individuals may have had job loss, previous debt or marital

problems, or unexpected medical issues, usually these events were

unforeseen and cause a major setback in finances. As a result, late

payments, charge-offs, repossessions and even foreclosures may result.

Due to these previous credit problems, these individuals may also be

precluded from obtaining any type of loan for an automobile. To meet

this demand, lenders have seen that a tiered pricing arrangement, one

which allows these individuals to pay a higher interest rate, may allow

loans which otherwise may not occur.

Queen Elizabeth Not

amused

Subprime Crisis and theImpact on India

As interest rates started falling due to

excess liquidity, house prices rose

rapidly, creating a pool of wealth in

the hands of Americans, which they

unlocked by contracting mortgage

loans. It benefited them in two ways

they got huge liquidity at inflated

housing prices and interest rates that

15

If these things were

so large, how come

everyone missed

them? Why did

nobody notice it?

AWFUL!!!
http://www.thinkplaninvest.com/resources/real-estate/http://www.thinkplaninvest.com/resources/real-estate/


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were practically lowest in the last twenty years. This became a virtuous

cycle, which resulted in very high consumer spending, obviously fuelling

global growth.

As interest rates started rising in the US due to inflation concerns, this

virtuous cycle came to a standstill and the demand for houses started

tapering. This resulted in lower prices for houses and many were unable

to cover the mortgage loans. It has now hit the entire banking industry in

the US and the virtuous cycle is becoming a vicious cycle.

What does all this mean for the Indian capital market? For one, the

flow of capital coming to the Indian stock market will be reduced. India

was always considered one of the robust emerging markets, but definitely

with certain political and economic risks.

Let us also look at domestic fundamentals. Indian markets

will see a correction because ofhigh oil prices, high interest rates,

slowing down of exports because of the slowing down of the US

economy and rupee appreciation. This will definitely have animpact on the GDP growth rate.

The stock market has, in the recent past, rallied largely because of global

cues and has almost completely ignored the local issues. With liquidity

drying up, the market will now focus on local issues, including political

uncertainties and corporate earnings. It is natural to expect that, finally,

fundamentals will rule over technicalities, and the market will look atground realities.

Perhaps a similar story will unfold in the next couple of months

for these lenders who have lent big money into the subprime markets.

One or more banks will fold, just like Enron did, resulting in a huge crisis

of confidence. It would be naive to wish away this major problem

inflicting the global markets and to presume that the Indian market is

decoupled. If the global super-tanker US, which has a 25 per cent share of

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global GDP, slows down it will definitely have an impact on the Indian

economy.

II LEADING CAUSES

Government activities as a cause

According to one wired.com article: "Then the model fell apart. Cracks

started appearing early on, when financial markets began behaving in

ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008when ruptures in the financial system's

foundation swallowed up trillions of dollars and put the survival of the

global banking system in serious peril...Li's Gaussian copula formula will

go down in history as instrumental in causing the unfathomable losses

that brought the world financial system to its knees."

It has been estimated that the "from late 2005 to the middle of 2007,around $450bn of CDO of ABS were issued, of which about one third

17

GovernmentActivities

Securitization

Practices

Oil

prices

Credit

creation

Other

claimed

Causes

Leading

causes


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were created from risky mortgage-backed bonds...[o]ut of that pile,

around $305bn of the CDOs are now in a formal state of default, with the

CDOs underwritten by Merrill Lynch accounting for the biggest pile of

defaulted assets, followed by UBS and Citi."

These massive, practically unthinkable, losses have dramatically

impacted the balance sheets of banks across the globe, leaving them with

very little capital to continue operations.

Credit creation as a cause

The Austrian School of Economics proposes that the crisis is an excellent

example of the Austrian Business Cycle Theory, in which credit created

through the policies of central banking gives rise to an artificial boom,

which is inevitably followed by a bust. This perspective argues that the

monetary policy of central banks creates excessive quantities of cheap

credit by setting interest rates below where they would be set by a free

market..

Oil prices

Economist James D. Hamilton has argued that the increase in oil prices in

the period of 2007 through 2009 was a significant cause of the recession.

He evaluated several different approaches to estimating the impact of oil

price shocks on the economy, including some methods that had

previously shown a decline in the relationship between oil price shocks

and the overall economy. All of these methods "support a common

conclusion; had there been no increase in oil prices between 2007:Q3 and

2008:Q2, the US economy would not have been in a recession over the

period 2007:Q4 through 2008:Q3."

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http://en.wikipedia.org/wiki/Austrian_School_of_Economicshttp://en.wikipedia.org/wiki/Austrian_Business_Cycle_Theoryhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Boom_and_busthttp://en.wikipedia.org/wiki/Boom_and_busthttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Interest_ratehttp://en.wikipedia.org/wiki/James_D._Hamiltonhttp://en.wikipedia.org/wiki/Austrian_School_of_Economicshttp://en.wikipedia.org/wiki/Austrian_Business_Cycle_Theoryhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Boom_and_busthttp://en.wikipedia.org/wiki/Boom_and_busthttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Interest_ratehttp://en.wikipedia.org/wiki/James_D._Hamilton


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Other claimed causes

Many libertarians, including Congressman and former 2008 Presidential

candidate Ron Paul and Peter Schiff in his bookCrash Proof, claim to

have predicted the crisis prior to its occurrence.

An empirical study by John B. Taylor concluded that the crisis was:

(1) caused by excess monetary expansion;

(2) Prolonged by an inability to evaluate counter-party risk due to

opaque financial statements; and

(3) Worsened by the unpredictable nature of government's response

to the crisis.

It has also been debated that the root cause of the crisis is

overproduction of goods caused by globalization Overproduction tends

to cause deflation and signs of deflation were evident in October and

November 2008, as commodity prices tumbled and the Federal Reserve

was lowering its target rate to an all-time-low 0.25%.

On the other hand, Professor Herman Daly suggests that it is

not actually an economic crisis, but rather a crisis of overgrowth

beyond sustainable ecological limits This reflects a claim made in the

1972 book Limits to Growth, which stated that without major

deviation from the policies followed in the 20th century, a permanent

end of economic growth could be reached sometime in the first two

decades of the 21st century, due to gradual depletion of natural

resources.

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http://en.wikipedia.org/wiki/Libertarianshttp://en.wikipedia.org/wiki/Ron_Paulhttp://en.wikipedia.org/wiki/Peter_Schiffhttp://en.wikipedia.org/wiki/John_B._Taylorhttp://en.wikipedia.org/wiki/Overproductionhttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Deflationhttp://en.wikipedia.org/wiki/Herman_Dalyhttp://en.wikipedia.org/wiki/Exponential_growthhttp://en.wikipedia.org/wiki/Limits_to_Growthhttp://en.wikipedia.org/wiki/Libertarianshttp://en.wikipedia.org/wiki/Ron_Paulhttp://en.wikipedia.org/wiki/Peter_Schiffhttp://en.wikipedia.org/wiki/John_B._Taylorhttp://en.wikipedia.org/wiki/Overproductionhttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Deflationhttp://en.wikipedia.org/wiki/Herman_Dalyhttp://en.wikipedia.org/wiki/Exponential_growthhttp://en.wikipedia.org/wiki/Limits_to_Growth


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By country

Belgium

Iceland

Ireland

Latvia

Russia

Spain

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http://en.wikipedia.org/wiki/2008%E2%80%932009_Belgian_financial_crisishttp://en.wikipedia.org/wiki/2008%E2%80%932009_Icelandic_financial_crisishttp://en.wikipedia.org/wiki/2008%E2%80%932009_Irish_financial_crisishttp://en.wikipedia.org/wiki/2008%E2%80%932009_Latvian_financial_crisishttp://en.wikipedia.org/wiki/2008%E2%80%932009_Russian_financial_crisishttp://en.wikipedia.org/wiki/2008%E2%80%932009_Belgian_financial_crisishttp://en.wikipedia.org/wiki/2008%E2%80%932009_Icelandic_financial_crisishttp://en.wikipedia.org/wiki/2008%E2%80%932009_Irish_financial_crisishttp://en.wikipedia.org/wiki/2008%E2%80%932009_Latvian_financial_crisishttp://en.wikipedia.org/wiki/2008%E2%80%932009_Russian_financial_crisis


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Subprime mortgage crisis of lehman brthersCompany failures

New Century Financial Corporation

American Freedom Mortgage American Home Mortgage

Bernard L. Madoff Investment Securities LLC

Charter Communications

Lehman Brothers

o Bankruptcy of Lehman Brothers

Linens 'n Things Mervyns

NetBank

Terra Securities

o Terra Securities scandal

Sentinel Management Group

Washington Mutual

Icesave

Kaupthing Singer & Friedlander

Yamato Life

Circuit City

Banco Privado Portugus

Allco Finance Group

Waterford Wedgwood

Saab Automobile

BearingPoint

Tweeter

Chrysler

o Chrysler Chapter 11 reorganization

General Motors

o General Motors Chapter 11 reorganization22
http://en.wikipedia.org/wiki/New_Centuryhttp://en.wikipedia.org/wiki/American_Freedom_Mortgagehttp://en.wikipedia.org/wiki/American_Home_Mortgagehttp://en.wikipedia.org/wiki/Bernard_Madoffhttp://en.wikipedia.org/wiki/Charter_Communicationshttp://en.wikipedia.org/wiki/Lehman_Brothershttp://en.wikipedia.org/wiki/Bankruptcy_of_Lehman_Brothershttp://en.wikipedia.org/wiki/Linens_'n_Thingshttp://en.wikipedia.org/wiki/Mervynshttp://en.wikipedia.org/wiki/NetBankhttp://en.wikipedia.org/wiki/Terra_Securitieshttp://en.wikipedia.org/wiki/Terra_Securities_scandalhttp://en.wikipedia.org/wiki/Sentinel_Management_Grouphttp://en.wikipedia.org/wiki/Washington_Mutualhttp://en.wikipedia.org/wiki/Icesave_disputehttp://en.wikipedia.org/wiki/Kaupthing_Singer_%26_Friedlanderhttp://en.wikipedia.org/wiki/Yamato_Lifehttp://en.wikipedia.org/wiki/Circuit_Cityhttp://en.wikipedia.org/w/index.php?title=Banco_Privado_Portugu%C3%AAs&action=edit&redlink=1http://en.wikipedia.org/wiki/Allco_Finance_Grouphttp://en.wikipedia.org/wiki/Waterford_Wedgwoodhttp://en.wikipedia.org/wiki/Saab_Automobilehttp://en.wikipedia.org/wiki/BearingPointhttp://en.wikipedia.org/wiki/Tweeter_(store)http://en.wikipedia.org/wiki/Chryslerhttp://en.wikipedia.org/wiki/Chrysler_Chapter_11_reorganizationhttp://en.wikipedia.org/wiki/General_Motorshttp://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganizationhttp://en.wikipedia.org/wiki/New_Centuryhttp://en.wikipedia.org/wiki/American_Freedom_Mortgagehttp://en.wikipedia.org/wiki/American_Home_Mortgagehttp://en.wikipedia.org/wiki/Bernard_Madoffhttp://en.wikipedia.org/wiki/Charter_Communicationshttp://en.wikipedia.org/wiki/Lehman_Brothershttp://en.wikipedia.org/wiki/Bankruptcy_of_Lehman_Brothershttp://en.wikipedia.org/wiki/Linens_'n_Thingshttp://en.wikipedia.org/wiki/Mervynshttp://en.wikipedia.org/wiki/NetBankhttp://en.wikipedia.org/wiki/Terra_Securitieshttp://en.wikipedia.org/wiki/Terra_Securities_scandalhttp://en.wikipedia.org/wiki/Sentinel_Management_Grouphttp://en.wikipedia.org/wiki/Washington_Mutualhttp://en.wikipedia.org/wiki/Icesave_disputehttp://en.wikipedia.org/wiki/Kaupthing_Singer_%26_Friedlanderhttp://en.wikipedia.org/wiki/Yamato_Lifehttp://en.wikipedia.org/wiki/Circuit_Cityhttp://en.wikipedia.org/w/index.php?title=Banco_Privado_Portugu%C3%AAs&action=edit&redlink=1http://en.wikipedia.org/wiki/Allco_Finance_Grouphttp://en.wikipedia.org/wiki/Waterford_Wedgwoodhttp://en.wikipedia.org/wiki/Saab_Automobilehttp://en.wikipedia.org/wiki/BearingPointhttp://en.wikipedia.org/wiki/Tweeter_(store)http://en.wikipedia.org/wiki/Chryslerhttp://en.wikipedia.org/wiki/Chrysler_Chapter_11_reorganizationhttp://en.wikipedia.org/wiki/General_Motorshttp://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganizationhttp://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganizationhttp://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganization


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It culminated on September 9, when Lehman's shares plunged 45% to

$7.79, after it was reported that the state-run South Korean firm had

put talks on hold.

On September 17, 2008 Swiss Re estimates its overall net exposure to

Lehman Brothers as approximately CHF 50 million.

Investor confidence continued to erode as Lehman's stock lost

roughly half its value and pushed the S&P 500 down 3.4% on

September 9.

The Dow Jones lost 300 points the same day on investors' concerns

about the security of the bank. The U.S. government did not announce

any plans to assist with any possible financial crisis that emerged at

Lehman.

The next day, Lehman announced a loss of $3.9 billion and their

intent to sell off a majority stake in their investment-management

business, which includes Neuberger Berman. The stock slid seven

percent that day.

Lehman, after earlier rejecting questions on the sale of the company,

was reportedly searching for a buyer as its stock price dropped

another 40 percent on September 11, 2008.

Just before the collapse of Lehman Brothers, executives at Neuberger

Berman sent e-mail memos suggesting, among other things, that the

Lehman Brothers' top people forgo multi-million dollar bonuses to"send a strong message to both employees and investors that

management is not shirking accountability for recent performance."

SubprimeCrisis and Banking Industry

Subprime crisis has ended history of many banks in the USA. As of now

22 banks closed because of Subprime crisis. It is started with the Lehman

Brothers, a 138 year old company filed bankrupt. It is followed byWashington Mutual Funds. Like this 20 other small and medium size

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http://en.wikipedia.org/wiki/Subprime_lenderhttp://en.wikipedia.org/wiki/Subprime_mortgage_crisishttp://en.wikipedia.org/wiki/Tranchehttp://en.wikipedia.org/wiki/Korea_Development_Bankhttp://en.wikipedia.org/wiki/Subprime_lenderhttp://en.wikipedia.org/wiki/Subprime_mortgage_crisishttp://en.wikipedia.org/wiki/Tranchehttp://en.wikipedia.org/wiki/Korea_Development_Bank


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banks fallen easily. American International Group (AIG) survived by

giving the $80 billion bail out money by the USA government. Another

major collapse with Citi Bankwhich has written off $60 billion as the

bad debts. CitiBankalso rescued by the USA government using bail out

plan. It is estimated that USA needs atleast $800 billion required to

handle the Subprime crisis. It is not yet over and now the Automobile

companies are struggling. You can read that in the next section.

Survival of Automobile Biggies

Now the turn is Automobile industry and it is affected more than any

other industry in the USA. The major three companies in the USA,

General Motors(GM), Ford and Chrysler needs help from the

government to survive. The discussion is going on and the decision will

be taken by the next week. The fall of automobile companies will be

more, so it is expected that government will come to the rescue. i will

write the another post on details of how automobile companies went into

trouble

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http://en.wikipedia.org/wiki/S%26P_500http://en.wikipedia.org/wiki/Neuberger_Bermanhttp://en.wikipedia.org/wiki/S%26P_500http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Averagehttp://en.wikipedia.org/wiki/Neuberger_Berman


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INDIA IMMUNE?

NOT REALLY!!!

FII PULLING OUT

CAPITAL MARKET INR

ECR Restricted

INR

DOWN AVAILABILITY

LIMITED FOR

No CB DEBT.

No EQUITY

No GDR/ADR Overseas lender

- No appetite

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INDIAN

MARKET


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INDIA BANKS THOUGHT TO BE OUT OF IT Some banks in it / rumors abound

Other- exposures undisclosed

No one is lending to anyone

Latest cost -CALL- 17%

-MIBOR-17%

But no credit is available

Small borrowers Defaulting INTENTIONAL??

26


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IMPACT ON ECONOMY

Growth of capital - not available

Investment - cycle

Slowstop

Demand & growth - slowjob loss

Global slow down - impact on economy as

well

Impact on corporate

No Fund Available

INDIA

OR

OVERSEAS

No Fund Available

Debt

Or

Equity

Internal Generation

Limited

Slow business

Cash is king!!!!

27


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Timeline of subprime losses June 2007

Bear Stearns spent $3.2bn (1.5bn) bailing out two of its funds

exposed to the sub-prime market

August 2007

American Home Mortgage, one of the largest US independent home

loan providers, filed for bankruptcy after laying off the majority of its

staff

September 2007

1. Bank runin Northern Rockin UK

2. Northern Rock asked for and been granted emergency financial

support from the Bank of England, in the latter's role as lender of last

resort.

March 2008

Bear Stearns was acquired by JP Morgan Chase for $1.2b

September 2008

1. Fannie Mae and Freddie Macplaced into conservatorship

2. Lehman Brothers & Washington Mutual Inc. filed for

Ch11 Bankruptcy Protection

3. The Federal Reserveprovided an emergency loanof $85b to AIG

4. British bank Bradford & Bingley was nationalized by UK

government by taking control of the banks 50b mortgages and

loans

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Bailout

A bailout is an act of giving capital to a company in danger of failing in

an attempt to save it from bankruptcy, insolvency, or total liquidation and

ruin; or to allow a failing company to fail gracefully without spreading

contagion.

29

Remedies

Bailouts Capital

Injection

Deposit

Guarantee

Nationalization


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Reasons against bailouts

1 Signals lower business standards for giant companies by incentivizing

risk

2 Creates moral hazard through the assurance of safety nets

3 Promotes centralized bureaucracy by allowing government powers to

choose the terms of the bailout

4 Instills a socialist style of government in which government creates

and maintains control over businesses.

5 Instills a corporatist style of government in which businesses use the

state's power to forcibly extract money from taxpayers.

Capital injection

Analysts in the media commonly refer to "capital injections" made by the

government in a public corporation, when some financial support is

provided. The notion of "capital injection" as such is not defined in the

SNA93 and in the ESA95. In the media, it may cover any payment fromgovernment to a public corporation having the characteristics of either a

capital transfer or a financial transaction in national accounts.

Deposit Guarantee Schemes

Deposit Guarantee Schemes reimburse a limited amount of deposits to

depositors whose bank has failed. From the depositors' point of view, this protects a part of their wealth from bank failures. From a financial

stability perspective, this promise prevents depositors from making panic

withdrawals from their bank, thereby preventing severe economic

consequences.

In October 2008, the Commission proposed urgent legislative changes

that entered into force in March 2009. In order to ensure greater

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effectiveness of Deposit Guarantee Schemes, the Commission is now

reviewing the Directive as a whole.

Moreover, a number of reports were commissioned in recent years, an

expert roundtable took place in March 2009 and in 2006 a

Communication was issued.

Nationalization

Definition

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Government ownership of an industry or company.

Opposite of denationalization.

Alteration or assumption of control or ownership of private property by

the state. It is historically a more recent development than and differs in

motive and degree from expropriation or eminent domain, which is

the right of government to take property for particular public purposes

(such as the construction of roads, reservoirs, or hospitals), normally

accompanied by the payment of compensation.

More recently, a further impetus has been resentment of

foreign control over industries upon which the state may be largely

dependent, as in the nationalization of the oil industries in Mexico in

1938 and Iran in 1951, and in the nationalization of foreign businesses in

Cuba in 1960. A third motive for recent nationalizations may be the belief

in some developing countries that state control of various industrial

operations is at least temporarily necessary because of the lack of a

developed capital market or supply of entrepreneurs in the domestic

private sector.

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From the above all discussion it can be concluded that there are many

factors which causes global meltdown also known as recession.

We have discussed above 8 year crashing cycle of stock market of India

but in this assignment recent US market crash has been discussed. This

meltdown is due to subprime lending in US. Which effect the whole

world in this subprime lending means lending money to sub prime

borrowers i.e. lending to people with low or poor credit worthiness.
http://www.businessdictionary.com/definition/government.htmlhttp://www.businessdictionary.com/definition/ownership.htmlhttp://www.investorwords.com/2447/industry.htmlhttp://www.investorwords.com/992/company.htmlhttp://www.investorwords.com/1406/denationalization.htmlhttp://www.britannica.com/EBchecked/topic/477326/private-propertyhttp://www.businessdictionary.com/definition/government.htmlhttp://www.businessdictionary.com/definition/ownership.htmlhttp://www.investorwords.com/2447/industry.htmlhttp://www.investorwords.com/992/company.htmlhttp://www.investorwords.com/1406/denationalization.htmlhttp://www.britannica.com/EBchecked/topic/477326/private-propertyhttp://www.britannica.com/EBchecked/topic/159990/developing-nationhttp://www.britannica.com/EBchecked/topic/93894/capital-markethttp://www.britannica.com/EBchecked/topic/477342/private-sector

global meltdown project

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