wall street meltdown

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FINANCIAL MELTDOWN 2007–2008 Group-3 Ankit Garg (13125010) Harshit Garg (13125018) Ridhima Agrawal (14114262) Shivani Gupta (13125051)

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Wall street meltdown

financial Meltdown20072008Group-3Ankit Garg (13125010)Harshit Garg (13125018)Ridhima Agrawal (14114262)Shivani Gupta (13125051)

INTRODUCTION Black Monday, September 29, 2008 Wiping of 1.2 trillion dollars from U.S. stock market Collapse of large financial institutions Bankruptcy and liquidation of Lehman Brothers Companies like Bear Stearns and Merrill Lynch were sold at fire-sale prices, and Goldman Sachs and Morgan Stanley became commercial banks, subjecting themselves to more stringent regulation People lost their homes Dropping of stock markets, corporate bonds, real estate, airlines, tourism etc. Wages collapsed and people lost jobs resulting decline in consumer wealth Public services were disrupted or privatized in U.S. Closure of factories and Assembly lines at a standstillGroup 3| Financial Meltdown 2007-082Reasons The crisis was the result of "high risk, complex financial products; undisclosed conflicts of interest; the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.US Senates LevinCoburn Reportcont.Group 3| Financial Meltdown 2007-083REASONS Lower interest rates encouraged borrowing From 2000 to 2003, Federal funds rate lowered from 6.5% to 1.0% Business investments vs. Housing U.S. (United States) housing bubble burst in 2007 Subprime lending : Easy access to loans, overvaluation of mortgagesWeak and fraudulent underwriting practices Citi 2006-07: 60% (1600) Defective Mortgages : 80% during 2007 Increased debt burden or overleveraging USA household debt as a % of annual disposable income : 127% in 2007, vs. 77% in 1990 U.S. private debt : 123% of GDP in 1981 to 290% by 3rd quarter of 2008Lack of adequate capital holdings by financial institutions Commodities boom Oil Prices: $50 to $147 from early 2007 to 2008 & Copper: $1,600/tonne in 1999 to $7,040/tonne in 2008, etc.

Group 3| Financial Meltdown 2007-084

World map showing real GDP growth rates for 2009* (Countries in brown were in recession)*Source: Gdp_real_growth_rate_2007_CIA_FactbookGLOBAL IMPACTcont.Group 3| Financial Meltdown 2007-085global IMPACT Banking failures and reductions in domestic lending Reduced investments and reduction in lending due to non-availability of cash Declined to only $80 billion in 2009 from $410 billion in 2007 *2 Reduction in export earnings Economic growth of most developing countries linked with exports Reductionin demand for goods from advanced economies and lesstourism earnings of developing countries World trade to decline from 9.4 % in 2006 to 2.1 % in 2009 - International Monetary Fund (IMF) in Feb 2009 Global output decrease of 2.2 per cent in 2009 - first time since World War II *1 Reduction in financial flows Huge decline in the amount of direct foreign investments, reaching to $ 700 billion between 2008 and 2009 *2 Global unemployment rate increased to 6.6 per cent World unemployment : Increased almost 34 million between 2007 and 2009*3 Youth unemployment : 11.8 % in 2007 to 13.4 % in 2009: Increased by 10 million*2 European bank failures and sovereign debt crisis

*1: United Nations; Resolution No 63/303: on Outcome of the Conference on the World Financial and Economic Crisis and Its Impact on Development, 9 July 2009, P.3*2: Ibid, P.10, P.47, P.80 *3: International Labour Organization, (ILO); Global Employment Trends, Geneva, January 2010, P.47Group 3| Financial Meltdown 2007-086Role played by government Glass-Steagall Act Separates commercial and investment banking. Came into being in 1933 and was repealed in 1999 Post financial crisis, legislators have unsuccessfully tried to reinstate it Investors bought safer tranches of CDO that were rated AAA by Moodys and S&P, which were paid by banks who created these CDOs. Federal reserve lowered rates to 1% to do away with effects of dot com bubble and September 2001 attack Increase in trade deficits required US to borrow money from abroad which lowered interest rates Policies encouraged home ownership, providing easier access to loans Fannie Mae and Freddie Mac relaxed underwriting standards which had pressure from stock holders to maintain growth in profits Securities and Exchange Commission relaxed rules which enabled investment banks to increase their debt level In 1997, Federal Reserve chairman Alan Greenspan fought to keep derivatives market unregulated

Group 3| Financial Meltdown 2007-087Financial vs. manufacturing capital There are 5 types of capital: Natural, Human, Social, Manufactured and Financial Financial Capital enables other types of Capital to be owned and traded but has no real value In recent times, financial markets have come to dominate the industrial and agricultural economics In US more money has been made through appreciation of real estate that any other way

Group 3| Financial Meltdown 2007-088US economy & other economies Real economies are affected with sharply slowing economic activity and rising unemployment (Economic crisis in Iceland involved all three countrys major banks) Financial liberalisation has resulted in developing countries more prone to periodic financial and currency crisis (Asian financial crisis) Emergence of universal banks or financial supermarkets increased the degree of entanglement of different agents within the financial system Strategy of increasing reserves builds a cushion against capital flight in the event of a change in investor confidence and prevents the currency from appreciating. But it creates the bizarre global result of financial liberalisation, that poor countries end up financing the expansion and consumption of the richest economies, especially the US, rather than investing in their own development. The Financial Stability Forum of the Bank for International Settlements excludes any representation from developing countries. The tiny countries of Belgium, Netherlands and Luxembourg, with a total population of less than 28 million, have more votes in the IMF than China, Brazil or India.

Group 3| Financial Meltdown 2007-0810Implications on Third world country like IndiaDirect Impact of Sub-prime crisis Indian banks were not exposed to sub-prime lending as a result the shock of big banks such as Lehman collapsing didnt send shockwaves across India. The Indian banking sector remained isolated from the sub-prime crisis Also, it was mainly due to the financial habit of third world country like India where people are prone to save a part of their income and not live off the credit card(plastic money). So when the sub-prime crisis hit and almost 250,000 crores were swept off the Indian stock exchange on a single day, Indians had their money saved in banks to rely upon Third world people invest in precious metals such as Gold not just as an ornament but to safeguard themselves in crisis and the prices of Gold didnt fall much, therefore people had gold to save themselves from crisis India was a very strict norm against loans which includes tight collateral valuation, financial capability of borrower and credit default checks which further prevented individuals from taking sub-prime loans

Indirect Impact of Sub-prime crisisIndia on the larger aspect was not able to isolate itself from the financial instability going around the world Indian exporters faced a nightmare importers of Indian goods were facing financial crisis Export of services faced a downturn and Indian IT majors : Infosys, TCS had to cut jobs and freeze hiring. India had been focusing on educating its youth but now jobs had declined and unemployment was on the rise Manufacturing sector in third world countries was down as demand for goods in US which is a major consumer was reduced Around 50,000 artisans and 3000 crores in handloom industry was lost in India which were a part of Indian cultural heritage FIIs withdrew their money which further was a huge setback for India

RBI Exchange Rate Impact The Reserve Bank had to sterilize the liquidity impact of large foreign exchange purchases through a series of increases in the cash reserve ratio Inflationary pressures emanating both from strong domestic demand and elevated global commodity prices, policy rates were also raised Monetary policy continued with pre-emptive tightening measures up to August 2008 Dollar was at it lowest during the sub prime crisis and Indian exporters felt the heat

Socio-Political Impact Indian National Congress went through its most difficult times during the sub-prime crisis. It was not able to control inflation, GDP growth had slowed and Indian budget deficit had widened. This marked the beginning of death bell for congress which ended by giving a full majority to BJP in 2014 elections Entrepreneurs were left in a lurch with VC not wanting to fund any of the projects, young minds had come to rest The spending power of the citizens fell down drastically so they refused to try out new products. As a result, no new products were seeing the daylight People wanted to earn quick money as many faced a crunch for money, so Corruption increased and during this time India saw some of its highest scams such as 2G, CoalGate scam

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