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2008 Economic Crisis

2008 Economic Crisis . Crisis Overview. Collapse of Housing Market and Large Financial Institutions Downturn in Stock Market Government bailout of Banks Lead to Severe Global Economic Recession Shaped the current Economic Landscape . Housing Market. 1997-2006 Housing Prices Inc 147%

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2008 Economic Crisis

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  1. 2008 Economic Crisis

  2. Crisis Overview • Collapse of Housing Market and Large Financial Institutions • Downturn in Stock Market • Government bailout of Banks • Lead to Severe Global Economic Recession • Shaped the current Economic Landscape

  3. Housing Market • 1997-2006 Housing Prices Inc 147% • Belief that prices would continue to appreciate lead to Adj Rate Mortgages • Subprime Lending: Easy Credit conditions/Reg • Underwriting: High risk borrowers/ Risky loans • 40% subprime loans Automated Loan Approval • Predatory Lending pushes ARM’s and bait-switch to generate higher fees and commissions

  4. Risk-Taking Behavior • Housing Speculation: • 40% of Homes 2006 not primarily used • 28% for Invpurposes (Flipping)/ 12% Vacational • Leverage: • Borrowing/Investing Large Sums of money • Financial Institutions take on 113.8% debt in 2007 • Set up for failure if there was a decline in Economic Production

  5. Financial Market Innovation • Adjustable Rate Mortgages: • Low rates at first then adjust to market IR • Mortgage Backed Securities/COD’s: • Firms bundle securities (mortgages) together • Sell to investors hoping to profit from payments • Credit Default Swaps: • Insured Obligations of Financial Institutions • Insurer receives fees for promise to pay (AIG)

  6. Inaccurate Credit Ratings • Agencies under scrutiny for giving AAA investment grade Rating to Securities • Encouraged investment and trading in securities that were likely to default • Half of Moody’s Revenue in 2007 came from rating Subprime Securities • 3x the revenue for grading bonds

  7. Shift from Regulation to Deregulation • 1999: Gramm-Leah-Barney Act: • Reduces separation between commercial and investment banks • 2004: SEC relaxes Net Capital Rules • Increases level of debt exposure for banks • 2000: Commodity Futures Modernization Act • Self-Regulation of Derivatives Market • CDS included in Derivatives Market

  8. Timeline • March 16th 2008: • Investment Bank Bear Sterns Considered Illiquid • Purchased by JP Morgan Chase for $2 a share • Stock price traded at $172 a share in January 07!!! • September 7th: • Government Sponsored Fannie Mae and Freddie Mac placed into conservatorship • Sept 15th: Lehman Brothers files for Bankruptcy

  9. Timeline Continued • Sept 16th 2008: • AIG seized by government for $85 billion dollar purchase • “Too Big to Fail” • October 3rd 2008: • TARP: Troubled Asset Relief Program signed by President Bush • Increase Liquidity of Banking System and Firms

  10. December 16th 2008: • Ben Bernake cuts federal funds rate to 0-.25% • February 17th 2009: • Congress Approves $787 Billion economic stimulus

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