FINANCIAL

MELTDOWN

Group-3
Ankit 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 standstill

GROUP 3| FINANCIAL MELTDOWN 2007-08

REASONS
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 US
ofSenates
Wall Street.
Levin
Coburn Report

GROUP 3| FINANCIAL MELTDOWN 2007-08

con

REASONS
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 mortgages

Weak 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 2008

Lack 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 2007-08

GLOBAL IMPACT

World map showing real GDP growth rates for 2009* (Countries in brown were in
recession)
GROUP 3| FINANCIAL MELTDOWN 2007-08
*Source:

con

GLOBAL 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
GROUP 3| FINANCIAL MELTDOWN 2007-08
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*2: Ibid, P.10, P.47, P.80

ROLE 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
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FINANCIAL 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 2007-08

US 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.

IMPLICATIONS ON
THIRD WORLD
COUNTRY LIKE
GROUP 3| FINANCIAL MELTDOWN 2007-08

10

DIRECT 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 CRISIS

India 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

Thank You !