Global Recession?

Fact or fiction, causes and indicators

CK

A period of general and sustained economic decline

CK

a stage of business cycle in which economic activity is in slow decline. A Recession usually follows a boom, and precedes a depression

CK

CK

CK

CK

CK

CK

CK

Jan 11 - Bank of America buys Countrywide Financial for $4 billion in an all-stock deal. March 16 - JP Morgan Chase buys Bear Stearns. July 11 - IndyMac is 12th to be seized by the FDIC after depositors withdraw $1.3 billion in 11 days.July 13 - Fannie Mae and Freddie Mac are nationalized

CK

September 15– Investment bank Lehman Brothers files for Chapter

11 bankruptcy protection. – Rival Merrill Lynch agrees to be taken over by Bank

of America.– The Dow Jones fell 504 points, the index’s worst

since the 2001 terrorist attacks.

September 16 - Insurer American International Group (AIG) is rescued by the federal government through an $85 billion loan package

CK

September 21 - Goldman Sachs Group Inc. and Morgan Stanley become bank holding companies regulated by the Fed, essentially ending Wall Street's investment banking model.

September 25 – Washington Mutual is seized by the FDIC, making it the

largest U.S. bank failure, with $307 billion in assets. – JPMorgan Chase buys WaMu’s banking assets for $1.9

billion.

CK

CK

Liquidity Crunch - A crisis that occurs when a business experiences a lack of cash required to grow the business, pay for day-to-day operations, or meet its debt obligations when they are due, causing it to default.

Credit Crunch - a sudden reduction in the availability of loans (or "credit") or a sudden increase in the cost of obtaining a loan from the banks, and interest rates are high

CK

Subprime Mortgage – offered/issued at a higher interest rate to persons who do not qualify for prime rate loans. With the following perks:– No down payment required– Credit Rating Ignored– Credit history Ignored– No proof of employment required– No proof of ability to pay mortgage (income)

CK

HOW and WHY– Long term trend of rising house prices (so your

purchase will increase in value)– Interest rates start of small but increase with

time.

– Mortgage Brokers• Competition for commissions• Did not actually lend any money

CK

Next – Large number of subprime mortgages put

together into a RBMS - Residential Mortgage-Backed

– Security

CK

Next – RBMS split into 4 parts each with a different

rating, risk and return.

CK

Next – as many as 150 of each part put into a CDO

CK

Next – CDO rated and sold to large investors

CK

CK

“When the United States Sneezes, the rest of world may well catch a cold”

-By Rich Miller

CK

Biggest economy in the worldConstitutes 27% of Global GDPWorld’s biggest debtor countryBiggest Importer of Oil 27% in 2007

700 Billion Bailout– To prevent the total collapse of U.S. economy and

Wall Street– To restore confidence and stability– Money goes to the largest banks– Money comes from other countries but paid for

ultimately by taxpayers

CK700,000,000,000,

Rich people got it good in this country ...Broke people are about to bailout rich people... It's

welfare for the rich.-Wanda Sykes

CK

You could buy 438 pounds of rice for every single person in Africa.14 times the budget of Trinidad and Tobago (08-09) It is more than $100 for every person in the world.$668,577 dollars for every Trinidadian and Tobagonian.You can buy a country - Denmark, Peru, Nepal, or Iceland

CK

Cost to bring every delinquent mortgage to par: $11 billionCost to restore every foreclosed home (2 years): $ 60 billion

Just take three of the major Banks bonuses ‘07– a. Goldman Sachs paid 30 billion – b. Morgan Stanley paid 30.7 billion– c. Lehman Brothers paid 10.9 billion

CK

Nationalisation of some banksFiscal Policy

– Tax cuts/rebates– Establishment of new govt jobs– Unemployment insurance

Monetary Policy– Reduce the reserve ratio – Lower the federal funds rate – Lower the discount rate – Use its own reserve money to buy government bonds – Changes in who can borrow

CK

CK

Market Continues to be volatileStocks expected lower today because of sagging housing marketBush to give pep talk to anxious countryG7 to meet on world financial crisis (Fri & Sat)