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When Wall Street Fell: The Financial Crisis of 2008

When Wall Street Fell: The Financial Crisis of 2008. BADM 381: Multinational Management October 14, 2008 Angela Grossi Devin Kelly Eric Slehofer Laura Beschorner. Background Information. Loans given out to anyone and everyone Investment bankers look to the U.S. housing market

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When Wall Street Fell: The Financial Crisis of 2008

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  1. When Wall Street Fell:The Financial Crisis of 2008 BADM 381: Multinational Management October 14, 2008 Angela Grossi Devin Kelly Eric Slehofer Laura Beschorner

  2. Background Information • Loans given out to anyone and everyone • Investment bankers look to the U.S. housing market • Mortgage backed security = pool of thousands of different mortgages • 2003-2006 Housing prices started increasing • However, housing prices then started to decrease and more houses came on market • Result = credit crisis

  3. Present Day • Freezing of commercial paper market (CPM) • CPM = way for big companies to borrow money • Money market mutual funds helped cause this market freeze-up • Reserve funds lost depositors’ money • Lehman Brothers goes bankrupt • Fund managers stopped lending money to companies. Extension of credit has ended. • Credit default swaps (CDSs) • $60 trillion = amount of outstanding CDSs

  4. Repercussions • Netting • Chain of loss • Credit is freezing up, banks do not trust one another, are not lending money • Possible solution could have been regulation of CDS market • 1998: Congress shot down attempt to regulate CDS market • $60 trillion in financial market with no oversight • Lack of trust • The government will have to step in

  5. Housing Prices Tax burden for Americans Federal budget deficit Consumers spending less Companies spending less Decrease in stock prices Credit availability issues How this affected America

  6. Vicious Cycle • All factors come together to keep the American consumers and our economy stuck in a vicious cycle.

  7. Possible Opportunities? • Stock opportunities • Housing opportunities • Credit opportunities

  8. Global Impact • Three problems resulting from the subprime mortgage fallout that have affected the banking system of nearly every country: • Solvency – having taken huge losses, banks need capital • Funding – because they cannot borrow in the longer-term paper markets, they are short of the funds they need to finance the share of their assets not covered by their deposits • Liquidity – because short-term money markets are closed, the banks are cut off from their main source of liquidity

  9. Global Response • Coordinated cut by 6 central banks of the LIBOR rate (rate at which banks lend to each other)‏ • Other efforts have been less systemic and multilateral – most responses have been on a country by country basis.

  10. A Special Case: Iceland • Country has essentially become bankrupt. • Three largest banks nationalized (Landsbanki, Kaupthing, Glitnir)‏ • Currency (Krona) lost much of its value and has stopped being traded • possible abandonment and “adoption” of Euro, hand over monetary policy to European Central Bank • International Monetary Fund intervention

  11. U.S. $700 Billion Bailout Plan • Standards will be set to prevent inappropriate executive compensation for participating companies • Any transactions will require equity sharing • Maximize efforts to modify mortgages for homeowners at risk of foreclosure • Require loan modifications for mortgages owned or controlled by the Federal Government • Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America’s housing needs • $700 billion authorized, with $250 billion available immediately and an additional $100 billion released on a need basis • Final $350 billion is subject to a Congressional joint resolution of disapproval

  12. U. K. Plan • Offering up to GBP 50 billion to buy stakes in banks • Will guarantee up to GBP 250 billion in bank debts • Will add up to GBP 100 billion to allow banks to exchange “hard-to-sell” securities for government bonds • HSBC Holdings (a U.K. bank) has loaned out GBP 2 billion to other banks for 3 – 6 months and is planning to send out more • Many banks have been reluctant to lend out money to others for periods of more than a day

  13. Other Country’s Plans • Russia: • $36 billion into Russian banks a day after initial stock drop • Possible plan of over $200 billion • Spain: • Set aside 30 billion euros ($40.7 billion) to fund lenders to free up capital so they can continue to lend to companies and households • Iceland: • Being rescued by Russia with a loan of 4 billion euros ($5.4 billion)

  14. Sources • The Wall Street Journal • USA Today • Business Week • CTV • The Economist • The New York Times

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