Transcript The Financial Crisis of 2007

Finance 215
Financial Markets and Institutions
Instructor: Lina Tannir
Presented By: Joe Sarkis
Ahmad Ibrahim
The Financial Crisis of 2007
Outline

Overview

Weaknesses in the US financial system

Crucial moments in the collapse

Global spread of financial crises

Recent events
The Financial Crisis of 2007
Overview

The recent global financial crisis is born from
previous crises in the 1990s

The real effects of this crisis started to appear
in the second half of 2007

The crisis first started spreading in the United
States before it reached global markets

The creation of Sub-prime mortgage backed
securities are what triggered the crisis
The Financial Crisis of 2007
Weaknesses in the U.S. Financial System

During the 1990s Banking and Financial
institutions slashed interest rates to stimulate the
U.S. Economy and divert the threat of a possible
recession.

The decrease in interest rates combined with
excess savings, increased public demand and
investment in the real estate sector.

To profit from the increased exposure of the real
estate markets, Banking institutions introduced
Sub-prime mortgage loans to the public.
The Financial Crisis of 2007
Weaknesses in the U.S. Financial System

Sub-prime loans attracted risky borrowers with
poor credit quality, who otherwise were not eligible
for Prime real estate loans. This exposed lenders
to greater risk of default.

To avoid default risk, financial institutions
securitized sub-prime. These illiquid assets were
pooled and into other financial securities, then sold
as mortgage backed securities.

In originating loans, lenders cared less about
ensuring proper underwriting standards.
Mortgages were inadequately documented.
The Financial Crisis of 2007
Crucial moments in the Collapse

Countrywide Financial, the country’s largest
mortgage issuer, nearly failed in the summer of
2007.

The failure of Bear Sterns and its acquisition in
March 2008

The U.S. government takes control of mortgage
lenders – Fannie Mae and Freddie Mac
The Financial Crisis of 2007
Crucial moments in the Collapse

Indy Mac Bank, the 9th largest mortgage lender in
the U.S. in 2007, was seized by the FDIC in July of
2008.

The Fed took the unprecedented step of lending
directly to Wall Street investment banks.

The Fed cuts interest rates to a record low, placing
it between Zero and 0.25%
The Financial Crisis of 2007
Crucial moments in the Collapse

The U.S. treasury introduces TARP

Citigroup requires massive capital injections to
keep afloat.

The BIG 3 U.S. Automakers – Ford, General
Motors, and Chrysler are at the brink of collapse
and appeal for Bailout funds

Financial Crisis reaches Arabian Gulf
The Financial Crisis of 2007
Crucial moments in the Collapse

September 15, 2008 – Black Monday
- Lehman Brothers Files for Bankruptcy
- Merrill Lynch was bought by Bank of
America
- The American International Group – AIG,
began negotiations with federal regulators to raise capital
- The Dow Jones fell over 500 points, hitting a
seven year low.

Wednesday September 17, 2008 - The U.S. government
seized control of AIG.
The Financial Crisis of 2007
Global Spread of the Financial Crisis

We live in an age of globalization, Financial
intuitions invest consumer funds globally to hedge
risk.

Inefficiency of global monetary institutions such as
the IMF and World Bank. These institutions did not
have the adequate political backing to enforce
measures that would have prevented the spread
of the crisis.

Rapid Depreciation of the Dollar
The Financial Crisis of 2007
Recent Events

October 3, 2008 the United States Congress
passed the Troubled Assets and Relief Plan
(TARP).

Internationally, Many European and Asian
government s announced financial stimulus
packages of their own.

December 19, 2008 President Bush announced
that a bailout plan for the auto industry
The Financial Crisis of 2007
Recent Events

On February 17, 2009 U.S. President Barack
Obama and his Treasury Secretary Timothy
Geithner announced the American Recovery and
Reinvestment Act.

The American International Group (AIG)
announced that it would be granting “retention”
payments to a portion of its “valued employees”

On April 20, 2009 U.S. Automaker Chrysler
announced that it would be filing for Chapter 11
Bankruptcy
The Financial Crisis of 2007
THE END