THE GLOBAL FINANCIAL

CRISIS (GFC) 2007-08

SUBMITTED TO M. TAHIR
SUBMITTED BY M.ZAHEER BANGASH
REGISTRATION NO SP18-BBA-079
SECTION C
SEMESTER 8TH
PROGRAM BBA

|MANAGEMENT SCIENCES
|COMSATS UNIVERSITY ISLAMABAD, LAHORE CAMPUS
 FINANCIAL INSTITUTION

CONTENTS

Financial crises ................................................................................................................................................................ 2

The global financial crisis (gfc) 2007-08 ......................................................................................................................... 2
Causes ........................................................................................................................................................................... 2
Other causes ................................................................................................................................................................. 2
Affected countries ......................................................................................................................................................... 3
Implications .................................................................................................................................................................. 4
Short-term impact of the financial crisis on the economy? .................................................................................... 4
Long-term impact of the financial crisis on the economy? ..................................................................................... 5
Is the financial system safer than it was before the crisis? ................................................................................... 5
How did the crisis change the housing market? ..................................................................................................... 5
Suggestion .................................................................................................................................................................... 6

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FINANCIAL CRISES

A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large
part of their nominal value. ... Other situations that are often called financial crises include stock market crashes
and the bursting of other financial bubbles, currency crises, and sovereign defaults.

THE GLOBAL FINANCIAL CRISIS (GFC) 2007 -08

Financial crisis of 2007-08, also called subprime mortgage crisis or also known as the global financial crisis.
The economic crisis started in the U.S. but spread to the rest of the world. U.S. consumption accounted for
more than a third of the growth in global consumption between 2000 and 2007 and the rest of the world
depended on the U.S. consumer as a source of demand. The de-leveraging of financial institutions, as assets
were sold to pay back obligations that could not be refinanced in frozen credit markets, further accelerated
the solvency crisis and caused a decrease in international trade. Reductions in the growth rates of developing
countries were due to falls in trade, commodity prices, investment and remittances sent from migrant
workers.

For example, the financial crisis has resulted in the collapse of massive financial institutions such as Fannie
Mae, Freddie Mac, Lehman Brothers and AIG. The overwhelming spread of the global crisis and poses great
challenges for the Asian and Pacific regions as well as Vietnam. Vietnam is known as one of the most open
economies of the globe and it relies deeply on external capital sources to support its development demands.
Thus, Vietnam is highly vulnerable to the vast effects of the financial crisis on global trade and financial
flows.

CAUSES

The financial crisis in 2008 that led to a crisis in the banking sector, and which nearly led to a complete
collapse of the economy globally, was not only caused by changes in the regulatory, regulation and
legislation oversight, but also fiscal and monetary policies. Many believe that, expansion of excesses
monetary and irresponsibility of some of the government agencies led to the crisis. Some believes that the
excessive monetary policies were the main cause of the crisis.

OTHER CAUSES

Contributing to the growth of subprime lending was the widespread practice of securitization, whereby
banks bundled together hundreds or even thousands of subprime mortgages and other, less-risky forms of
consumer debt and sold them (or pieces of them) in capital markets as securities (bonds) to other banks
and investors, including hedge funds and pension funds. Bonds consisting primarily of mortgages became
known as mortgage-backed securities, or MBSs, which entitled their purchasers to a share of the interest
and principal payments on the underlying loans. Selling subprime mortgages as MBSs was considered a
good way for banks to increase their liquidity and reduce their exposure to risky loans, while purchasing
MBSs was viewed as a good way for banks and investors to diversify their portfolios and earn money. As
home prices continued their meteoric rise through the early 2000s, MBSs became widely popular, and their
prices in capital markets increased accordingly.

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In 1999 the Depression-era Glass-Steagall Act (1933) was partially repealed, allowing banks, securities
firms, and insurance companies to enter each other’s markets and to merge, resulting in the formation of
banks that were “too big to fail” (i.e., so big that their failure would threaten to undermine the entire
financial system). In addition, in 2004 the securities and exchange commission weakened the net-capital
requirement (the ratio of capital, or assets, to debt, or liabilities, that banks are required to maintain as a
safeguard against insolvency), which encouraged banks to invest even more money into MBSs. Although
the SEC’s decision resulted in enormous profits for banks, it also exposed their portfolios to significant
risk, because the asset value of MBSs was implicitly premised on the continuation of the housing bubble.

Owing to changes in banking laws beginning in the 1980s, banks were able to offer to subprime
customers mortgage loans that were structured with balloon payments (unusually large payments that are
due at or near the end of a loan period) or adjustable interest rates (rates that remain fixed at relatively low
levels for an initial period and float, generally with the federal funds rate, thereafter). As long as home
prices continued to increase, subprime borrowers could protect themselves against high mortgage
payments by refinancing, borrowing against the increased value of their homes, or selling their homes at a
profit and paying off their mortgages. In the case of default, banks could repossess the property and sell it
for more than the amount of the original loan. Subprime lending thus represented a lucrative investment
for many banks. Accordingly, many banks aggressively marketed subprime loans to customers with poor
credit or few assets, knowing that those borrowers could not afford to repay the loans and often misleading
them about the risks involved. As a result, the share of subprime mortgages among all home loans
increased from about 2.5 percent to nearly 15 percent per year from the late 1990s to 2004–07.

And finally, the long period of global economic stability and growth that immediately preceded the crisis,
beginning in the mid- to late 1980s and since known as the “Great Moderation,” had convinced many U.S.
banking executives, government officials, and economists that extreme economic volatility was a thing of
the past. That confident attitude—together with an ideological climate emphasizing deregulation and the
ability of financial firms to police themselves—led almost all of them to ignore or discount clear signs of
an impending crisis and, in the case of bankers, to continue reckless lending, borrowing, and securitization
practices.

AFFECTED COUNTRIES

The financial crisis in 2008 that led to a crisis in the banking sector, and which nearly led to a complete
collapse of the economy globally, was not only caused by changes in the regulatory, regulation and legislation
oversight, but also fiscal and monetary policies. Many believe that, expansion of excesses monetary and
irresponsibility of some of the government agencies led to the crisis.

Financial institutions bankruptcy:

American freedom mortgage Inc. (USA) JAN 30, 2007.
Terra securities (NORWAY) NOV 28, 2007.
American home mortgage (USA) AUG, 2007.

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Financial institutions write-downs:

Deutsche bank (Germany) - $3.1 bln
CIBC (Canada) – $3.2 bln
HSBC (united kingdom)-$3.4 bln
Credit Agricole (France)- $4.8 bln
Citi group (USA)- $24.5bln
UBS AG (Switzerland)- $16.7 bln

Wall street investment firm Bear Stearns, having exhausted its liquid assets, was purchased by JPMorgan
chase, which itself had sustained billions of dolla.rs in losses. Fearing that Bear Stearns’s bankruptcy would
threaten other major banks from which it had borrowed, the Fed facilitated the sale by assuming $30 billion
of the firm’s high-risk assets. Meanwhile, the Fed initiated another round of reductions in the federal funds
rate, from 4.25 percent in early January to only 2 percent in April (the rate was reduced again later in the year,
to 1 percent by the end of October and to effectively 0 percent in December). Although the rate cuts and other
interventions during the first half of the year had some stabilizing effect, they did not end the crisis; indeed,
the worst was yet to com

IMPLICATIONS

Major impacts of the financial crises 2007-08 are:

▪ Major banks suffered from huge losses.

▪ Investors lost confidence in the stock market.
▪ World economy slipped into recession.
▪ Exports from china, korea, and Taiwan decreased.
▪ Consumer spending slowed down due to lack of cash or unwillingness.
▪ Poor prosperity of the countries.
▪ Recession-low economic activities.
▪ Very low GDP growth.

Collapse of financial system.

• Avoidance of such crises in the future

SHORT-TERM IMPACT OF THE FINANCIAL CRISIS ON THE ECONOMY?

The crisis was the worst U.S. economic disaster since the Great Depression. In the United States, the stock
market plummeted, wiping out nearly $8 trillion in value between late 2007 and 2009. Unemployment
climbed, peaking at 10 percent in October 2009. Americans lost $9.8 trillion in wealth as their home values
plummeted and their retirement accounts vaporized.
In all, the Great Recession led to a loss of more than $2 trillion in global economic growth, or a drop of nearly
4 percent, between the pre-recession peak in the second quarter of 2008 and the low hit in the first quarter of
2009, according to Moody’s Analytics.
“It was such a shock to the economic system that it unleashed dynamics that we still don’t understand fully,”
said Joe Brusuelas, chief economist at RSM, an audit and advisory firm.

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LONG-TERM IMPACT OF THE FINANCIAL CRISIS ON THE ECONOMY?

The U.S. economy has largely recovered. In late August, the U.S. stock market set a record for the longest-
running upswing in its history, replenishing the retirement accounts of workers who stayed invested through
bouts of volatility. Home prices have also rebounded, pushing total housing wealth to top the levels seen in
the pre-recession peak. Unemployment is low, at 3.9 percent in July.
“It’s fair to say the crisis was a financial calamity for homeowners everywhere, but now almost everyone has
recovered what they lost in that downturn,” said Mark Zandi, chief economist at Moody’s Analytics.
Still, the recovery has not buoyed all consumers equally. Many workers have struggled to land jobs that paid
as well as the positions they had before the recession. That shift, combined with the time spent out of work
and other drops in productivity since the crisis, has led to a loss of about $70,000 in lifetime income for every
American, according to an estimate from the Federal Reserve Bank of San Francisco. At the end of 2017,
4.4 million homeowners were underwater on their mortgages, meaning they owed more than their homes were
worth, according to the real estate company Zillow.

IS THE FINANCIAL SYSTEM SAFER THAN IT WAS BEFORE THE CRISIS?

Generally, economists agree that the financial system is safer. The 2010 Dodd-Frank Act put new guardrails
around the banking sector. The country’s biggest banks must now undergo periodic “stress tests” to prove they
could survive another crisis and draw up “living wills” so that they could be dismantled in an emergency
without requiring a taxpayer bailout.

HOW DID THE CRISIS CHANGE THE HOUSING MARKET?

The housing market was ground zero of the crisis. The market crashed as homeowners with
subprime and other troublesome loans defaulted at record levels. Home prices dropped, and millions
of lost their homes to foreclosure.
The market has largely recovered, with home prices rising and far fewer people behind on their
mortgages. Regulators have also established new restrictions on the types of loans banks could offer.

OTHER IMPACTS
These are:
▪ Major banks suffered from huge losses.
▪ Investors lost confidence in the stock market.
▪ World economy slipped into recession.
▪ Exports from the china, korea, and Taiwan decreased.
▪ Consumer spending slowed down due to lack of cash or unwillingness.
▪ Poor prosperity of the countries.
▪ Recession-low economic activities.
▪ Very low GDP growth.

Collapse of financial system.

• Avoidance of such crises in the future

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SUGGESTION

In order to prevent another global financial crisis, the following points should be considered:

▪ We should prevent an excessive concentration of loans in any one sector, region or kind of assets of the
economy.
▪ The role of the central bank as lender of last resort should be reassessed in light of the experience of global
financial crises (2007-08).
▪ We should prevent managers from taking excessive risks using other people´s money, managerial
compensation schemes should be changed.
▪ The issues which have to do with the conflict of interests in the credit rating agencies are still waiting for
better regulation