A Short History of Financial Euphoria

A short History of Financial Euphoria :John Kennedy
Galbraith
1) Summary Of Global Financial Crisis
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2 ) Phenomenal: Tulipomania
Year : Feb 1637
Continent : Europe
Country : Holland : Amsterdam
Leading Characters: Tulip Jobbers
Financial Instrument
Speculation of Tulip bulbs at Stock of Exchange of Amsterdam .
Causes:
1562 First Tulip arrived Western Europe from Constantinople ( Turkey :
Istanbul).
Tulip appreciation leads to speculation.
1636 a bulb of September Augustus worth Flouring $3,000
equivalent to USD$25,000.
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2) Phenomenal: Tulipomania
■ Effects:
 1637 tulip speculation ended.
 Mass Depression, thousands of Dutch, businessmen and dignitaries,
were financially ruined.
 Many were stuck with the bulbs, no court would enforce payment of
a contract. Since judges regarded the debts as contracted through
gambling, and thus not enforceable in law.
■ Remedies:
 Legislation to control set up of exchange.
 Dutch Parliament announced all futures contracts to be considered as
option contracts for period after 30 Nov 1636 and before early
spring. Hence, relieving the futures buyers of the obligation to buy
the future tulips so to compensate the sellers with a small fixed
percentage of the contract price.
 1637 Dutch government halted futures contracts transformation into
options contracts.
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3) Mississippi Company or Banque Royale

■Year : 1716 - 1721
■Continent : Europe
■Country : France
■Leading Characters: John Law ( 1671 to 1729)
■Financial Instrument: Speculation of Issued Bank Notes
 Bank took over landed property and issue notes secured by real estate.
 1720 Compagnie des Indes Orientales, Compagnie de Chine and Banque Royale
consolidate to 1 company.
 The Companies of Indies’s have monopoly commences at all seas. Their shares became
a sort of paper currency.
 Law exaggerated the wealth of Louisana this leads to wild speculations of the companies
shares. Shares 1719 : 500 Livres, 1720 : 15,000 livres.
 Former creditors became shareholders of Mississippi when they bought shares in
Mississippi with bonds and debt papers (debt-for-equity transaction).
 Debt for Equity transaction French government had successfully unloaded gigantic debt
of 1,000% the annual budget (perhaps 200% - 400% of GDP) and was basically debt free.
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3) Phenomenal : Banque Royale

■ Causes
■ Sun King Louis XIV died in 1715. He left 2 legacies:
 bankrupt treasury.
 Philippe II, Duke of Orléans who lacks intelligence but
deeply committed to self indulgence.
■ Effects
 Mass Depression and bank runs.
■ Remedies:
 Sovereign instituted some useful economic and tax reforms.
 Idle lands of clergy were given to peasants to farm.
 Local tolls were abolished and tariff reduced.
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4) Phenomenal : The South Sea Bubble

■ Year : 1720
■ Continent : Europe
■ Country : England
■ Leading Characters: Robert Harley Earl of Oxford (1661 to 1724 )
■ Financial Instrument: Speculation of joint stock companies stocks.
 1719 government debt amounted to £50m, with high interest but difficult to trade.
 The South Sea scheme proposed :
 Buy half of the government diverse debts.
 Gain right to issue marketable new shares to the public.
 The shares are pegged with an interest rate of 5% ( 1719 to 1727) and 4% after 1927.
 The high P/E supported by high fund of credit £70m.
 The company ‘sold’ shares to elite politician at market price. Politician instead of
paying held the shares, then sold them back to the company for profit as the
market price increase.
 The share price started Jan 1719 : £128m , collapse May 1720: £ 550m.
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4) Phenomenal : The South Sea Bubble.

■ Causes
■ The British government incurred huge debt after years of War of the Spanish
Succession (1701 to 1713). After the war British government also needs to pay the
army.
■ The debts are very diverse and complex in nature, give rise the need to unify and
repackage the debts in a simpler form.
■ Effects
■ Collapse of joint stock companies leads to public outrage.
■ "I can calculate the movement of the stars, but NOT the madness of men."
Sir Isaac Newton, after losing a fortune (£20,000) in the bubble.
■ Remedies:
■ June 1720 ( citation 6 Geo. 1, c. 18) The Bubble Act (repealed in 1825) required all
joint-stock companies to have a Royal Charter (registration process for limited
companies ).
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4) Phenomenal : The South Sea Bubble Chart AD1720
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5) Phenomenal : The Bank Notes.

■Year : 1837
■Continent : North Aamercia
■Country : USA, Pennsylvania, Philadelphia ( Carpenters' Hall )
■Leading Characters: Alexander Hamilton ( 1755 to 1824 )
■Financial Instrument: Speculation of issue bank notes.
 First Bank of United States.
 Sound finance, with a balanced government budget, except during
wartime emergency
 Sound banking, with reserves in gold and silver
 Being a lender of last resort
 The currency notes issued could serve as instruments of national
policy.
 Regulating the national economy.
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■ Causes
 1812 Britain declare war on leading colonists leads to extensive public borrowing.
 Mexico and Peru revolution disrupt silver and gold supply to Europe. Hence Europe
issue bank notes. This lead USA to follow Europe example.
 Early 1830s construction boom of new canals and first network of railroads. The
Federal government encouraged the speculative fever by selling millions of acres of
public lands in western states like Michigan and Missouri. Speculators bought and
resold land, in hopes getting well located parcels that would increase in value, with
construction of canals and railroads which would increase prices when new settlers
came looking for land.
 President Andrew Jackson economic policies who created the Specie Circular by
executive order and also refused to renew the charter of
Second Bank of the United States, resulting in the withdrawal of government funds
from that bank
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■ Effects
 The Panic was followed by a five-year depression, with the failure of banks and
record high unemployment levels.
■ Remedies:
 USA government halt bank note issuance.
 State regulation required banks to hold reserves of hard coins against outstanding
notes.
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6) Phenomenal : Railway Boom.

■Year : 1857 to 1860
■Continent : North America
■Country : USA,
■Leading Characters: ( to )
■Financial Instrument: Speculation of Railway Company Stocks.
• Railway company stocks brought about from public construction after
Civil War
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■ Causes
 Prosperity and speculation that had followed the Mexican-American War and the
discovery of gold in California in the late 1840s.
 Lost shipment of 13,500 kg of gold from the San Francisco Mint to eastern banks
shaken public confidence in government ability to back its paper currency with gold.
 Political fallout of Dred Scott decision to open up all of the western territories to
slavery, leads to bonds of east-west running railroads plummeted (but not those of the
north-south railroads).
 Withdrawal of British investors from USA Banks.
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■ Effects
 Collapse of New York City branch of the Ohio Life Insurance and Trust Co,
resulted by wide spread embezzlment.
 Over 5,000 businesses failed within a year. Unemployment was accompanied by
protest meetings in urban areas.
■ Remedies:
 An October bank holiday declared to avert runs on those institutions.
 Tariff Act of 1857 reduced the average tax rate to about 20% — another reduction
that was warmly greeted in the South and roundly derided in the North. The tax
cut bill aimed to disperse federal budget surplus accumulated in the mid 1850s.
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7) Phenomenal : The Trust Companies.

■ Year : 1907
■ Continent : North Amercia
■ Country : USA, New York
■ Leading Characters: F. Augustus Heinze, Knickerbocker Trust Company
■ Financial Instrument: Speculation of Trust Companies stocks.
■ Causes:
 Heinze bought Knickerbocker Trust became it’s director, he developed the trust
company into a financial chain.
 Banking industry leaders, threatened by the developing trusts, staged a financial
attack on Heinze's Knickerbocker Trust. Their motive was to sway public and
congressional opinion against trusts.
 Over-expansion and poor speculation led to a stock market crash in Mar 1907.2 nd
crash occurred in Oct 1907, it resulted from Heinze brothers in a failed takeover of
United Copper.
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7) Phenomenal : The Trust Companies.

■ Effects
 Financial crisis stock price fell nearly 50% from its peak in 1906.
 Numerous runs on banks and trust companies.
 Legislation against Trust Company.
■ Remedies:
 US Congress passed the Glass-Owen Bill which allowed a group of bankers to
create, buy the shares, and own the Federal Reserve System in 1913.
 United States Secretary of the Treasury George B. Cortelyou earmarked $35 million
of Federal money to quell the storm.
 J.P. Morgan with the help of a team of bank and trust executives, stepped in to avert
the crisis. The team redirected money between banks, secured further international
lines of credit, and bought plummeting stocks of healthy corporations.
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7) Phenomenal : The Investment Trust.

■ Year : 29 Oct 1929, Black Thursday, Dow Loss 13% loss in the day.
■ Continent : North America
■ Country : USA, New York, Wall Street
■ Leading Characters: Richard Whitney, vice president of the Exchange ( 1888
to 1974).
■ Financial Instrument: Speculation of Investment Trust Stocks.
■ Causes
 1914 to 1918 World War I, funds flow from Europe to USA.
 late 1920s speculative boom, brokers were routinely lending small investors more
than 2/3 of the face value of the stocks they were buying. P/E (price to earnings)
ratio of S&P Composite stocks was 32.6 in September 1929 .
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■ Causes:
■ Orthodox classical economics: monetarist, Austrian Economics and
neoclassical economic theory, points to over supply of money attributed to the
great depression.
■ 2nd structural theories especially Keynesian point to underconsumption and over
investment (economic bubble), malfeasance by bankers and industrialists or
incompetence by government officials, leads to the down turn.
■ Debt-deflation theory stressed current spending is drastically reduced, when a
price deflation occurred for people deeply in debt thus lowering demand for new
products. Businesses began to fail as construction work and factory orders plunged.
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■ Effects
 Legislation to regulate promotion of Investment Trust.
 Massive layoffs occurred, resulting in unemployment rates of over 25%.
 1st 10 months of 1930, 744 banks failed. In 1930s a total of 9,000 banks failed, by
1933, depositors saw $140 billion of their deposits disappear due to uninsured bank
failures.
■ Remedies:
■ Government increases spending through deficit budget in accordance with
structural theories Keynesian , who claim under consumption and over investment
is the cause of depression.
■ New banking regulation, to improve banking system.
■ Democrats president Franklin D. Roosevelt (elected1932 ) sought remedy via
empowering labor unions and farmers and by raising taxes on corporate profits.
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■ Remedies:
■ Monetarists (Milton Friedman and Benjamin Bernanke) , argue that the Great
Depression was caused by monetary contraction resulted from US Federal reserve
inaction.
■ Friedman claimed if the Fed had provided emergency lending to these key banks, or
simply bought government bonds on the open market to provide liquidity and
increase the quantity of money after the key banks fell. Then the rest of the smaller
banks would not have fallen, therefore money supply would not have contracted in
an accelerated extent.[5]
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8) Phenomenal : REITS.
■ Year : 1969 to 1973 Oil Crisis
■ Continent : North America and Middle East
■ Country : USA, New York, Wall Street.
■ Leading Characters: Saudi King Faisal and Egyptian president Anwar Sadat.
■ Financial Instrument: Speculation of REITS ( Real Estate Investment Trust).
■ Causes
 15 Aug 1971 US pulled out of the Bretton Woods system, taking the US off the
Gold Exchange Standard . US dollar had been pegged to the price of gold and all
other currencies were pegged to the US dollar
 resulted US Dollar depreciation against many other currencies.
 Oil was priced in US Dollars thus OPEC oil producers were receiving less "real" income
for the same price.
 OPEC increase Oil price to combat lost of ‘real income’, leads to high inflation.
 Due to the 6 Oct to 26 Oct 1973 Yom Kippur War (Arab-Israeli War ) Arab world
imposed the 1973 oil embargo against the United States, Western Europe, and
Japan.
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8) Phenomenal : REITS.
■ Effects
 OPEC ( Oil Producing Economic Countries ) made sizeable deposits to USA
Banks( eg Citi Bank, Morgan Stanley, Chase). USA in return made loans to South
America Countries.
 New York Stock Exchange shares lost $97 billion in value in six weeks.
■ Remedies:
 Establish International Financial Systems.
 The 1973 oil crisis contributed to Japan's economy shifting away from oil-intensive
industries to industries like electronics.
 The Western nations' central banks prescribed macroeconomic remedy by cutting
interest rates to encourage growth and ignoring inflation. This resulting in
stagflation.
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9) Phenomenal : Junk Bonds.

■ Year : 19 October 1987 , Dow Jones Index (DJI) plummeted 508 points loss
22.6% in a single day.
■ Continent : North America.
■ Country : : USA, New York, Wall Street.
■ Leading Characters: Michael Miken and Prexel Burnham Lambert
■ Financial Instrument: Speculation of Junk Bonds
■ Causes
 Computer program trading strategies for blindly selling stocks as markets fell,
exacerbating the decline.
 Louvre Accord , a monetary pact between the US, Japan, and West Germany to keep
currencies stable broke down. Prior to the crash, Alan Greenspan had said that the
dollar would be devalued.
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■ Causes
■ 1987 crash caused by confidence crisis when USD backed Hong Kong stock
exchange collapsed. This stems from G-7 industrialized nations monetary
policy dispute, US wants USD to appreciate so to curb inflation.
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■ Effects
 By the end of October, stock markets in Hong Kong had fallen 45.8%, Australia
41.8%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5%.
■ Remedies:
■ NYSEC ( New York Securities Exchange Commission ) tighten trading regulations,
to ensure trading orders have time to be properly sort out.
■ This new trading time frame gives Federal Reserve and other central banks time to
pump liquidity into the system to prevent a further downdraft.
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■ Dow Jones Industrials Average plummeted 508 points, losing 22.6% of its value
in one day.
■ Between the start of trading on

October 14th to the close on
October 19, the DJIA lost
760 points, a decline of
over 31 percent.
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10 ) Phenomenal : 1997 East Asian Financial Crisis.

■ Year : 27 October 1997
■ Continent : South East Asia.
■ Country :Thailand, Malaysia, Indonesia and Korea.
■ Leading Characters: George Soros (1930 to )
■ Financial Instrument: Devaluation of currencies
■ Causes
■ Southeast economies received huge inflow of hot money and experienced a dramatic
run-up in asset prices, by maintaining high interest rates to attract foreign investors.
■ Economist Paul Krugman argued that East Asia's economic growth had historically
been the result of capital investment, leading to growth in productivity.
However only total factor productivity not capital investment could sustain
prosperity. Since total factor productivity had increased only marginally or not at all
financial crisis in brewing.
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■ Causes:
■ Thailand, Indonesia and South Korea had large private current account deficits and
the maintenance of pegged exchange rates encouraged external borrowing . Which
led to excessive exposure to foreign exchange risk in both the financial and
corporate sectors.
■ From 1995 U.S. economy recovered from early 1990s recession , the U.S. FED
under Alan Greenspan began to raise U.S. interest rates to curb inflation. This made
hot money flow from Southeast Asia to US via high short –term interest rates and
increase the demand of USD, ultimately leads to USD appreciation.
■ Many Southeast Asia currencies are pegged to USD, with USD appreciation their
exports less competitive. This further worsen their current account deficit position.
■ In the mid 1990s China after implementing export-oriented reforms also begun to
compete effectively with other Asian exporters.
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■ Effects:Thailand
■ On 14 May and 15 May 1997, Thai baht was under massive speculative attacks.
Under huge pressure 2 Jul 1997 floated the Thai Baht. Thai stock market dropped
75% in 1997, it’s largest finance company Finance One collapsed. From 1985 to
2 July 1997, the Thai baht was pegged at Baht 25 : USD 1. In Jan 1998 baht was
Baht 56 : USD 1.
■ Many businesses collapsed, and as a consequence, millions of people fell below the
poverty line in 1997-1998.
■ In Thailand economic crisis also led to political upheaval resulted in the resignations
Prime Minister Chavalit Yongchaiyudh . This led to renew push for
corporate governance.
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■ Effects: Malaysia
■ Pre-crisis, Malaysia had a large current account deficit of 5% of GDP . Mahathir
government aspire to propell Malaysia into developed status by 2020.
■ July 1997 Malaysian ringgit was "attacked" by speculators lead by George Soros,
overnight rate jumped from under 8% to over 40%. Mahathir single out Soros as
targets of criticisms.
■ 1997 end KLSE had lost more than 50% from above 1,200 to under 600.The ringgit
had lost 50% of its value plunge from RMG 2.5 : USD1 to RMG 3.80: USD1.
■ The construction sector contracted 23.5%, manufacturing shrunk 9% and the
agriculture sector 5.9%. Overall, the country's gross domestic product plunged 6.2%
in 1998. During that year, the ringgit plunged below 4.7 and the KLSE fell below
270 points.
■ 1998 Bank Negara principal measure were to peg ringgit at RMG3.8:USD1. In
2005 ringgit was taken off the fixed exchange system and replaced by a managed
float.
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■ Effects :Indonesia
■ Indonesia had low inflation, current account surplus > $900 million, foreign
exchange reserves >$20 billion, and a good banking sector. Many Indonesian
corporations had been borrowing in U.S. dollars, this work well when effective
levels of debt and financing costs had decreased as the rupiah appreciates.
■ August 1997 rupiah came under severe attack the fears over corporate debts leads to
massive selling of rupiah, strong demand for dollars. The rupiah and Jakarta Stock
Exchange touched a new historic low in September.
■ During the crisis rupiah plunge from Rupiah 2,000 : USD 1 to Rupiah 18,000 :
USD 1. Indonesia lost 13.5% of its GDP that year. There was a renewed push for
corporate governance.
■ In Indonesia rampaging inflation weakened the authority of the Suharto regime ,
leads to 8 May 1998 riots. Subsequently ended 35 years of Suharto regime and
weaken central authority . Thus, accelerated East Timor's independence and
intensified Islamic and separatist movements.
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■ Effects : South Korea
■ South Korea macroeconomic fundamentals were good but the banking sector was
burdened with large corporation’s (chaebol ) non-performing loans due to
aggressive expansions.
■ Many companies collapse most notable Kia Motors , it was taken over by Hyundai
Motor in 1998. The Seoul stock exchange from 7 Nov 1997 to 8 Nov 1997 lost 11
%. Korean won, plunged from 1,000 won : 1 USD to 1,700 won : 1 USD. There
was a renewed push for company corporate governance.
■ Initial sharp economic slowdown and many companies going bankrupt. After the
crisis the government drove national debt 3 times to GDP ratio.
■ Since 2003 Korea has recovered, in 2006 it’s per capita GDP is 3 times that of post
1997 crisis period. Thereby, continuing its growth from 1960 as the world's fastest
growing economy in the period (1960-2006), per capita GDP having grown from
$80 capita to over $18,000.
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■ Effects :Japan
■ Japan economy > twice the size of the rest of Asia together , Asian countries
usually run a trade deficit with Japan.
■ About 40% of Japan's exports go to Asia, hence GDP real growth rate slide in 1997,
from 5% to 1.6%. Plus intense competition from cheapen rivals Japan sank into
recession in 1998.
■ Ultimately, Asian financial crisis led to more bankruptcies in Japan. The Japanese
yen fell to 147 as mass selling began, but Japan was the world's largest holder of
currency reserves at the time, so it was easily defended, and quickly bounced back.
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■ Effects :
■ Singapore economy due to financial contagion dipped into a short recession.
■ Unlike Hong Kong, Singapore government did not intervene. It let stock market
contract Straits Times Index (STI) lost 60% (Jul 97 :1,967.10; Aug 98:856.43).
■ Singapore economy recovered fairly fast from 1997 crisis, the government used a
combination of monetary policy, Keynesian and structural programs as remedies.
Thus rewarded with relatively short duration and milder effects of crisis.
■ Monetary Authority of Singapore (MAS) allowed a gradual 20% depreciation of the
Singapore dollar to cushion and guide the economy to a soft landing. (Monetary )
■ The timing of government programmes such as the Interim Upgrading Program and other
construction related projects were brought forward. ( Keynesian )
■ National Wage Council pre-emptively agreed to Central Provident Fund cuts to lower
labor costs, whereby limited impact on disposable income and local demand. (Structural)
■ Aggressive older labour force re-training program and re-evaluate education programs to
ensure labour force stays in tune with demand. (Structural)
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■ Remedies:
 Establish International Financial Systems.
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11 ) Phenomenal : Internet Boom.

■Year : 1999 to 2002
■Continent : North America.
■Country : : USA, New York, Wall Street.
■Leading Characters: ( to )
■Financial Instrument: Speculation of Internet Company Stocks
■Causes:
Internet Boom from Mid 1995 to 2000, where sky is the limit. Then bear
market 2000 to 2003 is a correction of high stock valuation , after a decade-
long bull market.
Terrorist attacks on New York World Trade Centre 11 Sep 11 2001 attacks,
indices slid steadily starting in March 2002.
US dollar declined steadily against the euro, reaching a 1-to-1 valuation not
seen since the euro's introduction.
Merger and Acquisition.
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■ Effects : DOW Jones Average Index
■ In 2000, the DOW lost 6.17% of it’s value ( 11,497.10 to 10,788.00 ).
■ In 2001, the DOW lost 5.35% of it’s value ( 10788.00 to 10,021.60 ).
■ In 2002, the DOW lost 16.76% of it’s value ( 10,021.60 to 8,341.63 ).
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■ Effects : Nasdaq Index
■ In 2000, the Nasdaq lost 39.28% of its value (4,069.31 to 2,470.52).
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■ Effects :
 DOW bull market from 1995 to 2000 ( DOW : 11,750.28 ,14 Jan 2000) , DOW rose
15% /year. Bear from May 2000 to August 2002 (DOW:7,200, 6 Oct 2002 ), DOW
contracted 10%/year.
 NASDAQ bull market from 1995 to 2000 ( NASDAQ: 5,132.52 , 10 Mar 2000 ),
bear from 2000 to 2003 (NASDAQ: 1,100 , 6 Oct 2000 ).
 Many large Internet companies went bankrupt file for chapter 11, they are
Webvan, Exodus Communications, and Pets.com.
 Other internet companies’ value took a huge dive but remain in business to
this day. Currently, they have good long term growth prospects , they are
Amazon.com, eBay, and Yahoo!.
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■ Remedies:
 Corporate Governance.
 SOX ( Sarbane and Oxley Act ) for listing companies.
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12 ) Phenomenal : 2007 Subprime Mortgage Crisis.

■Year : 2007 to 2009
■Continent : North America.
■Country : : USA, New York, Wall Street.
■Leading Characters: Richard Severin "Dick" Fuld, Jr ( Lehman Brothers CEO )
and James E. Cayne ( Bear Sterns CEO )
■Financial Instrument: Easy Credit For Housing Loan In Sub-Prime Market
■Causes: The subprime mortgage crisis :
■ liquidity squeeze in the global banking system arises from foreclosures .
■ Foreclosure legal proceeding when a mortgagee ( Banker ) obtains a court
ordered to terminate a mortgagor's ( home owners ) equitable right of redemption.
■ Foreclosure cases :
■ Accelerated in late 2006.
■ Triggered a global financial crisis through 2007 and 2008 .
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12 ) Phenomenal :Housing Loan Melt Down.

■ Causes and Effects :
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■ Causes : Sub-prime Information Background.
■ Sub-prime lending : A practice of making loan to borrower who do not
qualify for market interest rates owing to various risk factors, such as
income level, size of the down payment made, credit history, and
employment status.
■ the bursting of the US housing bubble and high default rates on

"subprime" and other adjustable rate mortgages (ARM) made to higher-
risk borrowers with lower income or lesser credit history than "prime"
borrowers.
■ Loan incentives and a long-term trend of rising housing prices encouraged

borrowers to assume mortgages, believing they would be able to
refinance at more favorable terms later. However, once housing prices
started to drop moderately in 2006–2007 in many parts of the U.S.,
refinancing became more difficult.
■ Defaults and foreclosure activity increased dramatically as ARM interest

rates reset higher.
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■ Causes : Securitization History
■ Sub-prime mortgages securitization (i.e. those passed to third-party
investors) increased from 54% in 2001, to 75% in 2006.
■ Alan Greenspan stated that the securitization of home loans for people
with poor credit — not the loans themselves — were to blame for the
current global credit crisis.
■ Before 1970 banks held loans until they matured or were paid off .
Banks get funds principally from deposits.
■ Deposit fund insufficient for banks to meet demand of rising housing
credit.
■ Banks sought ways of increasing the sources of mortgage funding , by
developing investment vehicles for mortgage pools .
■ In February 1970, the U.S. Department of Housing and Urban
Development created the transaction using a mortgage-backed
security. The Government National Mortgage Association (GNMA or
Ginnie Mae) sold securities backed by a portfolio of mortgage loans.
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■ Causes : Securitization Definition
■ Securitization is a process in where assets, receivables or cash-flow
producing financial assets are acquired, classified into pools. Then sold as
collateralized debt obligations (CDO) to investors.
■ Securitization leads to
■ Investor interest for mortgage-backed securities (MBS),
■ Rating Agencies to assign investment-grade ratings to MBS.
■ Loans with a high risk of default could be originated, packaged and the risk
readily transferred to others.
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12 ) Phenomenal : 2007 Sub-prime Mortgage Crisis.
■ Causes : Securitization Parties
■ There are many parties involved :
■ Borrowers are primary home owners who borrows money for financing
mortgage.
■ Lenders or Originators are banks or corporation who lends money to
Borrowers.
■ The arranger is an investment bank who helps to set up the structure of the
transaction.
■ SPV ( Special Purpose Vehicles ) or issuer is a tax-exempt company or trust
formed specifically to purchase assets from Originators. SPV issues tradable
securities to fund the purchase of assets from Originators.
■ QIB ( Qualified Institutional Buyer) or general investors who buys securities
SPV issued.
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■ Causes : Securitization Process
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12 ) Phenomenal : 2007 Sub-prime Mortgage Crisis..
■ Effects : Banks and Financiers face liquidity problems.
■ Global banks and brokerages have scrambled to sell assets and raise
capital in an effort to off-set against nearly USD300 billion of write-off
link to credit risk.
■ 1 March 1 2008 analysts from three large financial institutions
estimated the sub-prime defaults would be between U.S. $350–600
billion.
■ 28 Jul 2008 Light Sweet Crude hit new high USD146/Barrel.
■ 10 Mar 2008 Bear Sterns was on the verge of collapsing later bought
over Merchant Bank.
JP Morgan.
■ 11 Jul 08 both Financier Fannie Mae and Freddie Mac lost 50% of
their stock value pre-market trading. Growing speculation of a
government bailout is needed.
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■ Effects : Bear Sterns Company Inc
■ one of the largest global investment banks, securities trading and
brokerage firms prior to its collapse in 2008 .
■ Based on 2006 net revenue distributions, the main business areas
were:
■
■
■
■ Bear Sterns Market Value :

■ 30 Nov 2006, it had total capital of approximately $66.7 billion and total
assets of $350.4 billion.
■ Jan 2007 Bear Sterns Stock traded USD $172
■ Feb 2008 Bear Sterns Stock traded USD$ 93.
■ 16 Mar 2008 Bear Sterns signed a merger agreement JP Morgan stock
swap USD$2 per share or USD $236 million.
■ On 24 Mar 2008 that offer was raised to USD $10 per share or USD $1.1
billion, in an effort to pacify angry shareholders.
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■ Effects : Lehman Brothers files for Bankruptcy 15 Sep 2008
■ one of the largest global investment banks, securities trading and
brokerage firms prior to its collapse in 2008 .
■ The Dow Jones closed down just over 500 points (−4.4%) on
September 15, 2008
■ Lebman Brothers Market Value :

■ Holding over $600 billion in assets
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12 ) Phenomenal :2007 Sub-prime Mortgage Crisis.
■ Effects : USA Properties Foreclosure Data
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■ Effects : Dow Jones Index
■ Jul 2008 Dow Jones technically entered into Bear Market.
■ Dow decline consecutively for 200 days ( Jul 2008; Nov 2007).
■ Dow lost 22 % of its value ( Jul 2008 : 11,110 ; Nov 2007 : 14,280 ).
54
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Effects : Nasdaq Index
■ Jul 2008 Nasdaq technically entered into Bear Market.
■ Nasdaq decline consecutively for 200 days ( Jul 2008; Nov 2007).
■ Nasdaq lost 22 % of its value ( Mar 2008 : 2,169 ; Nov 2007 : 2,794 ).
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■ Remedies : Actions to manage the crisis.
■ The Federal Reserve Rescue Package.
■ Economic Stimulus Act of 2008 .
■ Regulation .
■ Bank financial health.
■ Credit rating agencies.
■ Loan modification/Loss Mitigation/Hope Now Alliance.
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■ Remedies : The Federal Reserve Rescue Package.
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■ Remedies : Economic Stimulus Act of 2008 .
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■ Remedies : Regulation .
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■ Remedies : Bank financial health.
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13 ) 5 weaknesses that to lead to financial disaster. They are:

I. The bad distribution of income.
II. The bad corporate structure.
III. The bad banking structure.
IV. The dubious state of the foreign balance.
V. The poor state of economic intelligence.
14)
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A Short History of Financial Euphoria

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A Short History of Financial Euphoria

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A short History of Financial Euphoria :John Kennedy

1) Summary Of Global Financial Crisis

3) Mississippi Company or Banque Royale

3) Phenomenal : Banque Royale

4) Phenomenal : The South Sea Bubble

4) Phenomenal : The South Sea Bubble.

4) Phenomenal : The South Sea Bubble Chart AD1720

5) Phenomenal : The Bank Notes.

5) Phenomenal : The Bank Notes.

5) Phenomenal : The Bank Notes.

6) Phenomenal : Railway Boom.

6) Phenomenal : Railway Boom.

6) Phenomenal : Railway Boom.

7) Phenomenal : The Trust Companies.

7) Phenomenal : The Trust Companies.

7) Phenomenal : The Investment Trust.

7) Phenomenal : The Investment Trust.

7) Phenomenal : The Investment Trust.

7) Phenomenal : The Investment Trust.

9) Phenomenal : Junk Bonds.

9) Phenomenal : Junk Bonds.

9) Phenomenal : Junk Bonds.

9) Phenomenal : Junk Bonds.

■ Between the start of trading on

10 ) Phenomenal : 1997 East Asian Financial Crisis.

10 ) Phenomenal : 1997 East Asian Financial Crisis.

10 ) Phenomenal : 1997 East Asian Financial Crisis.

10 ) Phenomenal : 1997 East Asian Financial Crisis.

10 ) Phenomenal : 1997 East Asian Financial Crisis.

10 ) Phenomenal : 1997 East Asian Financial Crisis.

10 ) Phenomenal : 1997 East Asian Financial Crisis.

10 ) Phenomenal : 1997 East Asian Financial Crisis.

10 ) Phenomenal : 1997 East Asian Financial Crisis.

11 ) Phenomenal : Internet Boom.

11 ) Phenomenal : Internet Boom.

11 ) Phenomenal : Internet Boom.

11 ) Phenomenal : Internet Boom.

11 ) Phenomenal : Internet Boom.

12 ) Phenomenal : 2007 Subprime Mortgage Crisis.

12 ) Phenomenal :Housing Loan Melt Down.

■ the bursting of the US housing bubble and high default rates on

■ Loan incentives and a long-term trend of rising housing prices encouraged

■ Defaults and foreclosure activity increased dramatically as ARM interest

12 ) Phenomenal : 2007 Subprime Mortgage Crisis.

12 ) Phenomenal : 2007 Subprime Mortgage Crisis.

12 ) Phenomenal : 2007 Sub-prime Mortgage Crisis.

■ Bear Sterns Market Value :

■ Lebman Brothers Market Value :

12 ) Phenomenal : 2007 Subprime Mortgage Crisis.

12 ) Phenomenal : 2007 Sub-prime Mortgage Crisis.

12 ) Phenomenal : 2007 Sub-prime Mortgage Crisis.

12 ) Phenomenal : 2007 Sub-prime Mortgage Crisis.

12 ) Phenomenal : 2007 Sub-prime Mortgage Crisis.

12 ) Phenomenal : 2007 Sub-prime Mortgage Crisis.

12 ) Phenomenal : 2007 Sub-prime Mortgage Crisis.

13 ) 5 weaknesses that to lead to financial disaster. They are:

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