2008 Financial Crisis

Cause # 1 - subprime People you would not loan to People you will

Cause # 1 - subprime subprime

The subprime people default Cause # 1 - subprime The subprime people default on their loans (as was expected)

Cause #2- ARM Decides he wants to live BUT HE CAN’T AFFORD THE MONTHLY PAYMENTS

CAUSE # 2 - ARM So he goes to a bank and qualifies for an Adjustable Rate Mortgage = ARM 3 years of low interest and low payments Then starts to climb….

Brilliant idea because of course housing prices have been going up and will continue to…. And then use that money for a new house Once the 3 year low interest rate expires he can SELL

BUT…..UH OH….. The housing market collapsed and his house is worth LESS than when he bought it.

So meanwhile Are making these risky loans And forecasting BIG profits (i.e they are loaning out all their money ) But…when Mr. Jones.. They find themselves with a lot of empty houses and no one to buy them…and no one to pay them back. Hard to raise capital….

So a bunch of investors get nervous…… And stock prices start to drop All of a sudden….the bank isn’t worth so much anymore

THIS MAKES PEOPLE EVEN MORE NERVOUS…

This creates a “credit crunch” And is self perpetuating So there are a couple of options….

Option #1 Let them sink….this is after all a “free market”.. ex Lehman Bros. files for bankruptcy But there is a downside to that… Lehman Bros had 25000 employees What about all the other people/companies who invested in the banks? And the overall effect on the stock market?

Dow Jones Industrial Average

Option 2 Relax the rules so that some of the bigger companies can buy out the smaller ones Downside here as well.. Bigger companies now exposed And allows for less competition. Note: Merrill Lynch bought by BofA, Bear Stearns bought by JP Morgan

Option #3 Government to the rescue US Federal Reserve and US Treasury provide $200 Billion in loans to Fannie Mae and Freddie Mac and incorporate them into a new conservatorship. US Federal Reserve bridge loans $85 billion to AIG in exchange for 80% of shares. Current plan - US government to provide $700 Billion to banks Maybe With or without safeguards? US Budget deficit/debt = opportunity cost

Worldwide ripple Morocco exchange

In the UK Last spring UK Central Bank guarantees Northern Rock’s assets. Designed to prevent a “run”. It worked, for now…

Other fun sites.. http://finance.yahoo.com/charts http://www.bkam.ma/ http://www.livecharts.co.uk/MarketCharts/nikkei.php http://www.forbes.com/markets/marketsbrief/ http://www.chartsrus.com/ I’ll put these on Moodle along with Casablanca exchange