The New Spectrum for Financial Markets and Management Alamgir Morshed Head of Global Markets 22 December 2009

Part 1: What Went Wrong? Part 2: The New Order / Changed Priorities Part 3: Role of financial experts & leaders Scope of Presentation

What went wrong? Financial Crisis  Subprime Crisis Problems

What went wrong? Financial Crisis  Subprime Crisis Problems

What went wrong? Financial Crisis  Subprime Crisis Problems  Global Effect

What went wrong? Financial Crisis  Subprime Crisis Problems  Global Effect  Liquidity Crisis

What went wrong? Financial Crisis  Subprime Crisis Problems  Global Effect  Liquidity Crisis

What went wrong? Financial CrisisReal Economic Crisis  Subprime Crisis Problems  Global Effect  Liquidity Crisis  Stock Markets Crash

What went wrong? Financial CrisisReal Economic Crisis  Subprime Crisis Problems  Global Effect  Liquidity Crisis  Stock Markets Crash  Collapse of Big Banks

What went wrong? Financial CrisisReal Economic Crisis  Subprime Crisis Problems  Global Effect  Liquidity Crisis  Stock Markets Crash  Collapse of Big Banks  Gloomy Outlook

Chronology of Events : Fed cuts interest rates down to 1%, until 2004 on worries about severe recession Even after tech bubble crash, American consumers continue to spend freely, bouyed by rising home prices. US Debt on rise, Worldwide asset bubbles building up The roots of the crisis  Long term impact of credit expansion  Globalization of financial markets  Progressive financial deregulation & innovations

Chronology of Events The roots of the crisis Credit Crunch  Long term impact of credit expansion  Globalization of financial markets  Progressive financial deregulation & innovations  Subprime Crisis  Liquidity Dries Up  Stock Markets Plunge, Major financial institutions fail/bailed out : Subprime Crisis develops. Default rates spike February 2007 : HSBC Subprime write-offs June 2007 : Bears Stearns hedge funds blow up August 2007 : BNP Paribas freezes 3 investment funds. This marked the beginning of the credit crisis. September 2007 : Interbank liquidity dries up. Northern Rock Bailed out October 2007 : Merrill reports loss of over 8 billion on mortgage related assets. Worldwide losses so far crossed $500 billion one year into crisis Jan 2008 : BOA acquires Countrywide Financial, largest US mortgage lender. US Fed slashed rate twice March 2008 : Sudden Collapse of Bear Stearns. Fed arranged takeover by JP Morgan. 90% loss for Bear’s shareholders June 2008 : Lehman Brothers announces $3 billion loss. Fear grips financial markets

Chronology of Events The roots of the crisis Credit Crunch Bailouts 2008  Long term impact of credit expansion  Globalization of financial markets  Progressive financial deregulation & innovations  Subprime Crisis  Liquidity Dries Up  Stock Markets Plunge, Major financial institutions fail/bailed out July 2008 : Mortgage lender IndyMac collapses. Fed to guarantee debts of Fannie and Freddie. Congress passes multi- billion dollar program to address mortgage and foreclosure crisis. September 7 : US government seizes control of Fannie and Freddie in $ 200 billion bailout September 15 : Lehman Brothers declares $ 600 billion bankruptcy. Merrill Lynch acquired by BOA September 17 : Bailout of AIG for $85 billion, Llyods TBS bought HBOS, September 25 : WAMU with assets of $ 307 billion closed down and sold to JPMorgan Chase September 28 : Fed announces $ 700 billion bailout plan September 29 : Icleland takes control of country's third largest bank. US House of Rep rejects rescue plan. Wall street shares plunge with the Dow plunging 7%, a record one day fall. October : Bailout package passed. Wells Fargo and Wachovia Corp announce merger US Fed continues to slash interest rates. Japan announces $ 276 billion stimulus package. November : Barack Obama elected US President. IMF Predicts Global Recession. Iceland bailed out by IMF. Fed to inject further $ 800bn into economy December : US in recession from December 2007 is acknowledged  Central Banks step into bailout major institutions  Massive Stimulus measures announced

Total Cost of the Crisis “U.S. taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies” - Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program. Global Credit Crunch has already cost more than $ 10 trillion – IMF Rich countries provided $9.2tn in government support, emerging economies spent $ 1.6 trillion Bailout costs : Capital injections - $1.1tn, Purchase of assets - $1.9tn, Guarantees - $ 4.6tn, Liquidity provision - $ 2.5tn Budget Deficit : G20 – 10.2% of GDP, US – 13.5%, UK – 11.6%, Japan 10.3 % Long Term damage : By 2014 govt debt will reach 239% of GDP in Japan, 132% in Italy, 112% in the US, and 99.7% in the UK. UK’s debt was only 44% in 2007 Rating agencies have warned if UK debt crosses 100% of GDP they would consider rating downgrade

Green Shoots Global Stock Markets are rebounding

Green Shoots Global Stock Markets are rebounding Commodity Prices are rising

Green Shoots Global Stock Markets are rebounding Commodity Prices are rising Credit Spread has reduced

Green Shoots Global Stock Markets are rebounding Commodity Prices are rising Credit Spread has reduced Positive Forecasts

New World Order FINANCIAL CRISIS: HOW IT HAPPENED "This economic crisis suddenly awakens us to the fact that this system is not working. When the system is not working that is the best time to undo it and redo it in a new way," – Nobel Laureate Professor Yunus

New World Order FINANCIAL CRISIS: HOW IT HAPPENED New Reserve Currency New Economic Powerhouses to emerge Emergence of Islamic Banking Financial Assitance for G10 countries ? Deleverage, De- Globalize, Re-Regulation Anglo-Saxon model of free reign to FI questioned Liquidity & Sustainability vs Profitability Basel II Savings vs Spending Credit Ratings questioned Vigilance, Risk Management, Governance From liberal to more protectionist, populist politics Preparedness : Proactive than being reactive Stronger leadership required Business education needs to be revamped Watching out for the Black Swan EconomicSocial/Political BACK TO BASICS

New role of Financial Managers "As a result of the demands placed on companies by shareholders, regulators and the public at large for increasing financial information, the CFO's role is shifting dramatically from one of transaction manager to communicator and strategist," - Bill Connell, Director of Risk Management for the BOC Group and chairman of IFAC's Financial and Management Accounting Committee (FMAC).

New role of Financial Managers New Role of Financial Managers: Vigilance: Being Proactive rather than Reactive Governance : Guardians of the corporate conscience Risk Management : Mitigation and Transfer Investor relations and reputation management Standardized and Fair Value Accounting Migration of best practices

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