When Wall Street Fell: The Financial Crisis of 2008 BADM 381: Multinational Management October 14, 2008 Angela Grossi Devin Kelly Eric Slehofer Laura Beschorner

Background Information  Loans given out to anyone and everyone  Investment bankers look to the U.S. housing market  Mortgage backed security = pool of thousands of different mortgages  Housing prices started increasing  However, housing prices then started to decrease and more houses came on market  Result = credit crisis

Present Day  Freezing of commercial paper market (CPM)  CPM = way for big companies to borrow money  Money market mutual funds helped cause this market freeze-up  Reserve funds lost depositors’ money  Lehman Brothers goes bankrupt  Fund managers stopped lending money to companies. Extension of credit has ended.  Credit default swaps (CDSs)  $60 trillion = amount of outstanding CDSs

Repercussions  Netting  Chain of loss  Credit is freezing up, banks do not trust one another, are not lending money  Possible solution could have been regulation of CDS market  1998: Congress shot down attempt to regulate CDS market  $60 trillion in financial market with no oversight  Lack of trust  The government will have to step in

How this affected America  Housing Prices  Tax burden for Americans  Federal budget deficit  Consumers spending less  Companies spending less  Decrease in stock prices  Credit availability issues

Vicious Cycle  All factors come together to keep the American consumers and our economy stuck in a vicious cycle.

Possible Opportunities?  Stock opportunities  Housing opportunities  Credit opportunities

Global Impact  Three problems resulting from the subprime mortgage fallout that have affected the banking system of nearly every country: Solvency – having taken huge losses, banks need capital Funding – because they cannot borrow in the longer- term paper markets, they are short of the funds they need to finance the share of their assets not covered by their deposits Liquidity – because short-term money markets are closed, the banks are cut off from their main source of liquidity

Global Response  Coordinated cut by 6 central banks of the LIBOR rate (rate at which banks lend to each other)‏  Other efforts have been less systemic and multilateral – most responses have been on a country by country basis.

A Special Case: Iceland  Country has essentially become bankrupt.  Three largest banks nationalized (Landsbanki, Kaupthing, Glitnir)‏  Currency (Krona) lost much of its value and has stopped being traded possible abandonment and “adoption” of Euro, hand over monetary policy to European Central Bank  International Monetary Fund intervention

U.S. $700 Billion Bailout Plan  Standards will be set to prevent inappropriate executive compensation for participating companies  Any transactions will require equity sharing  Maximize efforts to modify mortgages for homeowners at risk of foreclosure  Require loan modifications for mortgages owned or controlled by the Federal Government  Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America’s housing needs  $700 billion authorized, with $250 billion available immediately and an additional $100 billion released on a need basis Final $350 billion is subject to a Congressional joint resolution of disapproval

U. K. Plan  Offering up to GBP 50 billion to buy stakes in banks  Will guarantee up to GBP 250 billion in bank debts  Will add up to GBP 100 billion to allow banks to exchange “hard-to-sell” securities for government bonds  HSBC Holdings (a U.K. bank) has loaned out GBP 2 billion to other banks for 3 – 6 months and is planning to send out more Many banks have been reluctant to lend out money to others for periods of more than a day

Other Country’s Plans  Russia: $36 billion into Russian banks a day after initial stock drop Possible plan of over $200 billion  Spain: Set aside 30 billion euros ($40.7 billion) to fund lenders to free up capital so they can continue to lend to companies and households  Iceland: Being rescued by Russia with a loan of 4 billion euros ($5.4 billion)

Sources  The Wall Street Journal  USA Today  Business Week  CTV  The Economist  The New York Times