1. 2008 Financial Crisis

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

3. Cause # 1 - subprime
subprime

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

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

6. 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….

7. 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

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

9. 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….

10. 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

11. THIS MAKES PEOPLE EVEN MORE NERVOUS…

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

14. 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 employees
What about all the other people/companies who invested in the banks?
And the overall effect on the stock market?

15. Dow Jones Industrial Average

16. 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

17. 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

18. Worldwide ripple
Morocco exchange

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

20. Other fun sites.. http://finance.yahoo.com/charts http://www.bkam.ma/
I’ll put these on Moodle along with Casablanca exchange