1. Dr Maurice Mullard Lecture 10

2.  Financial crisis that started in America with sub prime mortgages  Savings glut thesis on global imbalances China Germany Japan high export surpluses US UK France deficit countries  Alan Greenspan low interest rates after 9/11  Compare with Depression of 1929 – 1931  Consumer debt

3.  Differences trigger events from structural flaws  Financial Sector Banks assets liabilities capital and liquidity  Intermiedary role deposits short term and long term exposure  Leverage  Thin capital and liquidity  Run on Banks  Gorton on repo markets and investment banks

4.  Credit crunch 20 07 limited to sub prime mortgages total1 trillion dollars not sufficient to create global crisis  Finance Securities Derivatives and Credit Default Swaps  640 trillion dollars 10 times global GDP  Bear Stearns March 2008 and JP Morgan  Lehman bankruptcy September 2008  AIG

5.  Innovation and New Instruments  Derivatives Market now worth 600 trillion dollars keep in mind world GDP is 65 trillion dollars  CDS Collatarised default swaps insurance for a fee insured pays insurer against default of loans worth 47 trillion dollars  Argument of distributing risks financial modelling started at JB Morgan

6.  CDS Collaterised Debt Obligation contained tranches of loans mortgage backed securities on home loans and also commercial properties  CDS sliced and diced into tranches according to risk and default  Senior seen as safest Mazzini and high risk  Mainly held at Lehmann and Bear Stearns

7.  History of House Prices house prices slowing down in 2007 first time in history CMS started to lose value worry about defaults  Bear Stearns take over by JB Morgan share value fell from 170 dollars to 2 dollars  Lehmann Brothers allowed to go into bankruptcy watershed  AIG rescue  Financials system described as falling off a cliff Buffet derivatives weapons of mass destruction

8.  Idea of Household Net worth  Estimate US household net worth about 103 trillion dollars net debt 50 trillion dollars  US households debt 15 per cent of income

9.  Lessons from History Financial Panics  Bank runs and insurance  Loss of confidence  30 year flood syndrome or a repeat of history  Unable to forecast the bubble  Reluctance to increase interest rates  The Savings Glut

10.  Bank of England monetary policy target inflation FSA responsible for Banks stress tests  De regulation Thatcher Revolution continued Labour Government light touch on regulation  Finance important to UK GDP expansion of hedge funds and Special Investment Vehicles SIV beyond supervision not defined as Banks

11.  More Powers to Bank of England deal with system failure Banks too big to fail competition authority  Future role of FSA  Bank of England MPC and New Finance Committee  Beishoff Report Adair Turner Report  HC Reports on Banking Crisis

12.  Difference between Commercial and Investment Banks how to protect individual savings account  Banks that are too large to fail a moral hazard  Shadow Banking bring into the formal system of regulation  Hedge Funds  Transparency and risk

13.  More restrictions on Shadow Banking Sector  Hedge Funds  Special Investment Vehicles  German criticisms of US and UK Model  Resistance from City of London

14.  Oversight and Regulatory authority  Tighter controls of regulators stop regulatory arbitrage  OTC to be standardised through central clearing system more transparency  Consumer protection