Abc Of Global Financial Crisis 2008

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Information about Abc Of Global Financial Crisis 2008
Business & Mgmt

Published on November 18, 2008

Author: arifanees

Source: slideshare.net

Description

The global financial crisis, brewing for a while, really started to show its effects in the middle of 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems.
On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. The problem could have been avoided, if ideologues supporting the current economics models weren’t so vocal, influential and inconsiderate of others’ viewpoints and concerns.
This presentation provides an overview of the crisis with links for further, more detailed, coverage at the end.
A crisis so severe, the world financial system is shaken…

Attached is a wonderful presentation by the wizard financial analyst and writer Arif Anees. Hope you'd all relish this rare stuff..

A.B.C. of The Global Financial Crisis 2008 [email_address] Making difference & creating inspiration through life changing presentations @ [email_address]

Faces of the CRISIS

Globalization? Global impact? Global Financial Crises? Why? Question: What is the truest definition of Globalization? Answer: Princess Diana's death. Question: How come? Answer: An English princess, with an Egyptian lover, crashes in a French tunnel, driving a German car, with a Dutch engine, driven by a Belgian who was drunk, on Scottish whisky, followed closely by Italian Photographers, on Japanese motorcycles; treated by an American doctor, using Brazilian medicines. This is being told by a British, using Bill Gates' technology, and you're seeing it through a Japanese multimedia projector, that use Taiwanese chips, and a Korean lens, assembled by Bangladeshi workers, in a Singapore plant, This is being told in front of Professors, Educated in USA, UK, Japan and France, That, my friends, is Globalization

Question: What is the truest definition of Globalization?

Answer: Princess Diana's death.

Question: How come?

Answer: An English princess,

with an Egyptian lover,

crashes in a French tunnel,

driving a German car,

with a Dutch engine,

driven by a Belgian who was drunk,

on Scottish whisky,

followed closely by Italian Photographers,

on Japanese motorcycles;

treated by an American doctor,

using Brazilian medicines.

This is being told by a British,

using Bill Gates' technology,

and you're seeing it through a Japanese multimedia projector,

that use Taiwanese chips,

and a Korean lens,

assembled by Bangladeshi workers,

in a Singapore plant,

This is being told in front of Professors,

Educated in USA, UK, Japan and France,

That, my friends, is Globalization

Global Financial Crisis Dictionary 2008 Making difference & creating inspiration through life changing presentations @ [email_address]

20 Steps to the DOOMSDAY 1. In 2001, following a massive stock market and capital spending bubble, Federal Reserve Chairman Alan Greenspan worried that the U.S. faced a severe recession. He began cutting interest rates down to 1% and kept them at that level until 2004, raising them slowly only 0.25% at a time thereafter. 2. With interest rates so low, the financial services industry sensed a lot of money could be made and went all in on real estate, seemingly unaware that low interest rates were masking large risks. 3. Meanwhile, Americans had been anticipating a nasty downturn after the bubble burst. But, they soon realized that money lost in the stock market was more than offset by rising home prices. So, Americans continued to spend freely. Making difference & creating inspiration through life changing presentations @ [email_address]

1. In 2001, following a massive stock market and capital spending bubble, Federal Reserve Chairman Alan Greenspan worried that the U.S. faced a severe recession. He began cutting interest rates down to 1% and kept them at that level until 2004, raising them slowly only 0.25% at a time thereafter.

2. With interest rates so low, the financial services industry sensed a lot of money could be made and went all in on real estate, seemingly unaware that low interest rates were masking large risks.

3. Meanwhile, Americans had been anticipating a nasty downturn after the bubble burst. But, they soon realized that money lost in the stock market was more than offset by rising home prices. So, Americans continued to spend freely.

4. As Americans spent freely, the U.S. went further into debt with the rest of the world. Foreigners, used their dollar IOUs from these debts to start their own bubbles too. 5. Eventually, things started to unravel in 2006 when those that could least afford to purchase homes -- so called subprime borrowers -- started to default in the U.S., prices having run well out of their range of affordability. 6. In February 2007, HSBC issued the first major warning, a harbinger of things to come, writing down tens of billions in losses from their ill-timed 2002 acquisition of U.S. subprime lender Household International. At first things looked fine and policy makers convinced themselves and the wider public that the problem was contained to subprime. 7. However, when two Bear Stearns hedge funds with exposure to the US housing market blew up in June 2007, people became worried that the risks had been underestimated. 8. It was in August 2007 when BNP Paribas, a large French bank, froze withdrawals in three investment funds that people began to panic. If a bank with zero obvious exposure to the U.S. mortgage sector could have this measure of difficulty, anyone could be hiding untold losses. This marked the official beginning of the credit crisis. The result was mutual distrust amongst large banks operating in the global market for interbank loans which meant credit was hard to come by for many banks. Making difference & creating inspiration through life changing presentations @ [email_address]

4. As Americans spent freely, the U.S. went further into debt with the rest of the world. Foreigners, used their dollar IOUs from these debts to start their own bubbles too.

5. Eventually, things started to unravel in 2006 when those that could least afford to purchase homes -- so called subprime borrowers -- started to default in the U.S., prices having run well out of their range of affordability.

6. In February 2007, HSBC issued the first major warning, a harbinger of things to come, writing down tens of billions in losses from their ill-timed 2002 acquisition of U.S. subprime lender Household International. At first things looked fine and policy makers convinced themselves and the wider public that the problem was contained to subprime.

7. However, when two Bear Stearns hedge funds with exposure to the US housing market blew up in June 2007, people became worried that the risks had been underestimated.

8. It was in August 2007 when BNP Paribas, a large French bank, froze withdrawals in three investment funds that people began to panic. If a bank with zero obvious exposure to the U.S. mortgage sector could have this measure of difficulty, anyone could be hiding untold losses. This marked the official beginning of the credit crisis. The result was mutual distrust amongst large banks operating in the global market for interbank loans which meant credit was hard to come by for many banks.

9. By September, liquidity in the interbank market was so bad that rumors were swirling about various institutions which received most of their funding in wholesale markets. One of these was Northern Rock, an aggressive British mortgage lender. The British public panicked and began lining up to pull their money out of the institution. The Bank of England was forced to bail out the company, subsequently nationalizing it altogether. 10.Meanwhile U.S. housing prices continued to decline. The result was massive losses in the alphabet soup of mortgage-related derivative assets held by large global banks. These instruments are called derivatives because their value is derived from the value in underlying assets like mortgages. The first wave of mortgage-related losses were concentrated in these instruments and investing vehicles: RMBSs (Residential Mortgage Backed Securities) CDOs (Collateralized Debt Obligations), and SIVs (Structured Investment Vehicles) and CDOs of CDOs. Merrill Lynch was the first to report a large loss, at $5.5 billion on 5 Oct 2007. Only to come back less than three weeks later on 24 Oct 2007 to say that the losses were now over $8 billion . Eventually, losses reached $500 billion a year into the crisis for all global institutions. Making difference & creating inspiration through life changing presentations @ [email_address]

9. By September, liquidity in the interbank market was so bad that rumors were swirling about various institutions which received most of their funding in wholesale markets. One of these was Northern Rock, an aggressive British mortgage lender. The British public panicked and began lining up to pull their money out of the institution. The Bank of England was forced to bail out the company, subsequently nationalizing it altogether.

10.Meanwhile U.S. housing prices continued to decline. The result was massive losses in the alphabet soup of mortgage-related derivative assets held by large global banks. These instruments are called derivatives because their value is derived from the value in underlying assets like mortgages. The first wave of mortgage-related losses were concentrated in these instruments and investing vehicles: RMBSs (Residential Mortgage Backed Securities) CDOs (Collateralized Debt Obligations), and SIVs (Structured Investment Vehicles) and CDOs of CDOs. Merrill Lynch was the first to report a large loss, at $5.5 billion on 5 Oct 2007. Only to come back less than three weeks later on 24 Oct 2007 to say that the losses were now over $8 billion . Eventually, losses reached $500 billion a year into the crisis for all global institutions.

11. The Merrill losses were followed by losses at most of the large global financial institutions. Many CEOs lost their jobs and the companies were forced to raise capital . By August 2008, the amount raised was to reach $350 billion. 12. The situation seemed to quiet down in early 2008. However, in March the failures of hedge funds Peloton and Carlyle Capital put the credit crisis back in full view. Another 2nd period of panic resulted in the sudden collapse of Bear Stearns, America's 5th largest investment bank. The Fed organized a takeover by JP Morgan Chase that was a catastrophic 90% loss for Bear's shareholders . 13. Eventually the collapse of Bear Stearns faded and, for the third time, we were lulled into a false sense of security that the worst was over. Nevertheless, writedowns continued unabated as did capital raising. When Lehman Brothers announced a massive $3 billion loss 0n 9 Jun 2008, the crisis came into full view yet again -- much as it had when Bear Stearns' hedge funds collapsed the previous June. 14.This time, market fears did not recede and the financial markets remained in a constant state of stress. Things started to unravel very quickly. IndyMac, an aggressive mortgage lender, an American version of Northern Rock, was taken over by the FDIC . And a panic was on for the third time. Making difference & creating inspiration through life changing presentations @ [email_address]

11. The Merrill losses were followed by losses at most of the large global financial institutions. Many CEOs lost their jobs and the companies were forced to raise capital . By August 2008, the amount raised was to reach $350 billion.

12. The situation seemed to quiet down in early 2008. However, in March the failures of hedge funds Peloton and Carlyle Capital put the credit crisis back in full view. Another 2nd period of panic resulted in the sudden collapse of Bear Stearns, America's 5th largest investment bank. The Fed organized a takeover by JP Morgan Chase that was a catastrophic 90% loss for Bear's shareholders .

13. Eventually the collapse of Bear Stearns faded and, for the third time, we were lulled into a false sense of security that the worst was over. Nevertheless, writedowns continued unabated as did capital raising. When Lehman Brothers announced a massive $3 billion loss 0n 9 Jun 2008, the crisis came into full view yet again -- much as it had when Bear Stearns' hedge funds collapsed the previous June.

14.This time, market fears did not recede and the financial markets remained in a constant state of stress. Things started to unravel very quickly. IndyMac, an aggressive mortgage lender, an American version of Northern Rock, was taken over by the FDIC . And a panic was on for the third time.

15. Next were the GSEs. The end result of the market panic was a questioning of the viability of Fannie Mae and Freddie Mac, the two largest mortgage lenders in the United States and at the core of the residential property market. Eventually the U.S. Government was forced to take the two companies into conservatorshi p. 16.Afterwards, all financial shares generally came under assault. The ones considered the weakest came under the heaviest selling pressure, resulting in the collapse of Lehman Brothers. Without government support and unable to close a merger in around-the-clock negotiations at the weekend, the company filed for bankruptcy on Sep. 15 . 17. Merrill Lynch, the venerated US investment bank, sensing trouble, sought and received cover in a takeover by Bank of America that very same weekend. 18. Financial markets smelled blood after Lehman collapsed. Apparently no company was too big to fail. So, the assault on financial service companies continued. Eventually, AIG, the largest insurance company in the world, succumbed to this pressure. The Federal Reserve, citing special considerations, bailed out the non-depositary institution . 19. At this stage, we were in free fall and the entire banking system was on the verge of collapse in the United States. Global shocks had not ended either, as UK institutions were increasingly under attack as well, having been damaged by their own property bubble. At the urging of the British Prime Minister and the UK regulatory authorities, Lloyds TSB bought Britain's largest mortgage lender HBOS , which was in jeopardy of failing. 20. By this time, the Feds had had enough. The time for ad hoc crisis management was at an end. Hank Paulson moved decisively and put forward his $700 billion bailout plan. Which was later approved…. And that's where we stand. Making difference & creating inspiration through life changing presentations @ [email_address]

15. Next were the GSEs. The end result of the market panic was a questioning of the viability of Fannie Mae and Freddie Mac, the two largest mortgage lenders in the United States and at the core of the residential property market. Eventually the U.S. Government was forced to take the two companies into conservatorshi p.

16.Afterwards, all financial shares generally came under assault. The ones considered the weakest came under the heaviest selling pressure, resulting in the collapse of Lehman Brothers. Without government support and unable to close a merger in around-the-clock negotiations at the weekend, the company filed for bankruptcy on Sep. 15 .

17. Merrill Lynch, the venerated US investment bank, sensing trouble, sought and received cover in a takeover by Bank of America that very same weekend.

18. Financial markets smelled blood after Lehman collapsed. Apparently no company was too big to fail. So, the assault on financial service companies continued. Eventually, AIG, the largest insurance company in the world, succumbed to this pressure. The Federal Reserve, citing special considerations, bailed out the non-depositary institution .

19. At this stage, we were in free fall and the entire banking system was on the verge of collapse in the United States. Global shocks had not ended either, as UK institutions were increasingly under attack as well, having been damaged by their own property bubble. At the urging of the British Prime Minister and the UK regulatory authorities, Lloyds TSB bought Britain's largest mortgage lender HBOS , which was in jeopardy of failing.

20. By this time, the Feds had had enough. The time for ad hoc crisis management was at an end. Hank Paulson moved decisively and put forward his $700 billion bailout plan. Which was later approved….

And that's where we stand.

Impact of the squeeze??? Here are some startling statistics that make our financial crisis all too real: 2/3 of Americans believe their children will be economically worse off then they are. Profits are at a 40 year high for Fortune 500 companies ($705 billion) nearly 2X previous high. But average wages only up 1% (inflation adjusted) (Bureau of Labor Statistics (BLS)). Median personal income is actually down, below 2000 levels (BLS), and also below 1977 levels in real dollars! The real median income in 1977 was $51,223 (inflation adjusted).  In 2006 it was $50,700.  (National Center for Education Statistics (NCES)). Virtually all income gains have gone to the richest Americans, the owners of capital and senior management compensation, which is now an incredible 400 times the average employee wage. In USA , out of 300 million people in which the richest 3 million own more than the bottom 256 million.  1% owns more than 90% of us put together! Prices in real terms of housing, education, and health care have risen nearly 300% more in the past 30 years, while individual incomes are stagnant. The amount of monthly income it takes to buy a house today is nearly 23% vs. 17% in 1970.  People who pay 50% of their income for rent or mortgage payments are at an all time high. Private college tuition and public tuition is up nearly 300% (College Board). The average debt of a college graduate is nearly $20,000+ (College Board). A majority of Baby Boomers expect to work beyond age 65 because they can’t afford not to. 47 million are medically uninsured.  Most are in families with at least one full time worker. Medical Insurance Premiums of an average American family exceed $1000 per month. Loan defaults and foreclosures are doubling monthly in many parts of the country. In Cleveland, Ohio nearly 10% of the homes are vacant and abandoned due to foreclosure caused by job loss. Retail sales are declining due to increase costs of gasoline, insurance, and housing. The savings rate for the average American 30 years ago was 9%.  Today it is at zero. America has fewer manufacturing jobs (14.3 million) than it did in 1950 with 2 times the population.   (In 1950 there were approximately 150 million Americans; today there are approximately 300 million. ) Since 1977, inflation-adjusted medium income for U.S. males has declined 7.5%. U.S. productivity in terms of output ranks 8th behind Norway, Belgium, France, Ireland, Italy, Austria, and Germany (OCED). U.S household debt exceeds $12 trillion. U.S. Federal Deficit is $8.8 trillion!  And climbing every second.

Here are some startling statistics that make our financial crisis all too real:

2/3 of Americans believe their children will be economically worse off then they are.

Profits are at a 40 year high for Fortune 500 companies ($705 billion) nearly 2X previous high.

But average wages only up 1% (inflation adjusted) (Bureau of Labor Statistics (BLS)).

Median personal income is actually down, below 2000 levels (BLS), and also below 1977 levels in real dollars! The real median income in 1977 was $51,223 (inflation adjusted).  In 2006 it was $50,700.  (National Center for Education Statistics (NCES)).

Virtually all income gains have gone to the richest Americans, the owners of capital and senior management compensation, which is now an incredible 400 times the average employee wage.

In USA , out of 300 million people in which the richest 3 million own more than the bottom 256 million.  1% owns more than 90% of us put together!

Prices in real terms of housing, education, and health care have risen nearly 300% more in the past 30 years, while individual incomes are stagnant.

The amount of monthly income it takes to buy a house today is nearly 23% vs. 17% in 1970.  People who pay 50% of their income for rent or mortgage payments are at an all time high.

Private college tuition and public tuition is up nearly 300% (College Board).

The average debt of a college graduate is nearly $20,000+ (College Board).

A majority of Baby Boomers expect to work beyond age 65 because they can’t afford not to.

47 million are medically uninsured.  Most are in families with at least one full time worker.

Medical Insurance Premiums of an average American family exceed $1000 per month.

Loan defaults and foreclosures are doubling monthly in many parts of the country.

In Cleveland, Ohio nearly 10% of the homes are vacant and abandoned due to foreclosure caused by job loss.

Retail sales are declining due to increase costs of gasoline, insurance, and housing.

The savings rate for the average American 30 years ago was 9%.  Today it is at zero.

America has fewer manufacturing jobs (14.3 million) than it did in 1950 with 2 times the population.   (In 1950 there were approximately 150 million Americans; today there are approximately 300 million. )

Since 1977, inflation-adjusted medium income for U.S. males has declined 7.5%.

U.S. productivity in terms of output ranks 8th behind Norway, Belgium, France, Ireland, Italy, Austria, and Germany (OCED).

U.S household debt exceeds $12 trillion.

U.S. Federal Deficit is $8.8 trillion!  And climbing every second.

Making difference & creating inspiration through life changing presentations @ [email_address]

 

“ the elephant in the room”

Origin point of the crisis United States, 2007: a price bubble in the housing market bursts… Making difference & creating inspiration through life changing presentations @ [email_address]

United States, 2007: a price bubble in the housing market bursts…

Origin point of the crisis … marking the end of the largest speculative surge of real housing prices in the U.S. in the last 50 years … Making difference & creating inspiration through life changing presentations @ [email_address] Notice the prolonged exponential growth!

… marking the end of the largest speculative surge of real housing prices in the U.S. in the last 50 years …

Origin point of the crisis … and resulting in a surge of loan delinquencies in the residential mortgage loan market … Making difference & creating inspiration through life changing presentations @ [email_address]

… and resulting in a surge of loan delinquencies in the residential mortgage loan market …

Origin point of the crisis … especially among the recent loan vintages on the “subprime” market segment. Vintage 2007 is the worst performing yet… % of delinquent loans (60+ days) Months from origination Making difference & creating inspiration through life changing presentations @ [email_address]

… especially among the recent loan vintages on the “subprime” market segment. Vintage 2007 is the worst performing yet…

Several questions pop up… What has fueled the observed house price bubble? U.S. monetary policy? Global saving glut? Lack of (other) investment opportunities? How can lower house prices increase mortgage loan defaults? Does the ability to repay mortgage loans depend on the value of the underlying real estate? Why was the crisis not contained at the point of origin? Shouldn’t risks be borne by those who originate them (=mortgage banks) ? Can the crisis affect the real economy and the world? How can problems in a relatively small segment of the U.S. economy affect growth inside and outside of the U.S.? Making difference & creating inspiration through life changing presentations @ [email_address]

What has fueled the observed house price bubble?

U.S. monetary policy?

Global saving glut?

Lack of (other) investment opportunities?

How can lower house prices increase mortgage loan defaults?

Does the ability to repay mortgage loans depend on the value of the underlying real estate?

Why was the crisis not contained at the point of origin?

Shouldn’t risks be borne by those who originate them (=mortgage banks) ?

Can the crisis affect the real economy and the world?

How can problems in a relatively small segment of the U.S. economy affect growth inside and outside of the U.S.?

Mortgage loan market in the U.S. – segmentation of the market Government guarantee and securitization GSEs- Fannie Mae, Freddie Mac… Private securitization market Countrywide financial, Bear Stearns, Lehman Brothers, Bank of America, Wells Fargo, Washington Mutual… Making difference & creating inspiration through life changing presentations @ [email_address] U.S. mortgage loan market “ Prime” LTV<80% FICO>660 “ Non-prime” “ Conforming” Principal < “ conforming” limit “ Jumbo” Principal > “ conforming” limit “ Near-prime” (Alt-A) LTV~80-90% FICO~581-659 “ Subprime” LTV>90% FICO<580

Mortgage loan market in the U.S. – relative size of the “subprime” segment The share of subprime increased by 130% from 2003 to 2005! The percent of loans securitized increased by 60% from 2001 to 2005! Share of subprime In total U.S. economy (measured by GDP): 1% (2001), increasing to 5% (2005) Making difference & creating inspiration through life changing presentations @ [email_address]

The share of subprime increased by 130% from 2003 to 2005!

The percent of loans securitized increased by 60% from 2001 to 2005!

Mortgage loan market in the U.S. – types of products Making difference & creating inspiration through life changing presentations @ [email_address] Mortgage loans Fixed rate mortgage (FRM) Adjustable rate mortgage (ARM) Common ARM ARM payment option Interest only (I-O) ARM Hybrid ARM

Functioning of the mortgage loan market in favorable market conditions Assumptions Rising real estate prices Rising income levels Low or falling interest rates Result Additional real estate equity due to price appreciation Borrowers are able to repay their loans with refinancing. Example of refinancing: Real estate value: $200.000 Mortgage loan: $200.000 Real estate value: $300.000 After 1 year Mortgage loan: $300.000 Repayment of initial loan: $200.000 Cash remaining $100.000 Making difference & creating inspiration through life changing presentations @ [email_address]

Assumptions

Rising real estate prices

Rising income levels

Low or falling interest rates

Result

Additional real estate equity due to price appreciation

Borrowers are able to repay their loans with refinancing.

Example of refinancing:

Functioning of the mortgage loan market in strained market conditions Assumptions Stagnating or falling real estate prices. Stagnating or falling income levels. High or rising interest rates. Result No new real estate equity. Repyment of loans by refinancing not possible. Borrowers faced with increasing difficulties in servicing real estate debt. Figure: Interest rate movements on U.S. mortgage market (hybrid ARM rates). Making difference & creating inspiration through life changing presentations @ [email_address]

Assumptions

Stagnating or falling real estate prices.

Stagnating or falling income levels.

High or rising interest rates.

Result

No new real estate equity.

Repyment of loans by refinancing not possible.

Borrowers faced with increasing difficulties in servicing real estate debt.

Figure:

Interest rate movements on U.S. mortgage market (hybrid ARM rates).

Risk factors contributing to the escalation of the crisis in the U.S. Global capital imbalances : Asia & Middle East – surpluss savings; United States – deficit savings; Europe – mostly balanced. Global demand for higher yields – low rates of return on classical high risk instruments (i.e. shares), in the post dot com era (after 2000). Predatory lending practices among U.S. mortgage banks – Combination of capital abundance in the U.S. due to international inflows and demand for higher yields provides incentives to U.S. banks for aggressive lending. Failure of prudent lending practices – loans made to individuals with poor or no credit histories, no documentation, no regular income! Widespread use of decieving credit products (hybrid ARMs) – Low initial fixed rates marketed to lure high credit risk individuals into borrowing without giving enough consideration to possible subsequent default; upon resetting of interest rates (fixed to floating) debt servicing requirements alone could increase 15-30%! Making difference & creating inspiration through life changing presentations @ [email_address]

Global capital imbalances : Asia & Middle East – surpluss savings; United States – deficit savings; Europe – mostly balanced.

Global demand for higher yields – low rates of return on classical high risk instruments (i.e. shares), in the post dot com era (after 2000).

Predatory lending practices among U.S. mortgage banks – Combination of capital abundance in the U.S. due to international inflows and demand for higher yields provides incentives to U.S. banks for aggressive lending. Failure of prudent lending practices – loans made to individuals with poor or no credit histories, no documentation, no regular income!

Widespread use of decieving credit products (hybrid ARMs) – Low initial fixed rates marketed to lure high credit risk individuals into borrowing without giving enough consideration to possible subsequent default; upon resetting of interest rates (fixed to floating) debt servicing requirements alone could increase 15-30%!

Global financial imbalances U.S. current account deficit recently as high as 6% of U.S. GDP! Financing provided mostly by capital inflows from Asian countires and oil exporters. Making difference & creating inspiration through life changing presentations @ [email_address]

U.S. current account deficit recently as high as 6% of U.S. GDP! Financing provided mostly by capital inflows from Asian countires and oil exporters.

Equity markets Equity markets were not an attractive investment opportunity in the aftermath of the collapse of the dot com bubble. Making difference & creating inspiration through life changing presentations @ [email_address]

Equity markets were not an attractive investment opportunity in the aftermath of the collapse of the dot com bubble.

Interest rates Interest rates in 2002-2003 were historically low as a result of expansionary monetary policies by major world central banks. Making difference & creating inspiration through life changing presentations @ [email_address]

Interest rates in 2002-2003 were historically low as a result of expansionary monetary policies by major world central banks.

Risk factors revisited: The final touch that puts it all together… Global financial imbalances  infusion of liquidity into international financial system, searching for yield Low yields on equities  incentives to invest into new high risk instruments with adequate risk profile Low interest rates  incentives to borrow for those who would normally never be able to afford it. Are the owners of global capital really willing to invest into high credit risk U.S. individuals? Probably only in small amounts… … unless the risks can be dispersed!  STRUCTURED FINANCE & SECURITIZATION Making difference & creating inspiration through life changing presentations @ [email_address]

Global financial imbalances  infusion of liquidity into international financial system, searching for yield

Low yields on equities  incentives to invest into new high risk instruments with adequate risk profile

Low interest rates  incentives to borrow for those who would normally never be able to afford it.

Are the owners of global capital really willing to invest into high credit risk U.S. individuals? Probably only in small amounts…

… unless the risks can be dispersed!

 STRUCTURED FINANCE & SECURITIZATION

Structured finance: the first round of securitization (schematic presentation) Mortgage loans Total value: $900.000 Mortgage loan portfolio can be divided into 9.000 bonds with $100 face falue. Different tranches of bonds carry different levels of risk depending on their seniority/subordination in debt repayment. 1. tranche (low risk) 3.000 bonds at $100 Coupon rate: 10 % 2. tranche (medium risk) 3.000 bonds at $100 Coupon rate: 15 % 3. tranche (high risk) 3.000 bonds at $100 Coupon rate: 20 % Securitization Mortgage backed securities (MBS) Demand: financial investors Supply: originators of mortgage loans Making difference & creating inspiration through life changing presentations @ [email_address]

Structured finance: The key to high (AAA) ratings Credit enhancement facilities External: Bond insurance – monoline insurers; Letter of credit – banks. Internal: Overcollateralization; Excess spread; Reserve account; Senior/subordinated debt structure. Liquidity facilities – sponsor banks Making difference & creating inspiration through life changing presentations @ [email_address]

Credit enhancement facilities

External:

Bond insurance – monoline insurers;

Letter of credit – banks.

Internal:

Overcollateralization;

Excess spread;

Reserve account;

Senior/subordinated debt structure.

Liquidity facilities – sponsor banks

Structured finance: The players in securitization Originator End borrowers Conduit/trust/ SPV/SPE/SIV Investment bank (underwriter) Rating agency Institutional investor End lenders Insurance company Broker Servicer $ $ $ $ $ Mortgages Mortgages MBS I&P ($) I&P ($) MBS, I&P ($) Financial returns ($) LEGEND KEY O&G – interest and principal SPV – special purpose vehicle SPE – special purpose enterprise SIV – special investment vehicle MBS – mortgage backed securities Founder: loan originator or investment bank Purpose: transfering ownerhship of claims (loans) and collateral (mortgages) in order to issue mortgage backed securities (bonds). Exposure of founder: implicit guarantee in case of large losses. Assigns credit rating to issued MBSs. Organizes issuing of MBSs and places MBSs to investors in financial markets. Broker places mortgage loans to borrowers for fee Manages the flow of interests and principal (I&P); usually, but not necessarilly the Originator Typically a specialized mortgage bank Mutual funds, pension funds, hedge funds… Can assume part of risks (insurance of mortgage loans, insurance of MBS returns). Making difference & creating inspiration through life changing presentations @ [email_address]

Structured finance: The second round of securitization Mortgage bonds Rating: AAA/Aaa Mortgage bonds Rating: AA/Aa2 Mortgage bonds Rating: A/A2 Mortgage bonds Rating: BBB/Baa2 Mortgage bonds Rating: BB/Ba2 Mortgage bonds Rating: B/B2 “ Equity” tranche Mortgage backed securities (MBS) Investment grade Speculative grade CDO Ratings: AAA/Aaa – BBB/Baa2 CDO Ratings: less than BBB/Baa2 Collateralized debt obligations (CDO) Investment grade MBS Other claims Making difference & creating inspiration through life changing presentations @ [email_address]

Structured finance: The third round of securitization… Making difference & creating inspiration through life changing presentations @ [email_address] A mil. $ question: if I am a sponsor bank of the SIV that issued CDO2, what is my risk exposure?

Structured finance: Instruments and volumes RMBS – residential mortgage backed securities CMBS – commercial mortgage backed securities MBS – mortgage backed securities ABS – asset backed securities CDO – collateralized debt obligations CDS – credit default swaps Making difference & creating inspiration through life changing presentations @ [email_address]

RMBS – residential mortgage backed securities

CMBS – commercial mortgage backed securities

MBS – mortgage backed securities

ABS – asset backed securities

CDO – collateralized debt obligations

CDS – credit default swaps

Structured finance: ratings of issued securities and types of claims for SIVs Making difference & creating inspiration through life changing presentations @ [email_address]

Structured finance: funding profile of SIVs and claims of ABCP conduits

International transmission of the crisis – institutional investors (1) Key question Why has a crisis in a relatively narrow segment of the U.S. financial system send such strong shockwaves through the U.S. and international financial environment? Explanations Investor miopia – excessive focus on yield and insufficient focus on risk due to benign international financial environment. Difficulties in estimating risks – failure of risk assessment models for structured finance instruments, which are not actively traded in the secondary markets (such as CDO and CDO2).

Key question

Why has a crisis in a relatively narrow segment of the U.S. financial system send such strong shockwaves through the U.S. and international financial environment?

Explanations

Investor miopia – excessive focus on yield and insufficient focus on risk due to benign international financial environment.

Difficulties in estimating risks – failure of risk assessment models for structured finance instruments, which are not actively traded in the secondary markets (such as CDO and CDO2).

International transmission of the crisis – institutional investors (2) Over reliance on credit rating agencies – systematic large downgrades of MBS credit ratings since July 2007 cause panic among investors and subsequent “flight to quality”  repricing of risk! Contagion effect – a lack of confidence spread from the narrow MBS segment to the wider ABS segment, which is based on a much broader pool of claims, including corporate bonds, student loans, car leases, credit card payments etc. Self-fulfilling negative spirals – investors’ lack of condifence  fire sales of structured finance instruments  stressed liquidation of SIV/SPV/SPE assets  falling prices of illiquid structured finance instruments  further lack of confidence  accelerated fire sales of structured finance instruments…

Over reliance on credit rating agencies – systematic large downgrades of MBS credit ratings since July 2007 cause panic among investors and subsequent “flight to quality”  repricing of risk!

Contagion effect – a lack of confidence spread from the narrow MBS segment to the wider ABS segment, which is based on a much broader pool of claims, including corporate bonds, student loans, car leases, credit card payments etc.

Self-fulfilling negative spirals – investors’ lack of condifence  fire sales of structured finance instruments  stressed liquidation of SIV/SPV/SPE assets  falling prices of illiquid structured finance instruments  further lack of confidence  accelerated fire sales of structured finance instruments…

Unreliable ratings of rating agencies in the MBS market

Transmission of risk aversion (1): From the RMBS to the CMBS segment… Making difference & creating inspiration through life changing presentations @ [email_address] Record drops in prices Record increases in risk premiums

Transmission of risk aversion (2): …from MBS to the entire ABS market… Making difference & creating inspiration through life changing presentations @ [email_address]

Transmission of risk aversion (3): …and even to corporate debt markets Making difference & creating inspiration through life changing presentations @ [email_address]

International transmission of the crisis –the interbank money market (1) Key question How has the crisis jumped from institutional investors to the interbank market? Explanations Realization of contingent liabilities of banks to various investment vehicles Important role of ABCP (asset backed commercial papers) with partial exposure to U.S. subprime market in transmission of the crisis! Conduits issuing ABCPs were established & sponsored by several european banks. Problems at German banks IKB and Sachsen LB and french BNP Paribas. Making difference & creating inspiration through life changing presentations @ [email_address]

Key question

How has the crisis jumped from institutional investors to the interbank market?

Explanations

Realization of contingent liabilities of banks to various investment vehicles

Important role of ABCP (asset backed commercial papers) with partial exposure to U.S. subprime market in transmission of the crisis!

Conduits issuing ABCPs were established & sponsored by several european banks. Problems at German banks IKB and Sachsen LB and french BNP Paribas.

International transmission of the crisis –the interbank money market (2) Non-functioning of the securitization market – banks can no longer transfer risks off their balance sheets (problems with pending LBOs). Unwanted claims put pressure on banks’ capital adequacy. Larger liquidity requirements at banks – due to increased risks of realization of additional contingent liabilities. Crisis of confidence between banks – problem of adverse selection creates a dangerous liquidity squeeze in the interbank money market. Banks respond by toughening lending standards. Increased liquidity requirements of nonfinancial companies – Due to stressed liquidity conditions, companies try to secure cash, creating further liquidity pressures for banks. Making difference & creating inspiration through life changing presentations @ [email_address]

Non-functioning of the securitization market – banks can no longer transfer risks off their balance sheets (problems with pending LBOs). Unwanted claims put pressure on banks’ capital adequacy.

Larger liquidity requirements at banks – due to increased risks of realization of additional contingent liabilities.

Crisis of confidence between banks – problem of adverse selection creates a dangerous liquidity squeeze in the interbank money market. Banks respond by toughening lending standards.

Increased liquidity requirements of nonfinancial companies – Due to stressed liquidity conditions, companies try to secure cash, creating further liquidity pressures for banks.

Transmission of the crisis to the interbank market – increase in credit and liquidity risks Making difference & creating inspiration through life changing presentations @ [email_address]

Countermeasures (1) Infusion of liquidity to the interbank market (Fed, ECB and other central banks) – liquidity provided in exchange for securities that “nobody else wants”. Lowering interest rates (Fed) – with the objective to prevent a sharp recession in the U.S. and to ease conditions in the mortgage markets Balance sheet clean-up and recapitalization of large, systemically important banks – substantial role of the so called sovereign wealth funds. Making difference & creating inspiration through life changing presentations @ [email_address]

Infusion of liquidity to the interbank market (Fed, ECB and other central banks) – liquidity provided in exchange for securities that “nobody else wants”.

Lowering interest rates (Fed) – with the objective to prevent a sharp recession in the U.S. and to ease conditions in the mortgage markets

Balance sheet clean-up and recapitalization of large, systemically important banks – substantial role of the so called sovereign wealth funds.

Countermeasures (2) Bailouts of failed banks – nationalization in case of Northern Rock, takeover (by JP Morgan Chase) in case of Bear Stearns, with the objective to contain systemic risks – problem of moral hazard! Measures to improve the conditions in the mortgage market (U.S.) – moratorium on loan repayments, increased authority for intervention by government sponsored enterprises (GSEs) both in granting guarantees and securitization, fiscal stimulation. Reconsidering the role of regulation and supervision of nonbank financial institutions and off balance sheet conduits and investment vehicles. Making difference & creating inspiration through life changing presentations @ [email_address]

Bailouts of failed banks – nationalization in case of Northern Rock, takeover (by JP Morgan Chase) in case of Bear Stearns, with the objective to contain systemic risks – problem of moral hazard!

Measures to improve the conditions in the mortgage market (U.S.) – moratorium on loan repayments, increased authority for intervention by government sponsored enterprises (GSEs) both in granting guarantees and securitization, fiscal stimulation.

Reconsidering the role of regulation and supervision of nonbank financial institutions and off balance sheet conduits and investment vehicles.

Bank capital write-downs and recapitalizations Making difference & creating inspiration through life changing presentations @ [email_address]

What are the costs of the crisis? Current estimates of potential losses from the crisis are $945 bil. (IMF). Of this, $ 225 bil. is due to estimated losses on outstanding loans, $ 720 bil. due to estimated losses on securities. About $440-510 bil. losses expected in banks, $105-130 bil. losses in insurance, $90-160 bil. in pensions/savings, $70-140 bil. in GSEs and government and $110-200 bil. in other institutions (including hedge funds). Making difference & creating inspiration through life changing presentations @ [email_address]

Current estimates of potential losses from the crisis are $945 bil. (IMF).

Of this, $ 225 bil. is due to estimated losses on outstanding loans, $ 720 bil. due to estimated losses on securities.

About $440-510 bil. losses expected in banks, $105-130 bil. losses in insurance, $90-160 bil. in pensions/savings, $70-140 bil. in GSEs and government and $110-200 bil. in other institutions (including hedge funds).

How will the crisis evolve in the future? Problems in the U.S. mortgage market are far from over which implies more potential for realization of contingent liabilities in financial institutions Delinquencies and defaults expected to continue; Write-downs in financial institutions expected to continue. Signs of cooling housing markets accross Europe United Kingdom, Ireland, Spain… Could there be a mini subprime case in Europe? Making difference & creating inspiration through life changing presentations @ [email_address]

Problems in the U.S. mortgage market are far from over which implies more potential for realization of contingent liabilities in financial institutions

Delinquencies and defaults expected to continue;

Write-downs in financial institutions expected to continue.

Signs of cooling housing markets accross Europe

United Kingdom, Ireland, Spain…

Could there be a mini subprime case in Europe?

How will the crisis evolve in the future? Impact of the crisis on credit risk premiums Implications of the “flight to quality”: repricing of risk – significantlly higher required yields for riskier investments than until recently. Danger of global growth slow down, if the crisis turns into a credit crunch and threatens smooth borrowing of nonfinancial enterprises. Making difference & creating inspiration through life changing presentations @ [email_address]

Impact of the crisis on credit risk premiums

Implications of the “flight to quality”: repricing of risk – significantlly higher required yields for riskier investments than until recently.

Danger of global growth slow down, if the crisis turns into a credit crunch and threatens smooth borrowing of nonfinancial enterprises.

Conclusion: systemic risks in international financial system have increased Making difference & creating inspiration through life changing presentations @ [email_address]

Sub-prime lending Sub-prime lending had spread from inner-city areas right across the US by 2005. By then, one in five mortgages were sub-prime, and they were particularly popular among recent immigrants trying to buy a home for the first time, and the poor. House prices were high, and it was difficult to become an owner-occupier. But these mortgages had a much higher rate of repossession than conventional mortgages (and thus much riskier) because they were adjustable rate mortgages (ARMs). Payments were fixed for two years, and then became higher and linked to Fed interest rates, which also rose substantially. Making difference & creating inspiration through life changing presentations @ [email_address]

Sub-prime lending had spread from inner-city areas right across the US by 2005. By then, one in five mortgages were sub-prime, and they were particularly popular among recent immigrants trying to buy a home for the first time, and the poor.

House prices were high, and it was difficult to become an owner-occupier. But these mortgages had a much higher rate of repossession than conventional mortgages (and thus much riskier) because they were adjustable rate mortgages (ARMs). Payments were fixed for two years, and then became higher and linked to Fed interest rates, which also rose substantially.

Subprime 2 A wave of repossessions is sweeping America as many of these mortgages reset to higher rates. By late 2007, one in ten homes in Cleveland had been repossessed and Deutsche Bank Trust, acting for of bondholders, was the largest property owner in the city. As many as two million families will be evicted from their homes as their cases make their way through the courts. The Bush administration is pushing the industry to renegotiate, but mortgage companies are being overwhelmed by a tidal wave of cases. Making difference & creating inspiration through life changing presentations @ [email_address]

A wave of repossessions is sweeping America as many of these mortgages reset to higher rates. By late 2007, one in ten homes in Cleveland had been repossessed and Deutsche Bank Trust, acting for of bondholders, was the largest property owner in the city.

As many as two million families will be evicted from their homes as their cases make their way through the courts. The Bush administration is pushing the industry to renegotiate, but mortgage companies are being overwhelmed by a tidal wave of cases.

Scale and Spread Collapse of the government backed mortgage system in the USA (Fannie and Freddie) followed by meltdown of major investment banks (Lehman, Bear, Merrill) exposed to mortgage market Mark-to-market asset pricing effects on balance sheets and cumulative liquidity retraction due to rising risk aversion; Now affecting Insurance (AIG) ; and pensions funds next? Making difference & creating inspiration through life changing presentations @ [email_address]

Collapse of the government backed mortgage system in the USA (Fannie and Freddie) followed by meltdown of major investment banks (Lehman, Bear, Merrill) exposed to mortgage market

Mark-to-market asset pricing effects on balance sheets and cumulative liquidity retraction due to rising risk aversion;

Now affecting Insurance (AIG) ; and pensions funds next?

Making difference & creating inspiration through life changing presentations @ [email_address]

Making difference & creating inspiration through life changing presentations @ [email_address]

Financial Times , 20 Sept 2008 “… bank boards and bank executives have failed to understand complex mortgage-backed banking products, as have central bankers, regulators and credit rating agencies.” “… a reward system that has granted huge bonuses to those who peddled toxic mortgage-related products….” “ Almost as absurd has been the degree of leverage racked up by investment banks.” Making difference & creating inspiration through life changing presentations @ [email_address]

“… bank boards and bank executives have failed to understand complex mortgage-backed banking products, as have central bankers, regulators and credit rating agencies.”

“… a reward system that has granted huge bonuses to those who peddled toxic mortgage-related products….”

“ Almost as absurd has been the degree of leverage racked up by investment banks.”

Policy reactions “ There are no atheists in foxholes and no ideologues in financial crises,” Mr. Bernanke told colleagues…( NYT 21.09.08) Freddie Mae and Freddie Mac (re)nationalised; Merrill sold to BankAmerica; Lehman to Barclays; Goldman and Morgan become banks again; US govt $700bn purchase of bad debt; G3 central banks support world banking. Expansionary monetary policy (to avoid recession like 1930s) and scale of US Govt (and G3) bailouts will have large repercussions, yet to be evaluated [lessons of Mexico etc?] Making difference & creating inspiration through life changing presentations @ [email_address]

“ There are no atheists in foxholes and no ideologues in financial crises,” Mr. Bernanke told colleagues…( NYT 21.09.08)

Freddie Mae and Freddie Mac (re)nationalised; Merrill sold to BankAmerica; Lehman to Barclays; Goldman and Morgan become banks again; US govt $700bn purchase of bad debt; G3 central banks support world banking.

Expansionary monetary policy (to avoid recession like 1930s) and scale of US Govt (and G3) bailouts will have large repercussions, yet to be evaluated [lessons of Mexico etc?]

Making difference & creating inspiration through life changing presentations @ [email_address]

Growth and trade World GDP growth already projected by IMF to slow down by 2 % points (from 5 to 3 for 2008 and 09); probably more. So with 2% world growth; global GDP per capita falls Asia probably most resilient (though exports to US will fall); LA will slow down, Africa recession? Commodity prices declining already; volumes too. Natural resource exporters will be hit; food and oil importers to benefit. Making difference & creating inspiration through life changing presentations @ [email_address]

World GDP growth already projected by IMF to slow down by 2 % points (from 5 to 3 for 2008 and 09); probably more. So with 2% world growth; global GDP per capita falls

Asia probably most resilient (though exports to US will fall); LA will slow down, Africa recession?

Commodity prices declining already; volumes too. Natural resource exporters will be hit; food and oil importers to benefit.

Making difference & creating inspiration through life changing presentations @ [email_address]

Making difference & creating inspiration through life changing presentations @ [email_address]

Making difference & creating inspiration through life changing presentations @ [email_address]

Investment and aid International investment (bonds, FDI) will slow down; as will emerging market stocks; as global confidence declines Sovereign spreads will rise due to rising risk premium (default probability x risk aversion): already up to 4%. Aid flows already under pressure; will be hurt by fiscal overload in G3. Making difference & creating inspiration through life changing presentations @ [email_address]

International investment (bonds, FDI) will slow down; as will emerging market stocks; as global confidence declines

Sovereign spreads will rise due to rising risk premium (default probability x risk aversion): already up to 4%.

Aid flows already under pressure; will be hurt by fiscal overload in G3.

Making difference & creating inspiration through life changing presentations @ [email_address]

Making difference & creating inspiration through life changing presentations @ [email_address]

Recent ODA rise will be difficult to sustain Making difference & creating inspiration through life changing presentations @ [email_address]

Poverty and human development MDG goals even less likely to be met (growth and aid are main drivers) Limitations of family support (Asia), few universal benefits (LA) and narrow safety nets (Africa): effect on poor Previous crises increased inequality, which remains even when growth recovers Commodity price reverse will change lottery of winners and losers Making difference & creating inspiration through life changing presentations @ [email_address]

MDG goals even less likely to be met (growth and aid are main drivers)

Limitations of family support (Asia), few universal benefits (LA) and narrow safety nets (Africa): effect on poor

Previous crises increased inequality, which remains even when growth recovers

Commodity price reverse will change lottery of winners and losers

Proactive macroeconomic policy Countercyclical monetary policy and real exchange rate management (inc. capital controls) necessary: MICs with forex reserves already do this; but LICs constrained by IMF. Support domestic banks (esp for agriculture and SMEs), underwrite longterm investment lending; keep real interest rates low. Raise tax pressure ( not rates) to maintain fiscal balance and reduce public borrowing. Making difference & creating inspiration through life changing presentations @ [email_address]

Countercyclical monetary policy and real exchange rate management (inc. capital controls) necessary:

MICs with forex reserves already do this;

but LICs constrained by IMF.

Support domestic banks (esp for agriculture and SMEs), underwrite longterm investment lending; keep real interest rates low.

Raise tax pressure ( not rates) to maintain fiscal balance and reduce public borrowing.

HD strategy for difficult times Evidence (UNICEF) that for children employment stability more important than wages; implications for e.g. inflation policy Essential to ringfence budgets (in real terms) for education and health; extend schemes for (simple) universal benefits. Focus on inequality (especially horizontal) rather than just poverty; to reduce conflict and increase social cohesion. Making difference & creating inspiration through life changing presentations @ [email_address]

Evidence (UNICEF) that for children employment stability more important than wages; implications for e.g. inflation policy

Essential to ringfence budgets (in real terms) for education and health; extend schemes for (simple) universal benefits.

Focus on inequality (especially horizontal) rather than just poverty; to reduce conflict and increase social cohesion.

International action and the “duty to protect” Essential to moderate G8 policy shifts (e.g. bank regulation, interest rates, exchange rates) from viewpoint of impact on world poor. Need for UN to speak in a clear, timely and credible fashion on these issues (TDR08 good, UN/DESA etc silent) Regional arrangements for mutual currency support etc are vital (Asia progressing; LA talking; Africa nothing). Role for sovereign wealth funds? Making difference & creating inspiration through life changing presentations @ [email_address]

Essential to moderate G8 policy shifts (e.g. bank regulation, interest rates, exchange rates) from viewpoint of impact on world poor.

Need for UN to speak in a clear, timely and credible fashion on these issues (TDR08 good, UN/DESA etc silent)

Regional arrangements for mutual currency support etc are vital (Asia progressing; LA talking; Africa nothing). Role for sovereign wealth funds?

Main points The US real estate market downturn, the associated global financial crisis, and the surge in commodity prices has pushed the probability of a world economic recession to its highest level since 2001. Neither Europe nor Japan is in a position to fill the gap left by weaker US demand. Moreover, commodity exporting and emerging market countries are likely to offset only part of the effects of the US slowdown. Hence, global growth is likely to fall to its lowest level since 2003. Euroland is unlikely to de-couple from the US, as the ECB expects. Hence, the ECB in our view is “falling behind the curve”. Making difference & creating inspiration through life changing presentations @ [email_address]

The US real estate market downturn, the associated global financial crisis, and the surge in commodity prices has pushed the probability of a world economic recession to its highest level since 2001.

Neither Europe nor Japan is in a position to fill the gap left by weaker US demand. Moreover, commodity exporting and emerging market countries are likely to offset only part of the effects of the US slowdown. Hence, global growth is likely to fall to its lowest level since 2003.

Euroland is unlikely to de-couple from the US, as the ECB expects. Hence, the ECB in our view is “falling behind the curve”.

Housing prices adjusted for inflation (GDP weighted averages for Euroland ) Source: OECD, DB Global Markets Research

Price-to-rent ratio Price-to-income ratio Source: OECD, DB Global Markets Research

Housing prices adjusted for inflation Source: OECD, DB Global Markets Research Making difference & creating inspiration through life changing presentations @ [email_address]

Source: OECD, DB Global Markets Research Making difference & creating inspiration through life changing presentations @ [email_address]

Source: ECB, Haver, DB Global Markets Research The cooling real estate market is likely to exert a drag on construction investment and consumption Making difference & creating inspiration through life changing presentations @ [email_address]

… and credit… Source: Bloomberg, DB Global Markets Research Making difference & creating inspiration through life changing presentations @ [email_address]

… leading to a tightening of lending standards… Sources: Fed, ECB, GM Research Making difference & creating inspiration through life changing presentations @ [email_address]

… and in Euroland to an increase in bank lending rates Lending rates on new loans with 1-5 year fixed rates Sources: ECB, GM Research Making difference & creating inspiration through life changing presentations @ [email_address] Consumer credit Mortgages Small corporations Large corporations Feb 07 – Feb 08 +0.38bp +0.25bp +0.41 +0.77

Hunt for collateral widens Euroland sovereign spreads… Source: Bloomberg, DB Global Markets Research bp Making difference & creating inspiration through life changing presentations @ [email_address]

Source: Bloomberg, DB Global Markets Research … while policy divergence is creating exchange rate tensions Making difference & creating inspiration through life changing presentations @ [email_address]

Making difference & creating inspiration through life changing presentations @ [email_address]

Despite rising profits, firms need credit to fund their growth Source: Haver, Bloomberg, DB Global Markets Research Making difference & creating inspiration through life changing presentations @ [email_address]

Source: Eurostat, Haver, DB Global Markets Research Investment has benefited from buoyant export growth Making difference & creating inspiration through life changing presentations @ [email_address]

Source: Eurostat, Haver, DB Global Markets Research Recursive eur regressions suggest no major changes in coefficient Making difference & creating inspiration through life changing presentations @ [email_address]

Source: ECB, Haver, DB Global Markets Research Making difference & creating inspiration through life changing presentations @ [email_address]

First-round impact on trade balance of the oil price surge since September 2007 Sources: IMF, DB Global Markets Research Making difference & creating inspiration through life changing presentations @ [email_address]

Falling terms of trade hurting consumer Source: Haver, DB Global Markets Research Making difference & creating inspiration through life changing presentations @ [email_address]

Retail sales plunge as surging food and energy prices tax consumers Source: Haver, DB Global Markets Research Making difference & creating inspiration through life changing presentations @ [email_address]

Source: ECB, OECD, Haver, DB Global Markets Research Headline inflation boosted by food and energy Wage inflation remaining contained

Source: DB Global Markets Research

Source: DB Global Markets Research

Hypotheses about the Origin of the Current Financial Turmoil Highly expansive monetary policy in industrial countries. The persistence of global macroeconomic imbalances. Technological developments in financial markets, which led to the creation of complex instruments. Insufficient transparency of non-bank entities’ operations and off-balance sheet bank operations. Inadequate regulation for the current sophisticated financial and equity markets. Making difference & creating inspiration through life changing presentations @ [email_address]

Highly expans

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