5. • 17 February – UK
government
nationalized struggling
Northern Rock bank
6. • March 14 – Bear Stearns
gets $30bn Fed funding as
shares plummet
• March 16 – Bear Stearns is
acquired for $240m a by
JPMorgan Chase in a fire
sale to avoid bankruptcy
(worth $18bn year earlier)
7. • March - July – more banks around the world starts to
announce huge losses many of them seek financing by issuing
stock or from governments
8. • September 7 - US government takeover of Fannie Mae and
Freddie Mac
• two companies at that time owned or guaranteed about half
of the US $12 trillion mortgage market
• this move causes panic on the markets
9. • September 14 –
Merrill Lynch, 158-year
old investment bank is
sold to Bank of America
for $50bn
10. • September 15 – Lehman
Brothers goes bankrupt
• Stock Exchange collapse:
DIJA down 500 points,
FTSE100 down 400
points
11. • September 16 – AIG credit
ratings downgraded
• September 16 – $140bn
withdrawn from money
market funds which causes
freeze of CP market
• September 17 – US FED lends
$85bn to AIG to prevent
bankruptcy
12. • September 18 –
HBOS plc the biggest
UK mortgage
provider took over by
Lloyds TSB for £12bn
13. US government response
• September 18 - Treasury Secretary Henry Paulson and Fed
Chairman Ben Bernanke meets with legislators with proposal
of $700 billion emergency bailout of toxic assets
14. • September 25 – due to
bank run and $16.4bn
deposit withdrawn in 10
days Washington Mutual is
closed down by regulator –
remaining assets sold to JP
Morgan Chase for $1.9bn
• at that time bank assets
were worth $307bn
15. • September 29 - Citigroup Inc.
announced that he would acquire
banking operations of Wachovia
• Later October 3: Wells Fargo
makes a higher offer for Wachovia
paying $15bn
16. • September 29 –
September 31: As
crisis hits Europe –
more banks
nationalized
17. • First days of October
– Iceland banking
sector nationalized
• stock exchange
operations
suspended
• rating agencies
downgrades
• economic downturn
• Iceland first country
to seek IMF help
18. US solution to liquidity crisis
• October 3 – President George W.
Bush signs act creating a $700 bn
Troubled Assets Relief Program
(TARP) to purchase failing bank
assets
• October 6 – Fed announces that it
will provide $900 billion in short-
term cash loans to banks
• October 7 – Fed makes emergency
move to lend $1.3 trillion directly
to companies outside the financial
sector (effect of freeze in CP)
19. October 6 2008
– October 10 2008
• Worst week for the stock market in 75 years
• The Dow Jones loses 22.1%, its worst week ever
on record, down 40.3 % since reaching a record
high of 14,164.53 October 9, 2007.
• The Standard & Poor's 500 index loses 18.2 %,
its worst week since 1933, down 42.5 % in since
its own high October 9, 2007
24. roots of world financial crisis
causes of crisis in risk perspective
25. causes of financial crisis
• no simple answer
• many direct and indirect factors
• variety of narratives describing the crisis
• highlights from risk management perspective
26. main factors
• policy of deregulation of financial sector
• government actions to help house purchase
• historically low interest rates after 2001 (household
debt ratio up)
• speculation (buying houses on investment purposes)
• extensive use of sub-prime loans
• raise of shadow banking system
• predatory lending
• housing bubble (peaked in 2005-2006, burst in 2007)
27. ARM (adjustable-rate mortgages)
• standard mortgage product
• mortgage loan with variable (adjustable) interest rate
• direct link to the underlying index or to bank policy
• initial discounts (e.g. first year payments are interest
only)
• variable rate of the loan to offset variable interest
rates of deposits
• standard banking product commonly offered to
customers
28. sub-prime lending
• making loans to customers who might have difficulty
with repayment schedule
• compensate for higher credit risk
– higher interest rates
– less favourable than ordinary terms
• targeting people with little or no assets, bad credit
history, lower or unstable income
• traditionally isolated from regular loans
29. securitization
• Securitization - process in which loans or other
income generating assets are bundled to create
bonds which can be sold to investors.
• What could be securitized:
– home equity loans
– mortgages and sub-prime mortgages
– student loans
– car loans
– credit card payments
– other
30. securitized instruments
• ABS (asset-backed security) a security where value
and income payments are derived from and
collateralized (or "backed") by a specified pool of
underlying assets
• MBS (mortgage-backed security) as above ABS but
used for mortgages
• CDO (collateralized debt obligation) type of ABS with
multiple "tranches" that are issued by special
purpose entities and collateralized by debt
obligations including bonds and loans
31. CDO/SPV model
SPV (special purpose vehicle) - a separate institution created to
handle the securitization of ABS
33. conclusions
• systematic assumption of house price increase
• real estate investment and speculation
• too liberal credit policy for mortgages
– NINA loans (no income, no assets customers without down payment)
– SIVA loans (stated income not verified) - based even only on credit
rating
• extensive sub-prime lending using also ARM lending
• predatory loans activities
• too extensive and complex securitization
• failed to regulate shadow banking system
• CDO - mixing up prime and sub-prime assets
34. risk management specific factors
• rise of financial engineering and complexity of the
securities
• derivatives market not regulated
• rating agencies paid by security issuer model
• financial sector salaries and incentives connected
with short term performance (not regulated)
