Business mathematics COURSE CODE:- FB-505

Submitted to

Md. Ariful Islam

Lecturer Dept. of Banking and Insurance University of Dhaka

Submitted by
MOHAMMAD ABU HOSSAIN MERIT NO- 335

Submission Date: May 31, 2012

Table of content:

Global financial crisis

Subject 1. Causes 2. Impact 3. Future Outlook 4. Recommendations Page No. 1-3 4-5 6-7 8-9

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Global financial crisis-2008 Causes:

Many experts believe that the global crisis was triggered by the US housing market collapse: Causes: US Housing Market Collapse
US Housing Market Collapse: Easy access to credit: Falling interest rates and rising availability of mortgages, combined with rising housing prices encouraged consumers to buy homes Relaxed lending standards: To cater to the growing number of mortgage seekers, lenders relaxed standards and issued a large number of sub-prime loans Inadequate regulations: Regulations did not keep pace with innovations in US financial products, leading to much higher complexity, poor transparency and greater risk Complex credit derivatives: The invention and use of complex debt derivatives such as CDOs (Collateralized Debt Obligations) made it difficult to

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Identify and contain the sub-prime lending problem, once default rates began to rise. Market collapse: The property boom led an over-supply of housing and prices could no longer be supported. Just like the self-perpetuating behavior that led to the rise, the crash was also self-perpetuating. As prices fell, more foreclosures started taking place, increasing the supply of homes on the market. Lenders started to tighten their standards and fewer consumers could qualify for mortgages and help reduce the supply.

Some experts have other opinion:

New Bank Capital RequirementsSome experts believe that an International Regulation that came into effect in 1988 contributed to the financial crisis. This regulation mandates that bank holds more capital if they make riskier loans or investments. This encourages to get rid of risky loans by turning them into securities to be sold to investors. Roles of the credit Rating AgenciesMany experts blame rating agencies such as Moodys, Standard and Poors and Fitch for the crisis because they granted AAA ratings to risky mortgage backed securities (MBS). Almost all agencies follow an issuer-pays revenue model and this poses
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a potential conflict of interest which some experts contend led to inappropriately high rating of risky MBS. Riskier Investment decision by BankSome experts blame poor decision-making in the part of bank for the crisis. Bank kept huge amounts of MBS on their balance sheet in spite of the sub-prime risk involved. They financed these and other risky assets with short time market borrowing and with a decline in the housing market, banks found it difficult to roll over short-term loan against this MBS and hence were forced to sell the assets at substantial loss. Market to Market accounting RulesFinancial regulation such as a market to market accounting stipulates that financial firm must treat potential losses as causes losses. Even through many financial instruments may still yield return in the future, their current assets valued highly devalued. Misleading economic statisticsSome Statistics believe that government statistics have been revised over the year to show the best possible picture of the US economy. These experts hold that such revisions in economic statistics are misleading and were used by Wall Street to sell their over-valued product.

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Impact: Global Economic Slowdown

Impact on stock market globallyWorld stock market have taken a beating, leading to a loss in confidence amongst investors who are stepping back in spite of several cuts in leading rates by the banks. Losses of InvestorsBoth institutional investors and individual investors have suffered huge losses both in MBS and related products and equities. Freeze in Inter Bank credit Failure of banks fueled anxiety in international banking markets leading to a freeze in inter-bank leading. Increasing UnemploymentThere have been job cuts in many companies across various sectors around the globe. This trend has not been limited to the financial sector alone. High numbers of layoffs were announced in the US through in September: 111000 in financial sector, 95000 in automotive sector,
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62000 in Transportation, 51000 in retail, 28000 in Telecommunications sector and more in other sectors. Decline in Business GloballyThere is considerable decline in business all over world marked by reduced output and consumer spending, particularly in Britain, France, Germany and Japan. The industries being impacted include automobile, airline, building materials etc. Automotive companies such as GM, Ford and Toyota 45%, 30% and 23% decline in sales respectively in October 2008.

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Future Outlook:
Most Future Outlook scenarios Consolidation and Restructuring of Banks Changes are already evident with deals that are taking place: Bank of America taking over Merrill Lynch Bank of China acquiring 20%stake in private banks such as Rothschild Barclays acquiring Lehman Brothers BNP Paribas expected to take a majority stake in the Belgian and Luxembourg operations of Fortis NV Emerging Economies to Help Out Developed NationsC a s h r i c h economies of world (developing nations and their Sovereign Wealth Funds) are expected to bailout the developed nations from the current crisis. As stock prices of the big banks from developed nations fall, they are expected to attract investors from developing nations. Some experts believe that China will act as the savior of developed economies facing the risk of recession by buying their banks
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Worsening financial crisis due to the unraveling of Alt-A mortgages This is the segment of mortgage loans given to prime borrowers but without complete documentation. From 2002 to 2007, Alt-A mortgages as a percentage of total mortgages have risen from 2% to ~13%, and experts say that the defaults on this category of mortgages will impact the financial market even more than sub-prime lending

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Recommendation.Opinion Leaders and Governments have made various recommendations for how to manage the current global financial crisis and stabilize the economy.

By opinion Leaders Some experts have suggested alternative bail-out plans, such as1. Govt. loans. 2. Reserve Auction. 3. Issues T-Bond. Some experts also indicated that the real solution is to stabilize
employment and hence cash flow. By Henry Paulson, Treasury Secretary of US: 1. Paulsons suggestions for the US financial market include: Fed should be the highest authority regulating all financial institutions and a new authority should look after consumer protection issues.
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 SEC should be merged with the commodity future trading commission. Large investors, such as Insurance companies should be brought under the federal regulation, by allowing them to opt for federal chartering and oversight (instead of state chartering). By European Government: European Government reportedly believes that rather than buying toxic assets, the government should focus to recapitalize the banks directly in exchange for some control of operations of the banks.

Thank You