Presented By

Piyush Chawala
Sukant Prusty
Anurag Nath
Satish Naik
Manjushaa
Hemanth Kumar
Downturn in the world economy
Causes
Housing Slump
Subprime Mortgage Crisis
Financial Innovation

Impacts
Bank Failures
Home Foreclosures
Federal Reserve Steps in
Changes in the Market

Events
Bear Stearns Bailout
Northern Rock/Bank of
England
Countrywide

Solutions
The Federal Reserve has tried
to take corrective measures
Regulation
Problems with Regulation
Housing Boom
Housing prices were on the rise
People bought and built more and more
Thought it was a good investment
Thought that home values would not decrease
Took out second mortgages to use toward consumer
spending
Housing Bust
Excess inventory
Housing price correction
Negative equity
Foreclosures
Where did the subprime mortgage crisis start?
Banks used to operate on a fractional reserve
system
Today almost no reserve is required due to new
rules that the public doesnt even know about
Banks are able to issue more loans when they do
not have to keep a reserve on hand
When they run out of qualified candidates, they
reduce the requirements, which leads to subprime
mortgages
These loans slowly inflate the system, and create
wealth that is not real
Mortgage originators sold the loans on the
secondary market
No risk for the originators so little effort went
into analyzing the borrowers ability to repay
High risk and debt tolerance
Adjustable Rate Mortgages (ARMs)
Rates are beginning to increase from the low
introductory rate
Financial innovation is the act of creating and
then popularizing new financial instruments
as well as new financial technologies,
institutions ,and markets.
Adjustable Rate Mortgages
Investment Vehicles that went wrong
Mortgage Backed Securities (MBS)
CDOs Collateralized debt obligations
Not understood by investors
Financial innovations are optimal responses to
various problems or opportunities
Many financial innovations that have been
created in the recent past to respond to the
financial boom were not fully understood
They were not adapted properly from the past,
and when the financial sector crashed, these
innovations responded negatively
Expense $3.8trillion income $2.3trillion

To meet deficit he borrows money in forms bonds
instruments or even foreign government.

Total loans and interest adds up $14 trillion

Pays money of interest by loans. reduce spending
or raise taxes

Call federal reserve ,create and deposit dollars.
Dollar value reduced inflation

Overseas manufacturing recession

Lead to stagflation

The day has come where the us can no longer
buy pay bills.
European debt crisis
The European Union introduced the euro on January 1, 1999.
It benefited countries such as Portugal, Italy, Ireland, Greece
and Spain (together now known as the PIIGS)
Before introduction of Euro, they borrowed money at interest
rates much higher than the rates at which a country like
Germany borrowed.
When they started to use the euro they could borrow money at
interest rates close to that of Germany, which was economically
the best managed country in the EU
The rest of Europe, in effect, used Germany's credit rating
to indulge its material desires. They borrowed as cheaply
as Germans could to buy stuff they couldn't afford
Inflation in the PIIGS countries was higher than the rate
of interest.
It means that, if the borrowing rate is 3 per cent while
inflation is 4 per cent you're effectively borrowing for 1
per cent less than inflation.
European peripheral countries (PIIGS) racked up enormous
amount of debt in Euros.
The debt of Greece, currently amounts to around 160 per cent
of its GDP. So, other than the citizens, the governments also
started to borrow.
A job which now pays 55,000 euros in Germany, pays 70,000
euros in Greece, even with the fact that Germany is a more
productive nation.
It means more and more borrowing by the government, when
they already have so much debt
Spain had the biggest housing bubble in the world.
To put things in perspective, Spain now has as many unsold
homes as the United States, even though the US is six times
bigger.
Most of these new homes were financed with capital from
abroad.
Spain's real estate debt comes to around 50 per cent of its
GDP. Every time there are default threats, the European
Central Bank (ECB), helps out with a bailout.
Since the start of the financial crisis ECB has bought, $80 billion
of Greek , Irish ,Portuguese Govt bonds and lent another $450
billion to various European Govts and banks accepting
virtually any collateral, including Greek Govt bonds
Germany ECB rescue fund. In case of Greece, a lot of
German and French banks which have lent money will be in
trouble if Greece defaults
The German Govt gives money Rescue Irish government
Give money to Irish banks repay their loans to the German
banks
When a country prints currency in huge quantities, the currency
will not remain of any real value.
So the citizens money gold or will continue using the euro.
People at the same time demanding their money back. Will
lead to a lot of banks collapsing.
Investors anticipating that their claims on the Italian
government would be redenominated into lira would shift into
claims on other euro-area governments, leading to a bond
market crisis
Admission of Greece to the euro in the 1
st
place.
ECB acceptance of Greek bonds as collateral
Despite high debt & deficits.
Investors charged near-zero spreads
Failure to send Greece to the IMF in early 2010.
Refusal to think about the likely
need for restructuring of the debt.
The crisis in the European and American economies
(any economy) impacts other economies via three
channels:
- Trade channel
- Financial channel
- Confidence channel
When an economy falls into a recession, it impacts
the affected countrys trading partners too.
Falling household and business demand in the
slump-hit economy hits the exports/imports of its
trading partners.
The share of exports to EU (excluding UK) and
imports from EU has fallen over the years.
In 1987-88, exports to EU constituted about 18.6% of
total exports. This has declined to 17.5% by 2010-11.

Trade channel can impact Indian external sector indirectly as
well.
Most policymakers, economists and experts put forth the view
that India has been only marginally affected.

Two reasons were cited forth

First, India is a virtual non-entity in global trade as its share
was less than 0.5%-0.7% of the total global trade volumes.

Second, share of developed economies in trade had declined.
In 1987-88 developed economies contributed 59% of exports
and in 2010-11 their share has declined to 34%.
The impact of turmoil in one economys financial
markets is not merely transmitted to other markets,
the quantum and direction of the movement is also
more or less similar (decline in equity markets, rise in
corporate bond spreads and depreciation in currency).

This is because cross border financial linkages have
increased substantially over the years. Besides, the
correlation between assets too has been rising across
the world.
Apart from movement in financial markets, four kinds of
financial flows could impact Indian financial markets:

1) Foreign Direct Investment:
There are many American and European
companies which have investments in India. So,
there has been a slowdown in FDI in India.
Already there has been a fall in FDI to 138462
crores in 2010-11 from 179059 crores in 2009-10.


2) Foreign Institutional Investment
With a turmoil in global financial markets, FII inflows
will decline.
We have a large number of global financial firms
which operate across the world and in case of a decline
in one major market, there is a pull out from other
markets as well.

FIIs pulled out nearly Rs 2,000 crore from the stock and
debt market in September 2011, the second consecutive
month in which overseas capital outflows were greater than
inflows.
3) External Commercial Borrowings
External commercial borrowings could also
decline if the European crisis spreads to other
economies.
ECBs declined in the first stage of the crisis as
well.
Already there has been a drop in the ECBs
because of the fall in rupee.
4) Remittances and NRI deposits
The deposits increase in the crisis periods Oct-Dec 2008
and Jan- Mar 2009 and decline thereafter.
It could be that NRI preferred to invest higher proceeds
in India seeing crisis in their own economies. In case of
remittances, we see a decline in crisis period Oct 08
Mar 09 but see improvements as crisis eases.
There were huge concerns of remittances collapsing
because of the crisis. In some countries they did collapse
worsening poverty status.
In India, despite the decline it manages to remain in
positive.
This channel shows confidence declines in business and
households seeing the global uncertainty.
So even if an economys macroeconomic conditions
and outlook look favorable, the decline in confidence
can disrupt the economic conditions.
Decline in confidence is also one of the reasons for
decline in business investments which led to decline in
overall Indian GDP growth.
Credit growth also declined because of decline in
business investments.
RBI Governor Mr Subbarao has stressed on this channel
on numerous occasions
Apart from these three channels, Indian economy has
become more global over the years.
The business and trade cycle of India has started to follow
the cycles of advanced economies.

RBI Executive Director Deepak Mohanty in his speech explained
the increasing correlation:
With increased global integration, the Indian economy now is
subject to greater influence of global business cycles. The
correlation between the cyclical component of the index of
industrial production (IIP) of the advanced economies and
India has risen to 0.50 during the period 1991-2009 from 0.20
in during the period 1971-1990
If the debt crisis spreads to other nations in Europe and their
banking systems, European entities could start repatriating
funds from Indian stock markets.

In recent years, some Indian conglomerates initiated or
increased their stakes in American and European companies.

There could be decline of exports of goods and services to
Europe and through the reduction of revenues or loss incurred
from European-related operations of these companies.

The macro-economic impact could have a more severe effect
on the Indian economy than the financial impact by
repatriation of foreign funds.
The euro zone crisis could trip the fundraising plans of Indian companies
at home and abroad and dent confidence, while euros weakness will
hurt exporters selling in the currency.

Analysts fear the crisis in the euro zone would impact equity markets
worldwide, including India, and companies may be forced to defer
fundraising plans.

Meanwhile, a weaker euro is worrying exporters.

India's chief economist Kaushik Basu is of the view that the debt crisis in
Europe may turn advantageous for the country's capital markets. This
is because foreign investors would look to park their money in safe
havens.
"An argument is made that there are just too
many question marks about the near future;
wouldn't it be better to wait until things clear up
a bit?...face up to two unpleasant facts: The
future is never clear [and] you pay a very high
price for a cheery consensus. Uncertainty actually
is the friend of the buyer of long term values."
- Warren Buffett
2011 may be a choppy ride on Dalal Street
Sensex all time highs at 20561.
RBI governor signals halt in interest rate hikes
after 6 continuous rates hikes reaching to
6.25%
Indias growth story intact at +8%
But concerns are.. Rising interest rates, soaring
commodity prices, increase in borrowing costs,
poor infrastructure, pressure on profit margin,
expensive share valuation, record crude
prices, large money raising targets.
The World Sinks!
Sensex Falls by 387 points or 2.2%
DATE SENSEX
04
August
17693
05
August

17305
Staying true to the age-old saying that 'when America sneezes,
the world catches a cold', the stocks markets across the globe on
Friday plunged deep into red after an overnight crash in the US
bourses.
The Dow tumbled 512 points -- its ninth deepest point drop ever -
- as fear about the global economy spooked investors.
In India, the stock market plunged deep into red on worries over
a possible recession in the US with the benchmark Sensex crashing
by over 700 points at one time to slip below 17,000 level.
Economic Affairs Secretary R Gopalan attributed day's fall in
markets to panic-like situation among investors due to negative
news flow about the US economy.
Fears take Lions Share
Sensex Falls by 315 points or 1.8%
DATE SENSEX
05
August
17305
08
August

16990
Fearful investors reacted to the United States losing
its coveted AAA credit rating
Standard & Poor's downgrade of the US sovereign
debt rating triggered a flight from risky assets in
global stock markets.
"If the global economic situation worsens then there
will be a flight to safety and money will be pulled
out from all the markets including India," - Dipen
Shah, head of private client research group at
Kotak Securities

Dalal Street gets a stimulus on Bernankes NO
Sensex rockets 567 pts on fed qe rejection

Sensex Rises by 567 points or 3.6%
DATE SENSEX
28
August
15848
29
August

16416
US Fed refrained from announcing another stimulus
Investors were relieved that Americas central bank
has stopped short of launching a third bond buying
programme, known as Quantitative Easing (QE)
It could have increased the flow of money into
commodities and emerging markets, including
India, stoking inflation.
The RBI on Monday unveiled the much awaited
draft norms on new banking licences that will allow
corporates to set up banks. Shares of non-banking
finance companies jumped after the announcement
Investors fret as stocks heads for weak end, Sensex
sheds 199 points in worsening global crisis, Rs
breaches 50 as RBI refuses to intervene
Sensex falls by 199 points or 1.2%
DATE SENSEX
22
September
16361
23
September
16162
Global Policymakers tries to calm the market
Rupee reached to a 28 month low of 49.90/$
Corporates and Bank want RBI to intervene in
the Forex market to stop the free fall of Rupee.
RBI deputy governor Subir Gokarn told very
narrow objective of smoothening what
might be a very volatile market situation,
nothing beyond that
Rupee Down due to global dollar scarcity.
Date Sensex %Change
4
th
January 2010 17558 --
3
rd
January 2011 20561 +17%
30
th
September
2011
16453 -20%
Sensex
YTD July to Date Year to June
952.17 978.45 654.74
Dow
YTD July to Date Year to June
504.63 646.31 287.99
Deviation
Sensex rose 623 points , biggest gain in 22 months,
From 17823.4 to 18446.5
The reason behind this rise was
Governments lower-than-expected fiscal deficit
estimate for 2011-12
The government pledged to contain fiscal deficit
in 2011-12 at 4.6% of GDP compared with 5.1% in
2010-11
But the rising crude oil prices raise doubts on whether the
government would meet its budget shortfall target, so
the investors were a bit sceptical.
Sensex fell by 371 points to 16,469.79, its lowest
level in nearly 15 months.

The reason for this drop
European markets fell sharply amid
deepening fears of major global economies,
including the US dipping into recession again
Renewed Eurozone debt crisis also dragged
the index down
SENSEX ended the day 513.19 points higher at
18,240.68
Reasons
Greece won the consent of international
lenders for a five-year austerity plan intended
to avoid looming bankruptcy
Its prime minister pledged to push radical
economic reforms through parliament.
JPMorgan and Goldman Sachs slashed
forecasts for crude prices in the third quarter
after the International Energy Agency
announced the release of 60 million barrels of
oil
The SENSEX continued to fall and closed at 16745.35
Investors feared a Greek default within weeks after
International lenders told Greece on Monday that
it must shrink its public sector and improve tax
collection to secure a vital 8 billion euro rescue
payment
Greece's prime minister cancelled a US trip to
chair an emergency cabinet meeting at home
German Chancellor Angela Merkel suffered a
regional election loss
EU finance ministers also failed to make progress
on the debt crisis
The BSE Sensex shot up 354 points to cross the
17k mark to reach 17099.28
The reasons
Hope of weakening rupee would boost earnings of
the IT companies and a firm global trend Infosys, rose
by 3.22% and TCS gained 3.94%
Greece expected to clinch the release of a 8 billion
euro ($11 billion) aid that it needs to avoid running
out of cash next month.
S&P downgraded its rating on Italy by one notch to
A/A-1 but European Central Bank buying Italian debt
also aided the sentiment.
Britain's FTSE was up 1.22 percent at 5,323.93 points
SENSEX crashed 704 points to 16,361-its biggest
single-session loss in over two years




The reasons
Fresh signs of slowdown in manufacturing
activities in China and Germany.
IMF warned that Europe's sovereign debt crisis
risks tearing a giant hole in banks' capital.
In Europe, questions about the ability of the
euro zone to manage some of its countries'
heavy debt remain, stock losses amounted to a
fall of over 21 percent for the year-to-date.
The slide was further aggravated by the
weakness of the Indian rupee.
The FTSEurofirst 300 fell more than 4 percent,
FTSE 100 lost 5 percent
Sensex jumped 472.93 points or 2.95% to 16,524.03



The events that led to the rise are
Hope of euro zone officials would act to corral Greece's
debt woes and prevent another banking crisis.
The parliaments of Finland and Germany were set to
vote on the approval to extend the powers of the euro
zone rescue fund considered critical to bailing out
Europes weak economies.
The new plan was to leverage the 440-billion rescue
fund, known as the European Financial Stability
Facility (EFSF), to help struggling European nations
avert debt defaults
A positive opening at European markets also helped
buying sentiments.
Movement of FTSE and
SENSEX
The slow pace of financial reforms taking in
India
Cautious approach towards permitting foreign
investments in Indian business sectors
Bureaucratic hurdles & regulatory constraints
Indian companies have major outsourcing
deals with American & European companies.
Indias export to US and European countries
has grown substantially in the past few years.
Full but gradual opening of current account.
Capital account and financial sector: More
calibrated approach towards opening up.
Equity flows encouraged
Debt flows subject to ceilings and some end-
use restrictions.
Capital outflows: progressively liberalized
External commercial borrowing is subject to Strict
rules and regulations.
Macro ceiling stipulated on portfolio investment in
Govt. Securities and Corporate Bonds by FIIs.
Imposition of prudential limits on Banks, such as
inter-bank liabilities, borrowing and lending, money
market, assets
Implementation of Basel II.

Banks credit quality remained high.

Less percentage of NPA .