Joel Tay The Financial Crisis of 2008 A brief analysis 19 th July - - PDF document

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The Financial Crisis of 2008 – A brief analysis

Joel Tay

19th July 2013

Agenda for 19th July 2013

Questions Conclusion Financial Regulations Post 2008 A Brief Overview Key Factors Effective or not? 1 2 3 4 5 6 7 2004-2008 Timeline

• What measures have been taken since the 2008

financial crisis to limit the chances of it happening again?

• Are these measures adequate?

Questions

• Collapse of financial institutions
• Government intervention
• Nationalisation and acquisitions of banks
• Stock market crash

The Financial Crisis

What happened?

2004- 2006 2007 2008

1) 2004-2006

• Interest rates

rose from 1% to 5.35%

• Unpaid

mortgages increase 2) 2007 Q1

• Sub-prime mortgage

lenders begin to default

• Sub-prime market

begins collapsing 3) 2007 Q2

• Investment bank

products evaporate in value

• Banks begin to refuse

lending to one another

• Cost of capital (Libor)

increases 5) 2007 Q4

• Banks runs

(Northern Rock)

• Capital injections

from governments

• Massive losses

(UBS, Citi, Merrill Lynch) 4) 2007 Q3

• Investment bank

products evaporate in value

• Banks begin to

refuse lending to

• ne another
• Cost of capital

(Libor) increases 6) 2008 Q1

• Global stock markets

crash

• Emergency rates cut
• Bond insurers start to

default

• Northern Rock

nationalised

• Credit crunch spreads

to other sectors 7) 2008 Q2

• Further government

intervention

• Western banks start to

get bought by foreign investors (Barclays) 7) 2008 Q3

• Stock markets face

steepest decline

• Weak US Employment

data

• Fannie Mae & Freddie

Mac and AIG gets bailout

• Lehman Brothers files

for bankruptcy

• Merrill Lynch gets

acquired 7) 2008 Q4

• Interest rates slashed to

1%

• Quantitative Easing

begins

• Nationalisation of banks

and capital injections across the world

The Financial Crisis: A Brief Timeline

• Repealed Glass-Stegall Act in 1998
• Low interest rates
• Unregulated derivatives market
• Loosened Capital Requirements
• Overwrote anti-predatory laws

Key Factors

Government

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• Unattractive low yields, asset managers looked towards

high yield of MBS

• Credit agencies rated junk bonds as AAA
• Highly leveraged
• Created new products such as MBS, CDOs, CDS
• Commercial banks involved themselves with these

products as well

Key Factors

Banks

• Mortgage lenders relaxing standards
• Customers not doing their own due diligence
• Customers purchasing what they cannot afford

Key Factors

Others

Financial Regulations

Post-2008

Aimed at reducing:

• The chances of another financial collapse
• The end of tax-payer bailouts
• Better customer protection

Financial Regulations

Dodd-Frank Act of 2010

Analysing the Dodd-Frank Act

• Increased capital

requirements for banks

• Consent required for

acquisition of financial companies

• Stricter leverage limits
• Derivatives subject to

regulation through central channels

• Volcker Rule: Ban on

proprietary trading Increased Limitations 1 Increased Oversight

• Proper disclosures to

customers

• Penalties for credit

agencies that rate financial instruments incorrectly

• Increased insurance

limits

• Establisment of Bureau
• f Consumer Financial

Protecion Customer Protection

• Establishment of an

Oversight committee

• Identification of

systematically important financial institutions

• Requires risk

committees

• Stress tests

3 2

Other Changes

• Largest 2 independent investment banking Goldman

Sachs and Morgan Stanley became bank holding companies

• Subject to stricter regulations from government bodies
• No longer able to take high-risk positions
• No longer able to have high leverages
• Higher capital requirements

Investment Banks

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Effective or not?

• 70.1% of the total 398 rulemaking

requirements missed

• 99.6% of 280 rules requiring

specified deadlines missed

• Proposals for 64 of missed 175

rules still missing

Implementation of rules

Effective or not?

• Overlapping authority
• Increased red-tape
• Increased costs
• Lack of clarity

Added Complexity

Effective or not?

• Unclear rules and complexity
• Opportunities to game the system
• Nomenclature issues
• Legal workarounds and loopholes

(cat-and-mouse game)

• Regulations may take years to be

implemented

Gaming the system

Effective or not?

• Short-term bias
• Instant gratification
• Greed

The Human Factor

• BBC
• Forbes
• Wall Street Journal
• Harvard Law School
• London School of Economics Research
• Congressional Research Services
• Wall Street Prep
• NY Times

Sources

• Can just a set of rules prevent yet another

crisis?

• Should there be any government bailouts

in the first place? Discussion Questions

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Q&A

Appendix

Global Regulation Chart