This presentation explains the reasons of 2007-09 financial crisis and also depicts the various measures taken to recover.

1. Global Financial Crisis
2007-09
What caused and how recovered

2. What it caused
It threatened the total collapse of large financial institutions, which was
prevented by the bailout of banks by national governments, but stock markets
still dropped worldwide. In many areas, the housing market also suffered,
resulting in evictions, foreclosures and prolonged unemployment. The crisis
played a significant role in the failure of key businesses, declines in consumer
wealth estimated in trillions of U.S. dollars, and a downturn in economic
activity leading to the 2008–2012 global recession and contributing to the
European sovereign-debt crisis.

3. Reasons of financial crisis
• Housing Price Bubble Bursting
• US Subprime mortgage crisis
• Low Interest rates by Federal Reserve
• Insufficient mortgage & derivatives market regulation
• Rating Agencies Interest conflicts & Unethical mortgage brokers
• Made worse by near collapse of US financial markets connected with
mortgage-backed securities, synthetic collateralized debt obligations (CDOs),
and credit default swaps.

4. Terms explained
• Housing Price Bubble Bursting: Means sudden fall in house prices due to
euphoric rise in house prices without any fundamental support.
• Subprime mortgage: is a type of loan granted to individuals, who as a
result of their deficient credit ratings, would not be able to qualify for
conventional mortgages.
• Mortgage-backed security: is a type of asset-backed security that is
secured by a mortgage. The mortgages are sold to a group of individuals (a
government agency or investment bank) that "securitizes", or packages, the
loans together into a security that can be sold to investors.

5. Continued
• Synthetic collateralized debt obligation: is a variation of a CDO that
generally uses credit default swaps and other derivatives to obtain its
investment goals. The value and payment stream of a synthetic CDO is
derived from premiums paying for credit default swap "insurance" on the
possibility that some defined set of "reference" securities - based on cash
assets - will default.
• Credit default swap: is a financial swap agreement that the seller of the
CDS will compensate the buyer (the creditor of the reference loan) in the
event of a loan default (by the debtor) or other credit event.

6. How it happened
• Creation of Bubble from 2001 to 2007
• The Taxpayer Relief Act of 1997 repealed the Section 121 exclusion and section 1034
rollover rules, and replaced them with a $500,000 married/$250,000 single exclusion of
capital gains on the sale of a home, available once every two years. This made housing
the only investment which escaped capital gains.
• Starting in the 1980s, considerable deregulation took place in banking. Banks were
deregulated through:
• The Depository Institutions Deregulation and Monetary Control Act of 1980 (allowing
similar banks to merge and set any interest rate).

7. Continued
• The Garn–St. Germain Depository Institutions Act of 1982 (allowing Adjustable-rate
mortgages).
• The Gramm–Leach–Bliley Act of 1999 (allowing commercial and investment banks to
merge).
This deregulation allowed many risky products to exist.
• Federal mandated to promote affordable housing. These were applied through the
Community Reinvestment Act and "government sponsored entities" (GSE's) "Fannie
Mae" (Federal National Mortgage Association) and "Freddie Mac" (Federal Home Loan
Mortgage Corporation).

8. Continued
• In the wake of the dot-com crash and the subsequent 2001–2002 recession the Federal
Reserve dramatically lowered interest rates to historically low levels, from about 6.5% to
just 1%.
• 'Mania' for home ownership
• Belief that housing is a good investment
• Promotion in the media
• Speculative fever
• Buying and selling above normal multiples
• Dot-com bubble collapse

9. Continued
• Other contributing factors
• Deregulation of financial markets
• Securitisation food chain: Borrower – Lender - Investment Bankers - Investors.
• Predatory & sub-prime lending.
• High private borrowing level.
• Globalisation.

10. Measures to Revive
• Response to the crisis revived the debate over regulation of financial markets
and Keynesian approaches to prevent deep recessions.

11. Quick US Response
• Rescue of Bear Stearns, takeover of Fannie Mae & Freddie Mac and dump
of Lehman Brothers.
• Troubled Asset Relief Program
• Bail outs of AIG & GM
• $245 billion Investment in US banks
• Economic stimulus package.

12. Long-term US Measures
• Capital Adequacy Requirements and Deleveraging.
• Regulation of previously unregulated markets (derivatives, but especially
credit default swaps).
• Improved protection for consumers.
• Mortgage renegotiation incentives.

13. Global Responses
• Reworking of international capital adequacy requirements (Basel Accords)
• Structural adjustment programs for Iceland, Ireland, Greece, Spain, and
other countries, often involving austerity measures.

14. Economy stimulus package
The $787 billion economic stimulus package was approved by Congress in
February, 2009. The package was designed to quickly jump-start economic
growth, and save between 900,000 to 2.3 million jobs. Its three categories of
spending were:
• $288 billion in tax cuts.
• $224 billion in extended unemployment benefits, education and health care.
• $275 billion for job creation using federal contracts, grants and loans.

15. Continued
To find out exactly how these funds were allocated, see American Recovery and
Reinvestment Act Details. The package was designed to be spent over ten years.
However, to give maximum impact, $720 billion, or 91.5%, was budgeted for
the first three fiscal years: $185 billion in FY 2009, $400 billion in FY 2010 and
$135 billion in FY 2011.
The outcome is The American Recovery and Reinvestment Act of 2009
(ARRA) was an economic stimulus package enacted by the 111th United States
Congress in February 2009 and signed into law on February 17, 2009, by
President Barack Obama.

16. Austerity measures
Austerity describes policies used by governments to reduce budget deficits
during adverse economic conditions. These policies may include spending cuts,
tax increases, or a mixture of the two. Austerity policies may be attempts to
demonstrate governments' fiscal discipline to their creditors and credit rating
agencies by bringing revenues closer to expenditures; they may also be
politically or ideologically driven.

17. Thank You
By Arindam Samanta, MBA 3rd Semester