Global financial-crisis-1228410534714358-9

Global Financial Crisis
Summary of the media’s coverage of the timeline, causes,
implications, impact and recommended path forward
December 1, 2008

Table of Contents

Objective and Methodology


• Timeline of Events

• Causes and Implications

• Future Outlook and Recommendations

Appendixes

November 19, 2008 | Copyright © 2008 Grail Research, LLC — Confidential 2

Objective: Provide a rich, yet concise summary of the media coverage on the current global
financial crisis

The synopsis was created using the following methodology:

Universe of Expert
Step 1
Opinions and Articles
Selected 12 publications (e.g., Economist, FT, Wall Street Journal), 8 think tanks
and select sources from other media such as radio
Scanned all sources for coverage of the current global financial crisis between mid
2007 and October 2008
~100 articles and reports
from preferred sources Step 2
Read ~100 articles and shortlisted them according to the following criteria:
• Analytical insight
• Breadth of coverage
~50 Relevant Articles • Uniqueness of opinion
for analysis

Step 3
Summarized shortlisted articles and incorporated them into the slides that follow
which cover:
• Timeline of events (2007/08)
Synopsis
• Causes and Implications of the Global Financial Crisis
• Global Impact


Table of Contents



• Timeline of Events

• Causes and Implications


Appendixes


Timeline of Events – 2007/08
The current financial crisis is categorized as the worst since the Great Depression. Some of
the major events related to the crisis are mapped to the Dow Jones Industrial Average

15,000 DJIA Index Value, June 2007-October 2008
Bernanke and Nouriel Roubini
Paulson urge fast states that
action to approve the governments will
USD 700 Bn bailout have to come up
with even bigger
12,000 Henry Paulson Paulson rejected the international rescues
assures investors possibility of the
that the sub-prime housing crisis leading to
problem is contained a broader economic Paulson shares that the
crisis US Treasury has no plans
to bailout Fannie Mae or
Freddie Mac
9,000 Housing Financial institutions fall Future
bubble
Stock market collapses outlook
bursts
0
Jun’ 07-Jul’07 Aug’ 07 Sep’ 07 Oct’ 07 Nov’ 07 Dec’ 07 Feb’ 08 Mar’ 08 Jun’ 08 Jul’ 08 Sep’ 08 Oct’ 08

Two hedge Federal Morgan US S&P cuts Merrill has Lehman Russia,
funds of Reserve Stanley financial ratings of USD 5.7 Brothers Romania
Bear reduces suffers crisis Morgan Bn of write files for and Ukraine
Sterns the fed loss of affects Stanley, downs; bankruptcy close their
forced to fund rates USD UBS which Merrill sells stock
dump by half 3.7 Bn confirms Lynch and shares exchange
assets, percentage loss of Lehman for few days
due to point USD 18.4 Brothers due to crisis
losses. Bn
Bear Bank of
Stearns Government
Fed and America rescues Governments of many
funds file buys countries announce
for other banks by
central Merrill nationalizing bailouts for their
bankruptcy Lehman Lynch for financial institutions
Merrill banks JP Morgan Fannie Mae,
Brothers Lynch share and Fed USD 50 Freddie Mac
and HSBC reports ~USD 40 Reserve Bn; Bank and giving
shut some loss on Bn in take steps of China AIG an Iceland’s financial crisis
of their USD 8.4 special to rescue buys 20% emergency grows as all three of its
offices Bn write loans to Bear stake in loan of USD major banks are
down banks Stearns Rothschild 85 Bn nationalized

Source: News Releases

Causes: US Housing Market Collapse
Many experts believe that the global crisis was triggered by the 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 CDOs1 made it difficult to 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
Note: 1Collateralized Debt Obligations
Source: ‘The Giant Pool of Money’, NPR News and This American Life Episode, Sep 09, 2008; ‘Crazy crisis may herald the end of new derivative folly’, FT, Dec 23, 2007; ‘Rethinking Capital
Regulation’, WSJ, Aug 23, 2008; ‘Central banks and financial crises’, WSJ, Aug 23, 2008; ‘Spooking investors - Financial markets remain on edge because the credit crunch has not been solved’,
Economist, Oct 25, 2008; ‘Out of the frying pan’, Economist, Jun 05, 2008


Causes: US Housing Market Collapse
… some experts have other opinions

Alternative Viewpoints

New Bank Capital Requirements: Some experts believe that an international
regulation (Basel I) that came into effect in 1988 contributed to the financial crisis.
This regulation mandates that banks hold more capital if they make riskier loans or
investments. This encouraged banks to get rid of risky loans by turning them into
securities to be sold to investors
Role of the Credit Rating Agencies: Many experts blame ratings agencies such
as Moody’s, Standard & Poor’s and Fitch for the crisis because they granted AAA
ratings to risky mortgage backed securities (MBS). Profits of ratings agencies grew
rapidly over the last decade. Almost all agencies follow an ‘issuer-pays’ revenue
model1, and this poses a potential conflict of interest, which some experts contend
led to inappropriately high ratings for risky MBS.
Riskier Investment Decisions by Banks: Some experts blame poor decision-making on the part of banks for the crisis. Banks kept
huge amounts of MBS on their balance sheets in spite of the sub-prime risk involved. They financed these and other risky assets with
short-term market borrowing and with a decline in the housing market, banks found it difficult to roll over short-term loans against these
MBS and hence were forced to sell the assets at a substantial loss
Mark-to-Market Accounting Rules: Financial regulation such as mark-to-market accounting stipulates that financial firms must treat
potential losses as cash losses. Even though many financial instruments may still yield returns in the future, their current asset price is
highly devalued. This concept makes firms ripe for forced liquidation, chases away capital, and leads to further decline in asset values
Misleading Economic Statistics: Some statisticians believe that government statistics (e.g. GDP and unemployment rate) have been
revised over the years 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 products

Note: 1The entity that issues the security is also seeking the rating, and pays the rating agency for the rating
Source: ‘New Bank Capital Requirement Helped to Spread Credit Woes’, WSJ, Aug 30, 2008; ‘How to Start the Healing Now’, WSJ, Oct 01, 2008; ‘Rethinking Capital Regulation’, WSJ, Aug 23,
2008; ‘Economy lacked a trusted national leader’, Washington Post, Oct 15, 2008; ‘Wall Street: the dark theory’, Fortune, Sep 19, 2008; ‘Triple-A Failure’, New York Times, Apr 27, 2008

Impact: Global Economic Slowdown

Impact on Stock Markets Globally Losses to Investors Freeze in Inter Bank Credit
World stock markets have taken a beating, Both institutional investors and individual Failure of banks fueled anxiety in international
leading to a loss in confidence amongst investors investors have suffered huge losses both in MBS banking markets leading to a freeze in inter-bank
who are stepping back in spite of several cuts in and related products, and in equities lending
lending rates by the banks • Banks alone are reported to have suffered
• E.g. DJIA fell below 10,000 mark (first time in USD 600 Bn of credit-related losses globally.
four years) plunging more than 800 points in According to IMF estimates, American and
a single day in October. The fall was mirrored European banks are predicted to loose USD
in stock markets, such as NASDAQ, NYSE, 10 trillion of assets
Nikkei 225, London’s FTSE, Germany’s DAX,
etc

Increasing Unemployment Decline in Businesses Globally Bailouts
There have been job cuts in many companies There is considerable decline in business all over Several bailout packages have been announced
across various sectors around the globe. This world marked by reduced output and consumer by governments around the world to fight the
trend has not been limited to the financial sector spending, particularly in Britain, France, growing financial crisis
alone Germany and Japan. The industries being • The US has announced a USD 700 Bn
• High number of layoffs were announced in impacted include automotive, airline, building bailout package for its banking sector,
the US through September 2008: 111,000 in materials etc. Automotive companies such as Germany announced a bailout package of
financial sector, 95,000 in automotive sector, GM, Ford and Toyota reported 45%, 30% and more than USD 200 Bn and Britain more than
62,000 in transportation, 51,000 in retail, 23% decline in sales respectively, in October USD 500 Bn for this financial crisis (see
28,000 in telecommunications and more in 2008 appendix for more detail on global bailout
other sectors announcements)

Source: ‘The Giant Pool of Money’, NPR News and This American Life Episode, Sep 09, 2008; ‘Off a cliff’, Economist, Oct 10, 2008; ‘Market meltdown: Global problem, global cure’, Fortune, Oct
06, 2008; ‘Europe to U.S.: You messed up the rescue, too’, Fortune, Oct 13, 2008; ‘The end of the beginning’, Economist, Oct 16, 2008; ‘When fortune frowned’, Economist, Oct 09, 2008; ‘But will
it work’, Economist, Oct 16, 2008; ‘Yahoo expected to point to advert drop-off’, Financial Times, Oct 20, 2008; ‘India’s Jet Airways cuts 1,900 jobs’, Oct 16, 2008; ‘U.S. layoffs increase as
businesses confront crisis’, IHT, Oct 26, 2008

Future Outlook

Opinions about what happens next gravitate
toward several scenarios

By Experts Most Common Future Outlook Scenarios

Consolidation and Restructuring Emerging Economies to Help Out Worsening financial crisis due to
of Banks – Changes are already Developed Nations – Cash rich the unraveling of Alt-A mortgages
evident with deals that are taking economies of world (developing nations – This is the segment of mortgage
place: and their Sovereign Wealth Funds) are loans given to prime borrowers but
• Bank of America taking over expected to bailout the developed without complete documentation.
Merrill Lynch nations from the current crisis. As stock From 2002 to 2007, Alt-A mortgages
• Bank of China acquiring 20% prices of the big banks from developed as a percentage of total mortgages
stake in private banks such as nations fall, they are expected to attract have risen from 2% to ~13%, and
Rothschild
investors from developing nations. experts say that the defaults on this
• Barclays acquiring Lehman
Some experts believe that China will category of mortgages will impact
Brothers
act as the savior of developed the financial market even more than
• BNP Paribas expected to take a
majority stake in the Belgian and economies facing the risk of recession sub-prime lending
Luxembourg operations of Fortis by buying their banks
NV
Source: ‘How to build a better bailout’, Fortune, Oct 06, 2008; ‘Why it's stimulus time again’, Fortune, Oct 14, 2008; ‘Financial sector in crisis’, FT, Sep 10, 2008; ‘A Return to 'Normality'?’, WSJ,
Sep 03, 2008; ‘Global breakdown: Winners and losers’, Fortune, Sep 30, 2008; ‘Market meltdown: Global problem, global cure’, Fortune, Oct 06, 2008; ‘A monetary malaise’, Economist, Oct 09,
2008; ‘Barclays: Wall Street's new gambler’, Fortune Oct 21, 2008

Recommendations
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 as:
• Government Loans: Funds allocated for bailout can be used to provide loans (with mortgage securities as collateral) rather than
buying the securities outright. This avoids the complexity of pricing the securities and enables interest from the loans to be returned
to taxpayers or used for their benefit
• Reverse Auction: The government (one buyer) can invite lowest bids from many sellers for different categories of securities
• Issue T-Bonds Now: The US Treasury should borrow money to pay for the bailout now by issuing 5-year and 10-year notes, since
interest rates and the cost of funding the bailout will rise as the economy begins to recover
Some experts have also indicated that the real solution is to stabilize employment and hence cash flow. They believe that though
the government is infusing liquidity into the market, households can still default on various debt instruments and hence the problem
will still remain unsolved

By Henry Paulson, Treasury Secretary of US By European Governments

Paulson’s suggestions for the US financial market include: European governments reportedly believe that rather than
• Fed should be the highest authority regulating all financial institutions and a new buying toxic assets, the government should focus to
authority should look after consumer protection issues recapitalize the banks directly in exchange for some control
• The Securities and Exchange Commission should be merged with the of operations of the banks
Commodity Futures Trading Commission. Thus by tightening the regulatory
gaps, banks will follow the Basel II guidelines (which it claims could have
mitigated the credit crisis, if followed earlier)
• Large investors, such as insurance companies, should be brought under the
federal regulations, by allowing them to opt for federal chartering and oversight
(instead of state chartering)

Source: ‘The $700 Billion Question: How Much Is That Exotic Security?’, Knowledge@Wharton, Oct 01, 2008; ‘How to build a better bailout’, Fortune, Oct 06, 2008; ‘Why it's stimulus time again’,
Fortune, Oct 14, 2008; ‘Financial sector in crisis’, FT, Sep 10, 2008; ‘A Return to 'Normality'?’, WSJ, Sep 03, 2008; ‘Europe to U.S.: You messed up the rescue, too’, Fortune, Oct 13, 2008;
‘Keeping U.S. Financial Markets Competitive And Orderly’, Forbes, Mar 31, 2008

Table of Contents



Appendixes

• A: Global Bailout Announcements

• B: Relevant Opinion Articles


Appendix A: Global Bailout Announcements as of Dec 1, 2008
The total value of global bailout announcements to date is USD 1.89 trillion
Norway Luxembourg Belarus Ukraine
Latvia 0.8 Bn 4.2 Bn 2 Bn1 16.5 Bn1
0.4 Bn 1.3 Bn

Netherlands Denmark
92.6 Bn 0.9 Bn
Belgium Iceland
22.1 Bn 2 Bn1
0.7 Bn Russia
216.4 Bn
Canada 23.5 Bn
21.6 Bn
Switzerland
59.3 Bn
US
725 Bn
544.8 Bn

ASEAN, Japan, China
and South Korea
South 80 Bn
Korea
42.2 Bn
UK France Spain Austria Hungary Germany UAE Qatar India Kazakhstan China International Financial
437.5 Bn 54.1 Bn 41 Bn 20.3 Bn 31.9 Bn1 136.6 Bn 32.6 Bn 5.3 Bn 0.7 Bn 8 Bn Corporation
5 Bn 0.4 Bn
98.1 Bn 18.1 Bn 3.5 Bn 92.2 Bn (For banks of poor
countries)
Serbia 3 Bn
0.5 Bn1 Oman Pakistan
2 Bn 7.6 Bn1

Starting with the US financial sector, the crisis soon spread across the globe and into other markets
Chile beyond just financial services
0.85 Bn
In response to the crisis, governments around the world have infused capital to bail out and stabilize
many private banks such as Fortis Bank, Royal Bank of Scotland, etc, and companies in other sectors

Total Bailout Government Company
Legend 0Bn – 100Bn 101Bn – 250Bn 251Bn – 400Bn Above 400Bn Bailout Funds Bailouts

Note: All figures are in USD; Bailout announcements updated on Dec 1, 2008; Figures only include capital allocated for institutions in the form of equity or
debt; 1Loans provided by Institutions such as IMF and World Bank or other countries.

Appendix B: Relevant Opinion Articles and Radio Shows
Date Title Source Links
17-Oct-07 Think the credit crunch is over? Think again Fortune http://money.cnn.com/2007/10/17/news/economy/eavis_creditcrunch.fortune/index.htm

Same as it ever was - What do earlier banking crises reveal about
10-Jan-08 Economist http://www.economist.com/finance/displaystory.cfm?story_id=10496807
America's travails today?

31-Mar-08 How to crack the credit crunch Fortune http://money.cnn.com/2008/03/27/news/fed-information.fortune/index.htm?postversion=2008032911

Predicting The U.S. Recovery: Some Leading Indicators Are Better
22-May-08 TD Bank Financial Group http://www.td.com/economics/special/bc0508_usecon.pdf
Than Others

23-Jun-08 The U.S. Credit Crisis In Perspective Forbes http://www.forbes.com/2008/06/23/credit-crisis-japan-ent-fin-cs_kw_0623whartoncreditcrisis.html

23-Aug-08 Central banks and financial crises Wall Street Journal http://online.wsj.com/public/resources/documents/Fed-Buiter081608.pdf?mod=relevancy

23-Aug-08 Rethinking Capital Regulation Wall Street Journal http://online.wsj.com/public/resources/documents/Fed-JacksonHole.pdf?mod=relevancy

This American Life (and
5-Sep-08 Giant Pool of Money http://www.thislife.org/extras/radio/355_transcript.pdf
NPR News)

10-Sep-08 Financial sector in crisis Financial Times http://www.ft.com/cms/s/0/ffa3bbd4-7f18-11dd-a3da-000077b07658.html

17-Sep-08 Wharton Faculty Debate the Impact of the Financial Crisis Knowledge@Wharton http://knowledge.wharton.upenn.edu/article.cfm?articleid=2053

19-Sep-08 Wall Street: The dark theory Fortune http://money.cnn.com/2008/09/19/news/economy/siklos_shadowstats.fortune/

23-Sep-08 "Constructing a Financial Perfect Storm" by Jagadeesh Gokhale Cato Institute http://www.cato.org/dailypodcast/podcast-archive.php?podcast_id=745

30-Sep-08 Global breakdown: Winners and losers Fortune http://money.cnn.com/2008/09/29/news/economy/gumbel_world_economy.fortune/index.htm

01-Oct-08 The $700 Billion Question: How Much Is That Exotic Security? Knowledge@Wharton http://knowledge.wharton.upenn.edu/article.cfm?articleid=2064

01-Oct-08 How to Start the Healing Now Wall Street Journal http://online.wsj.com/article/SB122282734447293049.html

02-Oct-08 Blocked pipes - When banks find it hard to borrow, so do the rest of us Economist http://www.economist.com/displaystory.cfm?story_id=12342237

06-Oct-08 How to build a better bailout Fortune http://money.cnn.com/2008/10/06/news/economy/betterbailout_sloan.fortune/

9-Oct-08 A monetary malaise Economist http://www.economist.com/specialreports/displaystory.cfm?story_id=12373682

10-Oct-08 Off a cliff Economist http://www.economist.com/finance/displaystory.cfm?story_id=12405370

13-Oct-08 Europe to U.S.: You messed up the rescue, too Fortune http://money.cnn.com/2008/10/13/news/international/gumbel_eurobank.fortune/index.htm

16-Oct-08 The end of the beginning? Economist http://www.economist.com/world/europe/displaystory.cfm?story_id=12436221

15-Oct-08 Analysis: Economy lacked a trusted national leader Washington Post http://www.washingtonpost.com/ac2/wp-dyn/emailafriend?contentId=AR2008101500432&sent=no

http://money.cnn.com/2008/10/10/news/economy/fox_great_depression.fortune/index.htm?postversi
13-Oct-08 We can beat this crisis Fortune
on=2008101307

Spooking investors - Financial markets remain on edge because http://www.economist.com/finance/displaystory.cfm?story_id=10024679
25-Oct-08 Economist
the credit crunch has not been solved


Appendix C: Key Sources

Journals/
Publications

Think Tanks

Radio Stations


For More Information Contact:
Grail Research
(info@grailresearch.com)

Copyright © 2008 by Grail Research, LLC
No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form or by any means —
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without the permission of Grail Research, LLC
This document provides an outline of a presentation and is
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