global financial crisis

December 1, 2008

Global Financial CrisisSummary of the media’s coverage of the timeline, causes, implications, impact and recommended path forward

| Copyright © 2008 Grail Research, LLC — ConfidentialNovember 19, 2008 2

Table of Contents

Objective and Methodology

Global Financial Crisis

• Timeline of Events

• Causes and Implications

• Future Outlook and Recommendations

Appendixes


Global Financial CrisisObjective and Methodology

Universe of Expert Opinions and Articles

~100 articles and reports from preferred sources

~50 Relevant Articles for analysis

Synopsis

Step 1Selected 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

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

Step 2Read ~100 articles and shortlisted them according to the following criteria:

• Analytical insight

• Breadth of coverage

• Uniqueness of opinion

Step 3Summarized shortlisted articles and incorporated them into the slides that follow which cover:

• Timeline of events (2007/08)

• Causes and Implications of the Global Financial Crisis

• Global Impact


The synopsis was created using the following methodology:


Table of Contents



• Timeline of Events

• Causes and Implications


Appendixes


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

0

12,000

15,000

9,000

DJIA Index Value, June 2007-October 2008

Source: News Releases

Global Financial CrisisTimeline of Events – 2007/08

Nov’ 07 Dec’ 07 Feb’ 08 Mar’ 08 Jun’ 08 Sep’ 08 Oct’ 08Jun’ 07-Jul’07

Two hedge funds of

Bear Sterns

forced to dump

assets, due to losses. Bear

Stearns funds file

for bankruptcy

Aug’ 07

Lehman Brothers

and HSBC shut some

of their offices

Sep’ 07

Federal Reserve reduces the fed

fund rates by half

percentage point

Oct’ 07

Merrill Lynch reports loss on

USD 8.4 Bn write

down

Morgan Stanley suffers loss of USD

3.7 Bn

Fed and other

central banks share

~USD 40 Bn in

special loans to banks

US financial

crisis affects

UBS which confirms loss of

USD 18.4 Bn

JP Morgan and Fed Reserve

take steps to rescue

Bear Stearns

S&P cuts ratings of Morgan Stanley, Merrill

Lynch and Lehman Brothers

Jul’ 08

Merrill has USD 5.7

Bn of write downs;

sells shares

Government rescues banks by

nationalizing Fannie Mae, Freddie Mac and giving

AIG an emergency loan of USD

85 Bn

Lehman Brothers files for

bankruptcy

Russia, Romania

and Ukraine close their

stock exchange

for few days due to crisis

Iceland’s financial crisis grows as all three of its

major banks are nationalized

Governments of many countries announce

bailouts for their financial institutions

Housing bubble bursts

Financial institutions fall

Stock market collapses Future outlook

Henry Paulson assures investors that the sub-prime

problem is contained Paulson shares that the US Treasury has no plans to bailout Fannie Mae or

Freddie Mac

Paulson rejected the possibility of the

housing crisis leading to a broader economic

crisis

Bernanke and Paulson urge fast

action to approve the USD 700 Bn bailout

Nouriel Roubini states that

governments will have to come up with even bigger

international rescues

Bank of America

buys Merrill

Lynch for USD 50

Bn; Bank of China

buys 20% stake in

Rothschild


Global Financial CrisisCauses: US Housing Market CollapseMany experts believe that the global crisis was triggered by the US housing market collapse

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

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

US Housing Market Collapse


Global Financial CrisisCauses: US Housing Market Collapse… some experts have other opinions

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 ratingSource: ‘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

Alternative Viewpoints


Global Financial CrisisImpact: Global Economic Slowdown

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

World stock markets have taken a beating, leading to a loss in confidence amongst investors who are stepping back in spite of several cuts in lending rates by the banks

• E.g. DJIA fell below 10,000 mark (first time in four years) plunging more than 800 points in a single day in October. The fall was mirrored in stock markets, such as NASDAQ, NYSE, Nikkei 225, London’s FTSE, Germany’s DAX, etc

Impact on Stock Markets GloballyBoth institutional investors and individual investors have suffered huge losses both in MBS and related products, and in equities

• Banks alone are reported to have suffered USD 600 Bn of credit-related losses globally. According to IMF estimates, American and European banks are predicted to loose USD 10 trillion of assets

Losses to InvestorsFailure of banks fueled anxiety in international banking markets leading to a freeze in inter-bank lending

Freeze in Inter Bank Credit

There 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 number of layoffs were announced in the US through September 2008: 111,000 in financial sector, 95,000 in automotive sector, 62,000 in transportation, 51,000 in retail, 28,000 in telecommunications and more in other sectors

There 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 automotive, airline, building materials etc. Automotive companies such as GM, Ford and Toyota reported 45%, 30% and 23% decline in sales respectively, in October 2008

Several bailout packages have been announced by governments around the world to fight the growing financial crisis

• The US has announced a USD 700 Bn bailout package for its banking sector, Germany announced a bailout package of more than USD 200 Bn and Britain more than USD 500 Bn for this financial crisis (see appendix for more detail on global bailout announcements)

Increasing Unemployment Decline in Businesses Globally Bailouts


Global Financial CrisisFuture Outlook

By Experts Most Common 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 Nations – Cash rich 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

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

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

Opinions about what happens next gravitate toward several scenarios


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

Global Financial CrisisRecommendationsOpinion leaders and governments have made various recommendations for how to manage the current global financial crisis and stabilize the economy …

Paulson’s 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• The Securities and Exchange Commission should be merged with the

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)

European governments reportedly believe 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

By Henry Paulson, Treasury Secretary of US By European Governments

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 recoverSome 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 Opinion Leaders


Table of Contents



Appendixes

• A: Global Bailout Announcements

• B: Relevant Opinion Articles


Global Financial Crisis Appendix A: Global Bailout Announcements as of Dec 1, 2008

Starting with the US financial sector, the crisis soon spread across the globe and into other markets beyond just financial servicesIn 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

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.

US725 Bn

544.8 Bn

UK437.5 Bn98.1 Bn

France 54.1 Bn18.1 Bn

Austria20.3 Bn3.5 Bn

Chile 0.85 Bn

UAE32.6 Bn

Russia216.4 Bn23.5 Bn

Iceland2 Bn1

0.7 Bn

Ukraine16.5 Bn1

1.3 Bn

Spain41 Bn

Hungary 31.9 Bn1

Qatar5.3 Bn

Germany136.6 Bn92.2 Bn

Canada21.6 Bn

South Korea

42.2 Bn

Belgium22.1 Bn

Netherlands92.6 Bn

Denmark0.9 Bn

Norway0.8 BnLatvia

0.4 BnLuxembourg

4.2 Bn

India0.7 Bn

Switzerland59.3 Bn

Belarus2 Bn1

0Bn – 100Bn 101Bn – 250Bn 251Bn – 400Bn Above 400BnTotal Bailout Legend

CompanyBailouts

Government Bailout Funds

ASEAN, Japan, China and South Korea

80 Bn

The total value of global bailout announcements to date is USD 1.89 trillion

China8 Bn

0.4 Bn

Pakistan7.6 Bn1

Oman2 Bn

Kazakhstan5 Bn

International Financial Corporation

(For banks of poor countries)

3 BnSerbia0.5 Bn1


Global Financial CrisisAppendix B: Relevant Opinion Articles and Radio Shows

Date Title Source Links17-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

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

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

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

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

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

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

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

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


Global Financial CrisisAppendix C: Key Sources

Think Tanks

Journals/ Publications

Radio Stations


For More Information Contact:

Grail Research([email protected])

Copyright © 2008 by Grail Research, LLC

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This document provides an outline of a presentation and is incomplete without the accompanying oral commentary and discussion.

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