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A Quick Guide To The Origins of The Global Financial Crisis

The global financial crisis began in 2007-2008 with the bursting of the US housing bubble and subprime mortgage crisis. It rapidly developed into a full-blown international banking crisis in 2008 with the failures of major financial institutions in the US and Europe. The crisis led to a liquidity crunch as banks cut lending to each other and deleveraged their balance sheets. This credit freeze had widespread knock-on effects across global stock markets, commodity prices, and international trade. Governments implemented massive bailouts of their financial systems to restore confidence and restart lending.

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107 views17 pages

A Quick Guide To The Origins of The Global Financial Crisis

The global financial crisis began in 2007-2008 with the bursting of the US housing bubble and subprime mortgage crisis. It rapidly developed into a full-blown international banking crisis in 2008 with the failures of major financial institutions in the US and Europe. The crisis led to a liquidity crunch as banks cut lending to each other and deleveraged their balance sheets. This credit freeze had widespread knock-on effects across global stock markets, commodity prices, and international trade. Governments implemented massive bailouts of their financial systems to restore confidence and restart lending.

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topace
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Global Financial Crisis 2008

A QUICK GUIDE TO THE ORIGINS OF THE


GLOBAL FINANCIAL CRISIS.
Global Financial Crisis 2008
 The global financial crisis of 2008 is a major ongoing financial crisis, the worst of its kind since the
Great Depression. It became prominently visible in September, 2008 with the failure, merger or
conservator ship of several large United States-based financial firms. The underlying causes leading to
the crisis had been reported in business journals for many months before September, with
commentary about the financial stability of leading U.S. and European investment banks, insurance
firms and mortgage banks consequent to the sub prime mortgage crisis.

 Beginning with failures of large financial institutions in the United States, it rapidly evolved into a
global crisis resulting in a number of European bank failures and declines in various stock indexes,
and significant reductions in the market-value of equities (stock) and commodities worldwide. The
crisis has led to a liquidity problem and the de-leveraging of financial institutions especially in the
United States and Europe, which further accelerated the liquidity crisis. World political leaders and
national ministers of finance and central bank directors have coordinated their efforts to reduce fears
but the crisis is ongoing and continues to change, evolving at the close of October into a currency crisis
with investors transferring vast capital resources into stronger currencies such as the yen, the dollar
and the Swiss franc, leading many emergent economies to seek aid from the International Monetary
Fund. The crisis has roots in the sub prime mortgage crisis and is an acute phase of the Financial crisis
of 2007-2008.
GLOBAL FINANCIAL CRISIS : HOW IT HAPPENED
Timeline: Global credit crunch

Most analysts link the current credit crisis to the sub-prime mortgage
business, in which US banks give high-risk loans to people with poor
credit histories. These and other loans, bonds or assets are bundled into
portfolios - or Collateralised Debt Obligations (CDOs) - and sold on to
investors globally.
GLOBAL FINANCIAL CRISIS : HOW IT HAPPENED
Timeline: Global credit crunch

Falling house prices and rising interest rates lead to high


numbers of people who cannot repay their mortgages.
Investors suffer losses, making them reluctant to take on more
CDOs. Credit markets freeze as banks are reluctant to lend to
each other, not knowing how many bad loans could be on their
rivals' books.
GLOBAL FINANCIAL CRISIS : Global Effects
Timeline: Global credit crunch

The impact of the sub-prime mortgage crisis is quickly shown to have


implications beyond the United States. Losses are felt by investment
banks as far afield as Australia. Firms cancel sales of bonds worth
billions of dollars, citing market conditions.
GLOBAL FINANCIAL CRISIS : Global Effects
Timeline: Global credit crunch

Shares have risen and fallen with news of failures, takeovers and bail-
outs. In part, this reflects investors' confidence in the banking
system. While bank shares have been hammered because of bad
debts, retailers have been hit as consumer confidence is shaken by
falling house prices and job insecurity.
GLOBAL FINANCIAL CRISIS : Global Effects – Bank Street
BANKS AFFECTED BY THE GLOBAL CRISIS - 2008

No. Bank Date Status Fund Involved

1. Fannie Mae 07 Sep 2008 Nationalised $ 5 trillion


2. Freddie Mac 07 Sep 2008 Nationalised $ 5 trillion
3. Lehman Bros 15 Sep 2008 Collapsed $ 6 trillion
4. Merrill Lynch 15 Sep 2008 Taken over $50bn
5. AIG 16 Sep 2008 Part-nationalised $ 1 trillion
6. HBOS 17 Sep 2008 Taken over $ 21bn
7. WaMu 25 Sep 2008 Collapsed and sold $ 19bn
8. Fortis 28 Sep 2008 Nationalised $ 16bn
9. Bradford & Bingley 29 Sep 2008 Nationalised £52 billion
10. Wachovia 29 Sep 2008 Taken over $ 15.1bn
11. Glitnir 29 Sep 2008 Nationalised $ 864m
12. Hypo Real Estate 06 Oct 2008 Rescue package $ 68bn
13. RBS 13 Oct 2008 Part-nationalised $ 12bn
14. Lloyds TSB 13 Oct 2008 Part-nationalised $ 9.7bn
GLOBAL FINANCIAL CRISIS : GETTING OUT OF THE CRISIS
Timeline: Global credit crunch

The US Federal Bank and the European Central Bank tries to


bolster the money markets by making funds available for banks
to borrow on more favourable terms.
Interest rates are also cut in an effort to encourage lending.
GLOBAL FINANCIAL CRISIS : GETTING OUT OF THE CRISIS
Timeline: Global credit crunch

Seeking a long-term solution, the US government agrees a $700bn


bail-out that will buy up Wall Street's bad debts in return for stake
in the banks. The US government plans to borrow the money from
world financial markets and hopes it can sell the distressed assets
back once the housing market has stabilised.
GLOBAL FINANCIAL CRISIS: GETTING OUT OF THE CRISIS
Timeline: Global credit crunch

The UK government launches its own bail-out, making £400bn extra


capital available to eight of the UK's largest banks and building societies
in return for preference shares in them. In return for its investment, the
government expects to get a stake in the banks - although exactly how
much is not quite clear yet.
GLOBAL FINANCIAL CRISIS : Global Effect
Timeline: Global credit crunch
GLOBAL FINANCIAL CRISIS : Is it recession?

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