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2007-2009 Financial Crisis
Transcript of 2007-2009 Financial Crisis
2007-2009 Financial crisis
Roots of the Crisis
Leverage, Profits and Risk
How does our financial system work
Events leading up to the 2007-2009 financial crisis
What caused the recession
What happened during the recession
What's happening post recession
Money & Currency
The dot-com bubble (also referred to as the dot-com boom, the Internet bubble
FED made borrowing easier by pushing the federal funds rate down to 1%
2000-2007 The global pool of fixed-income securities increased from approximately $36 trillion in 2000 to $80 trillion by 2007
House prices in the United States soared by 60% to 90%
Loans securitized, transformed into marketable securities when the are packaged together into bond-like instrument. ie. mortgage-backed security (MBS)
Banks became insolvent ie. Lehman Brothers and Bear Sterns
The U.S. stock market peaked in October 2007, when the Dow Jones Industrial Average index exceeded 14,000 points.
End of Recession
Following the depths of the 2007-2009 recession there's a "new world" characterized by:
Non-existent consumer discretionary spending
Tighter credit and borrowing standards
Reduced home ownership
Increased consumer savings
The severity of the crisis forced Goldman Sachs and Morgan Stanley to convert to bank holding companies, as well as Merrill Lynch being absorbed by Bank of America
Monetary and Fiscal Policies
Government became part owners of banks
Troubled Assets Relief Program
Stimulus Package -
$787 by President Obama
Stock Prices soared more that 60% between March and November 2009
Marked the turning point in the crisis. Lehman filed for bankruptcy on September 15,2008
GDP growth rate went from 3% in 2007-4 to -5% 2009-1
Monthly job loss went from >100,000 in 2007 to 800,000 by 2009
Fluctuations in employment riding on the status of the auto-industry
The U.S. stock market entered a decline. By March 2009, the Dow Jones average had reached a low of around 6,600.
Business became starved for credit to finance inventories and payrolls.
Between June 2007 and November 2008, Americans lost an estimated average of more than a quarter of their collective net worth.
The unemployment rate rose from 4.8% in February 2008 to 8.5% by March 2009.
Bank of United States
Are financial instruments that derive their value on their claim to another asset
Can be used to hedge against risk, protecting against a decline in value of the underlying asset
Or they can be used for simple speculation
Credit Default Swap
Is a form of derivative transaction
A form of bond insurance
Banks prioritize self-protection
Cautious loan policies result in massive delay
Europe Financial woes
Reports for the merger of Guardian Trust Company and Union Commerce Corporation on local newspaper
The Collapse of Lehman Brothers
Roots of crisis cont'd
Investors searched for higher yields than those offered by U.S. Treasury bonds
Emerging market debt
Consumers purchased homes with sub-prime mortgage's or NINJA loans
Unemployment peaked at 10.1% October 2009