MGM 07 - 7 OCT - 2. Topics in Finance: The Housing Bubble...

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Finance II Tuesday, October 7, 2008 MGM 101 - Introduction to Management Functions Key question : Briefing on 6 key issues in the world of finance… What are valuation bubbles? How have “sub-prime mortgages” triggered a global financial crisis & recession? The US Dollar – is it a blip or flop? Who invests in Hedge Funds, and why? What’s “contagious” in global financial markets? Today 1. Valuation “Bubbles” + Collapses “Bubbles”: periods of high momentum valuation increases, when many more people are optimistic about the future of a company, an industry, or the economy as a whole than are pessimistic about it - Between 1995 and April 2000 – the “ Dot-Com Bubble ”, valuations of NASDAQ-listed companies rose by ~300%, then declined by ~70% • Since 2005, the Shanghai Stock Exchange has increased by ~400% ¾ Bubble collapses can be extremely painful experiences 2. Topics in Finance: “The Housing Bubble & The Sub-Prime Mortgage Mess” There are about 10 banks in Canada; 8430 in the United States; Cut-throat competition among U.S. banks for higher yields & fast growth in lending Period of low interest rates since 2001 – was great for home buyers; bad for investors 10 - 20% of the potential mortgage market has high-risk profile : people with no credit/ poor credit – US banks made mortgage loans to them anyway – Confidence that even poor credit customers would be “okay” because of constantly rising real estate prices (a “ housing bubble” ) The Housing Bubble & The Sub-Prime Mortgage Mess – cont’d. Banks
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MGM 07 - 7 OCT - 2. Topics in Finance: The Housing Bubble...

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